August 6, 2015

ServiceSource Reports Second Quarter 2015 Financial Results

SAN FRANCISCO--(BUSINESS WIRE)-- ServiceSource® (Nasdaq: SREV), the global leader in recurring revenue management, today announced financial results for the second quarter ended June 30, 2015.

"ServiceSource continued to execute in the second quarter and we exceeded expectations across all key financial metrics. Year over year our gross margin increased, operating expenses decreased and EBITDA improved dramatically. We drove operational efficiency, while increasing revenues on behalf of our clients," said Christopher Carrington, CEO of ServiceSource. "Our customer-centric approach continues to tighten our relationships with customers, decrease churn and drive expansion activity. We recognize there is a great deal of work to do to return ServiceSource to growth and profitability, but I feel we are making the right changes in the business to reach that goal."

GAAP revenue was $61.6 million in the second quarter, representing a 6.6% decrease from the $66.0 million delivered in same the period in the prior year. Non-GAAP revenue, which excludes the impact of the reduction of deferred revenue in connection with our acquisition of Scout Analytics, was $61.7 million, reflecting a 7.0% decrease from the same period in the prior year.

For the second quarter of fiscal year 2015, adjusted EBITDA was a loss of $0.2 million, compared with a loss of $9.7 million for the same period last year. GAAP net loss in the quarter was $13.4 million, or $0.16 per share, compared with GAAP net loss of $21.1 million, or $0.25 per share, for the same period last year. Non-GAAP net loss in the quarter was $1.7 million compared with a net loss of $7.3 million for the same period last year. Non-GAAP EPS was a $0.02 loss per basic and diluted share, compared with a loss of $0.09 per basic and 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 second quarter 2015 results and 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. Conference ID number: 85291706. In addition, a live webcast of the call will also be available on the Investor Relations section of the ServiceSource web site under Events & Presentations. A replay of the webcast will also be available on the Company's website at http://ir.servicesource.com.

Forward-Looking Statements

This press release contains forward-looking statements, including statements regarding our business opportunities, challenges and market position. 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; our technology; the risk of material defects or errors in our software offerings or their failure to meet customer expectations; migrating customers to our SaaS offerings and the ability to integrate such offerings with other third-party applications used by our customers; errors in estimates as to the renewal rate improvements and/or service revenue we can generate for our customers; our ability to grow the market for service revenue management; changes in market conditions that impact our ability to sell our SaaS solutions and/or generate service revenue on our customers' behalf; 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; our ability to protect our intellectual property rights; the risk of claims that our offerings infringe the intellectual property rights of others; 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.

About ServiceSource

ServiceSource (NASDAQ:SREV) provides the world's leading B2B companies with expert managed services, cloud software and best-practice processes proven to increase customer success, drive revenue growth and decrease churn from existing customers. ServiceSource's solutions help companies with onboarding and adoption, upsell and cross-sell, retention and renewals-the entire revenue lifecycle. Only ServiceSource brings to market more than 15 years of exclusive focus on customer success and revenue growth, global deployments across 40 languages and 150 countries, and a powerful, purpose-built recurring revenue technology platform. For more information, go to http://www.servicesource.com.

Connect with ServiceSource:

http://www.facebook.com/ServiceSource

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http://www.linkedin.com/company/servicesource

http://www.youtube.com/user/ServiceSourceMKTG

Trademarks

ServiceSource, Renew OnDemand, Scout Analytics and any ServiceSource product or service names or logos above are trademarks of ServiceSource International, Inc. All other trademarks used herein belong to their respective owners.

 
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
2015 2014 2015 2014
Net revenue $ 61,613 $ 65,997 $ 127,810 $ 132,813
Cost of revenue (1) 42,692   48,518   88,507   96,113  
Gross profit 18,921   17,479   39,303   36,700  
Operating expenses:
Sales and marketing (1) 10,165 17,212 21,000 32,883
Research and development (1) 4,646 6,881 9,468 13,597
General and administrative (1) 10,701 12,256 22,866 25,121
Restructuring and other 2,988     3,739    
Total operating expenses 28,500   36,349   57,073   71,601  
Loss from operations (9,579 ) (18,870 ) (17,770 ) (34,901 )
Interest expense and other, net (2,739 ) (2,196 ) (4,584 ) (4,770 )
Loss before income taxes (12,318 ) (21,066 ) (22,354 ) (39,671 )
Income tax provision 1,089   26   1,223   161  
Net loss $ (13,407 ) $ (21,092 ) $ (23,577 ) $ (39,832 )
Net loss per share, basic and diluted $ (0.16 ) $ (0.25 ) $ (0.28 ) $ (0.48 )
Weighted average common shares outstanding, basic and diluted 85,072   82,784   84,665   82,432  
 
(1) Includes stock-based compensation expense as follows:
Three Months Ended Six Months Ended
June 30 June 30
2015 2014 2015 2014
Cost of revenue $ 659 $ 1,099 $ 1,495 $ 2,133
Sales and marketing 716 1,583 1,647 3,420
Research and development 444 736 991 1,437
General and administrative 1,158   1,932   3,411   3,942  
Total stock-based compensation $ 2,977   $ 5,350   $ 7,544   $ 10,932  
 
ServiceSource International, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
   

    June 30,    

December 31,
2015 2014
Assets
Current assets:
Cash and cash equivalents $ 78,045 $ 90,382
Short-term investments 136,202 125,000
Accounts receivable, net 57,172 70,163
Deferred income taxes 390 398
Prepaid expenses and other 7,549   6,815  
Total current assets 279,358 292,758
Property and equipment, net 25,540 25,658
Deferred income taxes, net of current portion 1,512 2,488
Goodwill and intangibles, net 10,201 10,957
Other assets, net 8,806   7,985  
Total assets $ 325,417   $ 339,846  
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,210 $ 2,922
Accrued taxes 1,101 1,721
Accrued compensation and benefits 18,957 20,056
Deferred revenue 7,311 7,018
Accrued expenses 6,383 8,882
Other current liabilities 2,282   2,569  
Total current liabilities 37,244 43,168
Convertible notes, net 124,301 120,730
Other long-term liabilities 4,877   4,660  
Total liabilities 166,422 168,558
Stockholders' equity:
Common stock 8 8
Treasury stock (441 ) (441 )
Additional paid-in capital 323,082 312,017
Accumulated deficit (164,985 ) (141,409 )
Accumulated other comprehensive income 1,331   1,113  
Total stockholders' equity 158,995   171,288  
Total liabilities and stockholders' equity $ 325,417   $ 339,846  
 
ServiceSource International, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
  Six months ended
June 30,
2015   2014
Cash flows from operating activities
Net loss $ (23,577 ) $ (39,832 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 6,783 6,322
Amortization of debt discount and issuance costs 3,903 3,636
Amortization of premium on short-term investments (497 ) 40
Deferred income taxes 980
Stock-based compensation 7,544 10,932
Restructuring and other 3,450
Changes in operating assets and liabilities:
Accounts receivable, net 11,754 15,504
Deferred revenue 338 (1,983 )
Prepaid expenses and other (852 ) (45 )
Accounts payable (2,064 ) 1,030
Accrued taxes (555 ) 315
Accrued compensation and benefits (1,570 ) 1,936
Accrued expense (2,448 ) 2,499
Other liabilities 125   (446 )
Net cash provided by (used in) operating activities 3,314   (92 )
Cash flows from investing activities
Acquisition of property and equipment (5,114 ) (5,577 )
Restricted cash (1,244 )
Cash paid for acquisition, net of cash acquired (32,551 )
Purchases of short-term investments (51,074 ) (46,926 )
Sales of short-term investments 40,194 23,134
Maturities of short-term investments 290   3,943  
Net cash used in investing activities (16,948 ) (57,977 )
Cash flows from financing activities
Repayment of long-term debt and capital lease obligations (91 ) (212 )
Proceeds from common stock issuances 944   3,569  
Net cash provided by financing activities 853   3,357  
Net decrease in cash and cash equivalents (12,781 ) (54,712 )
Effect of exchange rate changes on cash and cash equivalents 444 156
Cash and cash equivalents at beginning of period 90,382   170,132  
Cash and cash equivalents at end of period $ 78,045   $ 115,576  
 

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 revenue is defined as net revenue plus revenue not recognized in the period for Scout Analytics due to the impact of purchase accounting rules related to deferred revenue acquired. Non-GAAP gross profit consists of gross profit plus adjustments to revenue related to purchase accounting, stock based compensation, amortization of purchased intangible assets and amortization of internally-developed software.

Non-GAAP net loss consists of net loss plus adjustments to revenue related to purchase accounting, stock-based compensation, amortization of purchased intangible assets, amortization of internally-developed software, acquisition related costs associated with external and incremental costs resulting directly from merger and acquisition activities such as legal, due diligence, integration costs, and acquisition bonus payments, restructuring related costs and non-cash interest expense 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 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, acquisition related costs associated with external and incremental costs resulting directly from merger and acquisition activities such as legal, due diligence, integration costs, and acquisition bonus payments, restructuring related costs and adjustments to revenue related to purchase accounting. 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.
GAAP To Non-GAAP Reconciliation
(Dollars in thousands, except per share amounts)
(unaudited)
    Three Months Ended   Six Months Ended
June 30, June 30,
2015   2014 2015   2014
Net Revenue
GAAP net revenue $ 61,613 $ 65,997 $ 127,810 $ 132,813
Adjustments to revenue (A) 84   314   194   760  
Non-GAAP net revenue $ 61,697   $ 66,311   $ 128,004   $ 133,573  
 
Gross Profit
GAAP gross profit $ 18,921 $ 17,479 $ 39,303 $ 36,700
Non-GAAP adjustments:
Adjustments to revenue (A) 84 314 194 760
Stock-based compensation (B) 659 1,099 1,495 2,133
Amortization of internally-developed software (C) 1,016 505 2,021 1,036
Amortization of purchased intangible assets (D) 247   348   494   623  
Non-GAAP gross profit $ 20,927   $ 19,745   $ 43,507   $ 41,252  
 
Gross Profit %
GAAP gross profit 31 % 26 % 31 % 28 %
Non-GAAP adjustments:
Adjustments to revenue (A) % 1 % % 1 %
Stock-based compensation (B) 1 % 2 % 1 % 2 %
Amortization of internally-developed software (C) 2 % 1 % 2 % 1 %
Amortization of purchased intangible assets (D) % 1 % % %
Non-GAAP gross profit 34 % 30 % 34 % 31 %
Certain totals do not add due to rounding
Operating Expenses
GAAP operating expenses $ 28,500 $ 36,349 $ 57,073 $ 71,601
Stock-based compensation (B) (2,318 ) (4,251 ) (6,049 ) (8,799 )
Amortization of internally-developed software (C) (84 ) (83 ) (168 ) (141 )
Amortization of purchased intangible assets (D) (131 ) (212 ) (263 ) (377 )
Acquisition related costs (E) (175 ) (728 )
Restructuring and other (F) (2,988 )   (3,739 )  
Non-GAAP operating expenses $ 22,979   $ 31,628   $ 46,854   $ 61,556  
 
Net loss
GAAP net loss $ (13,407 ) $ (21,092 ) $ (23,577 ) $ (39,832 )
Non-GAAP adjustments:
Adjustments to revenue (A) 84 314 194 760
Stock-based compensation (B) 2,977 5,350 7,544 10,932
Amortization of internally-developed software (C) 1,100 588 2,189 1,177
Amortization of purchased intangible assets (D) 378 560 756 1,000
Acquisition related costs (E) 175 728
Restructuring and other (F) 2,988 3,739
Non-cash interest expense (G) 1,989 1,877 3,913 3,665
Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate (H) 2,210   4,907   2,830   8,725  
Non-GAAP net loss $ (1,681 ) $ (7,321 ) $ (2,412 ) $ (12,845 )
 
Diluted Net Loss Per Share
GAAP net loss per share $ (0.16 ) $ (0.25 ) $ (0.28 ) $ (0.48 )
Non-GAAP adjustments:
Adjustments to revenue (A) 0.01
Stock-based compensation (B) 0.03 0.06 0.09 0.13
Amortization of internally-developed software (C) 0.01 0.01 0.03 0.01
Amortization of purchased intangible assets (D) 0.01 0.01 0.01
Acquisition related costs (E) 0.01
Restructuring and other (F) 0.04 0.04
Non-cash interest expense (G) 0.02 0.02 0.05 0.04
Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate (H) 0.03   0.06   0.03   0.11  
Non-GAAP diluted net loss per share $ (0.02 ) $ (0.09 ) $ (0.03 ) $ (0.16 )
Certain totals do not add due to rounding
Shares used in calculating diluted net income (loss) per share on a non-GAAP basis 85,072   82,784   84,665   82,432  
 

Footnotes to GAAP to Non-GAAP Reconciliation

(A) Adjustments to revenue - Due to purchase accounting rules, upon acquisition, we recorded an adjustment of $1.7 million to reduce the balance of deferred revenue related to the assumed client contracts acquired from Scout Analytics. As a result of this adjustment, $0.1 million of revenue was not recognized for the three months ended June 30, 2015. Therefore, revenue is adjusted by an increase of $0.1 million to arrive at non-GAAP revenue for the three months ended June 30, 2015.

(B) 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.

(C) 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.

(D) Amortization of Purchased Intangibles. Included in our GAAP presentation of gross margin and operating expenses is amortization of purchased intangible assets. We believe amortization of acquisition-related intangible assets, such as the amortization of the cost associated with an acquired company's research and development efforts, trade names and customer relationships, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are continually evaluated for impairment, amortization of the cost of purchased intangibles is a static expense, one that is not typically affected by operations during any particular period.

(E) Acquisition related costs. Included in our GAAP presentation of operating expenses, acquisition costs consist of external and incremental costs resulting directly from merger and acquisition activities such as legal, due diligence, integration costs and acquisition bonus payments. These are one-time costs that vary significantly in amount and timing and are not indicative of our core operating performance.

(F) Restructuring and other expense. Included in our GAAP presentation, we will incur expenses with our ongoing restructuring effort to reduce expenses to better match revenues. We expect this restructuring effort to continue over the next several quarters. These costs would incur employee severance costs and also costs related to cancellation of contracts or loss of future benefit. These are one-time in nature costs that are not indicative of our core operating performance.

(G) Non-cash interest expense. Under GAAP, we are required to separately account for liability (debt) and equity (conversion option) components of the $150 million convertible senior notes that were issued in August 2013. Accordingly, for GAAP purposes we are required to recognize effective interest expense on our convertible senior notes which includes interest cost related to the amortization of debt issuance costs and the contractual 1.5% interest rate of the note. The difference between the effective interest expense and the contractual interest expense is excluded from our assessment of our operating performance because we believe that this non-cash expense is not indicative of ongoing operating performance. We believe that the exclusion of the non-cash interest expense provides investors a view of our core operating performance.

(H) Income tax effect on non-GAAP adjustments as well as the impact of normalizing the effective income tax rate. This adjusts (i) the provision for income taxes to reflect the effect of the non-GAAP items A, B, C, D, E, F, and G noted above on our non-GAAP net 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.
Reconciliation of Net Loss to Adjusted EBITDA
(In thousands)
(Unaudited)
 
  Three Months Ended   Six months ended
June 30, June 30,
2015   2014 2015   2014
 
Net loss $ (13,407 ) $ (21,092 ) $ (23,577 ) $ (39,832 )
Income tax provision 1,089 26 1,223 161

Interest expense and other, net

2,739 2,196 4,584 4,770
Depreciation and amortization 3,300   3,293   6,800   6,322  
EBITDA (6,279 ) (15,577 ) (10,970 ) (28,579 )
Stock-based compensation 2,977 5,350 7,544 10,932
Adjustments to revenue 84 314 194 760
Acquisition related costs 175 728
Restructuring and other 2,988     3,739    
Adjusted EBITDA $ (230 ) $ (9,738 ) $ 507   $ (16,159 )
 
ServiceSource International, Inc.
Reporting Segments
(In thousands)
(unaudited)
  Three Months Ended June 30,
2015   2014
Managed Services  

Cloud and Business
Intelligence

Managed Services  

Cloud and Business
Intelligence

Net Revenue $ 56,223 $ 5,390 $ 58,575 $ 7,422
Cost of Revenue 38,909   3,783   42,589   5,929
Gross Profit $ 17,314   $ 1,607   $ 15,986   $ 1,493
 
 
Six Months Ended June 30,
2015 2014
Managed Services

Cloud and Business
Intelligence

Managed Services

Cloud and Business
Intelligence

Net Revenue $ 114,237 $ 13,573 $ 117,144 $ 15,669
Cost of Revenue 80,905   7,602   83,895   12,218
Gross Profit $ 33,332   $ 5,971   $ 33,249   $ 3,451

Investor Relations Contact for ServiceSource:
ServiceSource International, Inc.
Erik Bylin, 415-901-4182
ebylin@servicesource.com

Source: ServiceSource International, Inc.

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