August 1, 2013

ServiceSource Reports Second Quarter 2013 Financial Results

SAN FRANCISCO--(BUSINESS WIRE)-- ServiceSource® (Nasdaq: SREV), the global leader in recurring revenue management, today announced its financial results for the second quarter ended June 30, 2013.

  • Total subscription bookings up nearly 40% quarter-over-quarter
  • Revenue: $67.7 million
  • Adjusted EBITDA: $4.4 million
  • Record amount of cash and short term investments: $132 million
  • Four new Renew OnDemand subscription deals signed

"The outperformance of our cloud offering, Renew OnDemand, combined with our managed services, drove strong performance for ServiceSource this quarter," said Mike Smerklo, ServiceSource's Chairman and Chief Executive Officer. "As our results demonstrate, ServiceSource has gained momentum in the first half of the year."

"We're proud to announce that Dell is live on Renew OnDemand as part of a global implementation," added Mr. Smerklo, "Dell is building solutions and partnering with leading companies to leverage the cloud and big data as part of their strategy to get closer to their customers."

Revenue for the second quarter of fiscal 2013 was $67.7 million, a 13% increase over the $59.7 million delivered in the same period of 2012.

Adjusted EBITDA in the quarter was $4.4 million, compared with $4.5 million for the same period last year.

GAAP net loss in the quarter was $4.9 million, or $0.06 per share, compared with a net loss of $36.8 million, or $0.50 per share for the same period last year. GAAP net loss for 2012 reflects a $33.1 million one-time, non-cash charge related to a valuation allowance applied to our deferred tax assets.

Non-GAAP net income in the quarter was $1.5 million, or $0.02 per diluted share, compared with a net income of approximately $1.5 million, or $0.02 per diluted share for the same period last year.

A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in this press release.

Quarterly Conference Call

ServiceSource will discuss its quarterly results and provide third quarter financial guidance today via teleconference at 1:30 p.m. Pacific Time. To access the call within the U.S., please dial (877) 293-5486, or outside the U.S. (914) 495-8592, at least five minutes prior to the start time. A live webcast of the call will also be available at http://ir.servicesource.com/events.cfm under the Events & Presentations menu. A replay of the webcast will also be available on the Company's website at http://ir.servicesource.com.

About ServiceSource International, Inc.

ServiceSource International, Inc. (NASDAQ: SREV) is the global leader in recurring revenue management. Renew OnDemand™, the only cloud application built specifically to grow recurring revenue, automates a highly valuable but typically manual business process. By leveraging big data to give companies a complete view of their customers, Renew OnDemand and our proven services drive higher subscription, maintenance, and support revenue, improved customer retention, and increased business predictability.

With over a decade of experience focused exclusively on growing recurring revenue, ServiceSource's products and services are based on proven best practices and global benchmarks. Headquartered in San Francisco, ServiceSource® manages over $9 billion in recurring revenue for the world's largest and most respected technology companies. ServiceSource renews a customer contract every 47 seconds through engagements in more than 150 countries and 40 languages. For more information, please go to www.servicesource.com.

Forward-Looking Statements

This press release contains forward-looking statements, including statements regarding our momentum and the benefits of ServiceSource offerings, including our managed services and our Renew OnDemand Cloud platform and application. These forward-looking statements are based on our current assumptions and beliefs, and involve risks and uncertainties that could cause our results to differ materially from those expressed or implied in our forward-looking statements. Those risks and uncertainties include, without limitation, fluctuations in our quarterly results of operations; the risk of material defects or errors in the our software offerings or their failure to meet customer expectations; migrating customers to Renew OnDemand and the ability to integrate Renew OnDemand with other third-party applications used by our customers; our ability to grow the market for service revenue management; our ability to protect our intellectual property rights; the risk of claims that our offerings infringe the intellectual property rights of others; changes in market conditions that impact our ability to sell the Renew OnDemand solution and/or generate service revenue on our customers' behalf; errors in estimates as to the renewal rate improvements and/or service revenue we can generate for our customers; the possibility that our estimates of service revenue opportunity under management and other metrics may prove inaccurate; demand for our offering that falls short of expectations; our ability to keep customer data and other confidential information secure; our ability to adapt our solution to changes in the market or new competition; general political, economic and market conditions and events; and other risks and uncertainties described more fully in our periodic reports and registration statements filed with the Securities and Exchange Commission, which can be obtained online at the Commission's website at http://www.sec.gov. All forward-looking statements in this press release are based on information currently available to us, and we assume no obligation to update these forward-looking statements.

ServiceSource International, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
                           
Three Months Ended Six Months Ended
June 30, June 30,
  2013     2012     2013     2012  
 
Net revenue $ 67,697 $ 59,694 $ 128,818 $ 117,268
Cost of revenue (1)   38,620     33,882     77,118     66,458  
Gross profit   29,077     25,812     51,700     50,810  
Operating expenses
Sales and marketing (1) 15,367 14,169 30,175 27,646
Research and development (1) 6,794 4,298 13,042 8,879
General and administrative (1)   10,783     10,564     22,004     20,639  
Total operating expenses   32,944     29,031     65,221     57,164  
Loss from operations (3,867 ) (3,219 ) (13,521 ) (6,354 )
Other expense, net   (295 )   (333 )   (403 )   (424 )
Loss before income taxes (4,162 ) (3,552 ) (13,924 ) (6,778 )

 

Income tax provision   744     33,217     1,437     31,267  

 

Net loss $ (4,906 ) $ (36,769 ) $ (15,361 ) $ (38,045 )

 

 
Net loss per common share:

 

Basic   (0.06 ) $ (0.50 )   (0.20 ) $ (0.52 )

 

Diluted $ (0.06 ) $ (0.50 ) $ (0.20 ) $ (0.52 )

 

 
Weighted-average shares used in computing net
loss per common share:
Basic   77,275     74,172     76,447     73,654  
Diluted   77,275     74,172     76,447     73,654  
 
(1) Includes stock-based compensation expense as follows:
 
Three Months Ended Six Months Ended
June 30, June 30,
  2013     2012     2013     2012  
Cost of revenue $ 688 $ 715 $ 1,420 $ 1,287
Sales and marketing 2,449 1,982 4,982 3,656
Research and development 519 530 1,005 893
General and administrative   1,767     2,133     3,936     3,771  
Total stock-based compensation $ 5,423   $ 5,360   $ 11,343   $ 9,607  
 
ServiceSource International, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
           
June 30, December 31,
  2013     2012  
Assets
Current assets:
Cash and cash equivalents $ 77,403 $ 76,568
Short-term investments 54,649 32,874
Accounts receivable, net 60,894 65,238
Deferred income taxes 177 389
Prepaid expenses and other   6,661     5,178  
Total current assets 199,784 180,247
Property and equipment, net 30,275 34,513
Deferred income taxes, net of current portion 1,986 2,321
Other assets, net 794 1,057
Goodwill   6,334     6,334  
Total assets $ 239,173   $ 224,472  
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 2,505 $ 3,293
Accrued taxes 1,801 1,056
Accrued compensation and benefits 18,873 15,738
Other accrued liabilities 13,640 10,403
Current portion of capital lease obligations   328     326  
Total current liabilities 37,147 30,816
Long-term liabilities   5,305     6,729  
Total liabilities   42,452     37,545  
Stockholders' equity:
Common stock 8 8
Treasury stock (441 ) (441 )
Additional paid-in capital 235,714 210,650
Accumulated deficit (38,759 ) (23,398 )
Accumulated other comprehensive income   199     108  
Total stockholders' equity   196,721     186,927  
Total liabilities and stockholders' equity $ 239,173   $ 224,472  
 
ServiceSource International, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
        Six Months Ended
June 30,
  2013           2012  
Cash flows from operating activities
Net loss $ (15,361 ) $ (38,045 )
Adjustments to reconcile net loss to net cash provided by operating activities:
 
Depreciation and amortization 6,028 4,576
Provision for doubtful accounts (149 ) -
Amortization of deferred financing costs 24 123
Accretion on premium on short-term investments 347 445
Deferred income taxes 545 32,220
Stock-based compensation 11,343 9,607
Income tax charge from stock-based compensation 264 362
Changes in operating assets and liabilities:
Accounts receivable 4,189 2,586
Prepaid expenses and other (1,204 ) (811 )
Accounts payable (558 ) (877 )
Accrued taxes 752 298
Accrued compensation and benefits 3,291 (4,820 )
Other accrued liabilities   2,156     4,145  
Net cash provided by operating activities   11,667     9,809  
 
Cash flows used in investing activities
Acquisition of property and equipment (2,224 ) (11,244 )
Purchases of short-term investments (26,647 ) (24,186 )
Sales of short-term investments 3,154 6,210
Maturities of short-term investments   1,250     11,820  
Net cash used in investing activities   (24,467 )   (17,400 )
 
Cash flows from financing activities
Repayments of capital leases (161 ) (155 )
Proceeds from common stock issuances 13,612 7,818
Income tax charge from stock-based compensation   (264 )   (362 )
Net cash provided by financing activities   13,187     7,301  
 
Net increase (decrease) in cash and cash equivalents 387 (290 )
Effect of exchange rate changes on cash and cash equivalents 448 (107 )
Cash and cash equivalents at beginning of period   76,568     65,983  
Cash and cash equivalents at end of period $ 77,403   $ 65,586  
 

Use of Non-GAAP Financial Measures

To supplement its financial statements presented in accordance with generally accepted accounting principles, or GAAP, ServiceSource also provides investors with non-GAAP gross profit, net income, net income per share and Adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the closest GAAP financial measure is presented in the financial tables below under the heading, "GAAP to Non-GAAP Reconciliation."

ServiceSource believes that the non-GAAP financial information provided in this release can assist investors in understanding and assessing its on-going core operations and prospects for the future and provides an additional tool for investors to use in comparing ServiceSource's financial results with other companies in the industry, many of which present similar non-GAAP financial measures to investors.

Non-GAAP gross profit consists of gross profit plus stock based compensation and amortization of internally-developed software.

Non-GAAP net income consists of net income (loss) plus stock-based compensation, amortization of internally-developed software and applying an income tax rate of 40% reflecting our estimated tax expense on our core operations. Stock-based compensation expense is expected to vary depending on the number of new grants issued, changes in the company's stock price, stock market volatility, expected option lives and risk-free rates of return, all of which are difficult to estimate.

EBITDA consists of net income (loss) plus depreciation and amortization, interest expense, other expenses, net, and income tax expense. Adjusted EBITDA consists of EBITDA plus non-cash, stock-based compensation expense. ServiceSource uses Adjusted EBITDA as a measure of operating performance because it assists the company in comparing performance on a consistent basis, as it removes from the operating results the impact of the company's capital structure.

These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles in the United States.

ServiceSource International, Inc.
Reconciliation of Net Loss to Adjusted EBITDA
(In thousands)
(Unaudited)
                   
Three Months Ended Six Months Ended
June 30, June 30,
  2013     2012     2013     2012  
 
Net loss $ (4,906 ) $ (36,769 ) $ (15,361 ) $ (38,045 )
Income tax provision 744 33,217 1,437 31,267
Other expense, net 295 333 403 424
Depreciation   2,814     2,309     6,020     4,577  
EBITDA (1,053 ) (910 ) (7,501 ) (1,777 )
Stock-based compensation   5,423     5,360     11,343     9,607  
Adjusted EBITDA $ 4,370   $ 4,450   $ 3,842   $ 7,830  
 
ServiceSource International, Inc.
GAAP To Non-GAAP Reconciliation
(Dollars in thousands, except per share amounts)
(unaudited)
                   
Three Months Ended Six Months Ended
June 30, June 30,
  2013     2012     2013     2012  
Gross Profit
GAAP gross profit $ 29,077 $ 25,812 $ 51,700 $ 50,810
Non-GAAP adjustments:
Stock-based compensation (A) 688 715 1,420 1,287
Amortization of internally-developed software (B)   838     318     1,658     458  
Non-GAAP gross profit $ 30,603   $ 26,845   $ 54,778   $ 52,555  
 
Gross Profit %
GAAP gross profit 43 % 43 % 40 % 43 %
Non-GAAP adjustments:
Stock-based compensation (A) 1 % 1 % 1 % 1 %
Amortization of internally-developed software (B)   1 %   1 %   1 %   1 %
Non-GAAP gross profit   45 %   45 %   43 %   45 %
Certain totals do not add due to rounding
Operating Expenses
GAAP operating expenses $ 32,944 $ 29,031 $ 65,221 $ 57,164
Stock-based compensation (A) (4,735 ) (4,645 ) (9,923 ) (8,320 )
Amortization of internally-developed software (B)   (432 )   (317 )   (883 )   (812 )
Non-GAAP operating expenses $ 27,777   $ 24,069   $ 54,415   $ 48,032  
 
Net Income (Loss)
GAAP net loss $ (4,906 ) $ (36,769 ) $ (15,361 ) $ (38,045 )
Non-GAAP adjustments:
Stock-based compensation (A) 5,423 5,360 11,343 9,607
Amortization of internally-developed software (B) 1,270 635 2,541 1,270
One-time income tax items (C) - 33,072 - 33,072

Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate

(D)

  (268 )   (832 )   1,453     (3,445 )
Non-GAAP net income (loss) $ 1,519   $ 1,466   $ (24 ) $ 2,459  
 
Diluted Net Income (Loss) Per Share
GAAP net loss per share $ (0.06 ) $ (0.50 ) $ (0.20 ) $ (0.52 )
Non-GAAP adjustments:
Stock-based compensation (A) 0.07 0.07 0.15 0.13
Amortization of internally-developed software (B) 0.02 0.01 0.03 0.02
One-time income tax items (C) - 0.45 - 0.45
 

Income tax effect on non-GAAP adjustments as well as the impact of normalizing the effective income tax rate

(D)

  0.00     (0.01 )   0.02     (0.05 )
Non-GAAP diluted net income (loss) per share $ 0.02   $ 0.02   $ 0.00   $ 0.03  
Certain totals do not add due to rounding
 
Shares used in calculating diluted net income (loss) per share on a non-GAAP basis
  81,855     74,172     76,447     73,654  

Footnotes to GAAP to Non-GAAP Reconciliation

   
(A) Stock-based compensation. Included in our GAAP presentation of cost of revenue and operating expenses, stock-based compensation consists of expenses for stock options and awards and purchase rights under our stock purchase plan. We exclude stock-based compensation expense from our non-GAAP measures because some investors may view it as not reflective of our core operating performance as it is a non-cash expense.
 
 
(B) Amortization of internally-developed software. Included in our GAAP presentation of cost of revenue and operating expenses, amortization of internally-developed software reflects non-cash expense for certain software purchases and software developed or obtained for internal use. We exclude these expenses from our non-GAAP measures because we believe they are not indicative of our core operating performance.
 
 
(C) One-time tax items. During the second quarter of 2012, we recorded a $33.1 million non-cash charge against a substantial portion of our deferred tax assets, much of which was recorded in connection with electing to be treated as a corporation, because the recoverability of these items for financial reporting purposes is uncertain. We have excluded these items from our non-GAAP measures because they are non-recurring and unique, they are non-cash in nature and are not indicative of our core operating performance.
 
 
(D) Income tax effect on non-GAAP adjustments as well as the impact of normalizing the effective income tax rate and calculating non-GAAP net income per share using a fully-diluted share count. This adjusts (i) the provision for income taxes to reflect the effect of the non-GAAP items A, B and C noted above on our non-GAAP net income (loss); (ii) the income tax rate to a normalized effective tax rate of 40%; and (iii) non-GAAP earnings per share based on a fully-diluted share count.
 
ServiceSource International, Inc.
Revenue by Segment
(In thousands)
(unaudited)
                 
Three Months Ended June 30,
2013   2012  
% of % of
  $ Revenue     $ Revenue
 
NALA $ 42,482 63 % $ 36,961 62 %
EMEA 18,238 27 % 15,518 26 %
APJ   6,977 10 %   7,215 12 %
$ 67,697 100 % $ 59,694 100 %
 
Six Months Ended June 30,
  2013   2012
% of % of
  $ Revenue     $ Revenue
 
NALA $ 80,289 62 % $ 73,073 62 %
EMEA 35,758 28 % 31,266 27 %
APJ   12,771 10 %   12,929 11 %
$ 128,818 100 % $ 117,268 100 %

ServiceSource International, Inc.
Investor Relations
Anne Bawden, 415-901-4182
abawden@servicesource.com

Source: ServiceSource International, Inc.

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