August 8, 2016

ServiceSource Reports Second Quarter 2016 Financial Results

Delivers year-over-year revenue growth

Record number of client wins, including three new logos

Sixth consecutive quarter of expanding gross margins, year-over-year

SAN FRANCISCO--(BUSINESS WIRE)-- ServiceSource® (Nasdaq: SREV), the global leader in customer success and revenue lifecycle management solutions, today announced financial results for the second quarter ended June 30, 2016.

"ServiceSource delivered strong results in the second quarter. Our global team is accelerating performance ahead of plan, resulting in the first quarter of year-over-year revenue growth in more than two years. Our people, process, and technology investments in our Revenue-as-a-Service platform are allowing us to convert opportunities for our clients more effectively and efficiently. This led to revenue, gross margin and EBITDA results that outperformed the upwardly revised guidance provided on June 9, 2016," said Christopher M. Carrington, CEO of ServiceSource. "In addition to our strong financial performance, we saw sustained progress and positive momentum across all areas of our business. Our sales team closed 25 transactions in the quarter, an all-time record for ServiceSource, which included three new logo wins. Our client relationships continue to strengthen, resulting in business expansions across all five of our target verticals. Lastly, our value proposition is resonating more strongly in the marketplace, positioning ServiceSource as a mission-critical partner for companies looking to succeed in the emerging outcomes-based economy."

GAAP revenue was $62.0 million in the second quarter, representing a 0.6% increase from the $61.6 million delivered in same the period in the prior year. Non-GAAP revenue was $62.0 million, reflecting a 0.4% increase from the same period in the prior year.

For the second quarter of fiscal year 2016, GAAP net loss in the quarter was $5.2 million, or $0.06 per share, compared with GAAP net loss of $13.5 million, or $0.16 per share, for the same period last year. Non-GAAP net income in the quarter was $1.1 million compared with Non-GAAP net loss of $1.7 million for the same period last year. Non-GAAP net income was $0.01 per basic and diluted share, compared with non-GAAP net loss of $0.02 per basic and diluted share for the same period last year. Adjusted EBITDA was $2.9 million, compared with a loss of $0.2 million 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 2016 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: 47540801. 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 expectations for financial and operational performance. 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; the ability to integrate our SaaS technologies 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 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; the potential effect of mergers and acquisitions on our customer base; 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 achieve our expected benefits from international expansion; 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, technology-enabled solutions and best-practice processes proven to grow and retain revenue from existing customers. With a holistic approach to the entire revenue lifecycle, ServiceSource solutions help companies drive customer adoption, expansion and renewal. 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 Revenue Lifecycle Management technology platform. For more information, go to http://www.servicesource.com.

Connect with ServiceSource:

http://www.facebook.com/ServiceSource
http://twitter.com/servicesource
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
2016   2015 2016   2015
Net revenue $ 61,969 $ 61,613 $ 121,719 $ 127,810
Cost of revenue (1) 40,344   42,692   81,778   88,507  
Gross profit 21,625   18,921   39,941   39,303  
Operating expenses:
Sales and marketing (1) 11,326 10,165 21,779 21,000
Research and development (1) 2,016 4,646 4,180 9,468
General and administrative (1) 11,552 10,701 23,595 22,866
Restructuring and other   2,988     3,739  
Total operating expenses 24,894   28,500   49,554   57,073  
Loss from operations (3,269 ) (9,579 ) (9,613 ) (17,770 )
Interest expense and other, net (1,700 ) (2,739 ) (3,209 ) (4,584 )
Loss before income taxes (4,969 ) (12,318 ) (12,822 ) (22,354 )
Income tax provision 249   1,134   1,537   1,313  
Net loss $ (5,218 ) $ (13,452 ) $ (14,359 ) $ (23,667 )
Net loss per share, basic and diluted $ (0.06 ) $ (0.16 ) $ (0.17 ) $ (0.28 )
Weighted average common shares outstanding, basic and diluted 85,413   85,072   85,747   84,665  
 
(1) Includes stock-based compensation expense as follows:
Three Months Ended Six Months Ended
June 30 June 30
2016 2015 2016 2015
Cost of revenue $ 379 $ 659 $ 847 $ 1,495
Sales and marketing 726 716 1,588 1,647
Research and development 144 444 341 991
General and administrative 1,087   1,158   2,419   3,411  
Total stock-based compensation $ 2,336   $ 2,977   $ 5,195   $ 7,544  
 
ServiceSource International, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
 
  June 30,   December 31,
2016 2015
Assets
Current assets:
Cash and cash equivalents $ 55,296 $ 72,334
Short-term investments 138,746 136,378
Accounts receivable, net 54,561 56,563
Deferred income taxes 97 97
Prepaid expenses and other 7,242   8,167  
Total current assets 255,942 273,539
Property and equipment, net 34,340 25,903
Deferred income taxes, net of current portion 169 1,759
Goodwill and intangibles, net 8,688 9,444
Other assets, net 7,677   6,919  
Total assets $ 306,816   $ 317,564  
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,310 $ 1,067
Accrued taxes 896 1,112
Accrued compensation and benefits 22,467 22,116
Deferred revenue 5,480 5,770
Accrued expenses 5,818 4,716
Other current liabilities 2,559   2,327  
Total current liabilities 39,530 37,108
Obligations under capital leases, net of current portion 153 198
Convertible notes, net 130,299 126,051
Other long-term liabilities 6,409   6,232  
Total liabilities 176,391 169,589
Stockholders' equity:
Common stock 8 8
Treasury stock (441 ) (441 )
Additional paid-in capital 328,916 331,922
Accumulated deficit (198,296 ) (183,941 )
Accumulated other comprehensive income 238   427  
Total stockholders' equity 130,425   147,975  
Total liabilities and stockholders' equity $ 306,816   $ 317,564  
 
ServiceSource International, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
  Six months ended
June 30,
2016   2015
Cash flows from operating activities
Net loss $ (14,359 ) $ (23,667 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 7,564 6,783
Amortization of debt discount and issuance costs 4,247 3,903
Accretion of premium on short-term investments and other 554 (497 )
Deferred income taxes 855 1,070
Stock-based compensation 5,195 7,544
Restructuring and other 3,450
Changes in operating assets and liabilities:
Accounts receivable, net 2,287 11,754
Deferred revenue (303 ) 338
Prepaid expenses and other 61 (852 )
Accounts payable 766 (2,064 )
Accrued taxes (231 ) (555 )
Accrued compensation and benefits 317 (1,570 )
Accrued expense 1,031 (2,448 )
Other liabilities 336   125  
Net cash provided by operating activities 8,320   3,314  
Cash flows from investing activities
Acquisition of property and equipment (14,316 ) (5,114 )
Restricted cash (1,244 )
Purchases of short-term investments (55,133 ) (51,074 )
Sales of short-term investments 53,361 40,194
Maturities of short-term investments 350   290  
Net cash used in investing activities (15,738 ) (16,948 )
Cash flows from financing activities
Repayment on capital lease obligations (103 ) (91 )
Repurchase of common stock (8,921 )
Proceeds from common stock issuances 739   944  
Net cash (used in) provided by financing activities (8,285 ) 853  
Net decrease in cash and cash equivalents (15,703 ) (12,781 )
Effect of exchange rate changes on cash and cash equivalents (1,335 ) 444
Cash and cash equivalents at beginning of period 72,334   90,382  
Cash and cash equivalents at end of period $ 55,296   $ 78,045  
 

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, restructuring related costs, 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, 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,
2016   2015 2016   2015
Net Revenue
GAAP net revenue $ 61,969 $ 61,613 $ 121,719 $ 127,810
Adjustments to revenue (A)   84     194  
Non-GAAP net revenue $ 61,969   $ 61,697   $ 121,719   $ 128,004  
 
Gross Profit
GAAP gross profit $ 21,625 $ 18,921 $ 39,941 $ 39,303
Non-GAAP adjustments:
Adjustments to revenue (A) 84 194
Stock-based compensation (B) 379 659 847 1,495
Amortization of internally-developed software (C) 1,598 1,016 3,173 2,021
Amortization of purchased intangible assets (D) 247   247   494   494  
Non-GAAP gross profit $ 23,849   $ 20,927   $ 44,455   $ 43,507  
 
Gross Profit %
GAAP gross profit 35 % 31 % 33 % 31 %
Non-GAAP adjustments:
Adjustments to revenue (A) % % % %
Stock-based compensation (B) 1 % 1 % 1 % 1 %
Amortization of internally-developed software (C) 3 % 2 % 3 % 2 %
Amortization of purchased intangible assets (D) % % % %
Non-GAAP gross profit 38 % 34 % 37 % 34 %
Certain totals do not add due to rounding
Operating Expenses
GAAP operating expenses $ 24,894 $ 28,500 $ 49,554 $ 57,073
Stock-based compensation (B) (1,957 ) (2,318 ) (4,348 ) (6,049 )
Amortization of internally-developed software (C) (143 ) (84 ) (255 ) (168 )
Amortization of purchased intangible assets (D) (131 ) (131 ) (263 ) (263 )
Restructuring and other (F)   (2,988 )   (3,739 )
Non-GAAP operating expenses $ 22,663   $ 22,979   $ 44,688   $ 46,854  
 
Net loss
GAAP net loss $ (5,218 ) $ (13,452 ) $ (14,359 ) $ (23,667 )
Non-GAAP adjustments:
Adjustments to revenue (A) 84 194
Stock-based compensation (B) 2,336 2,977 5,195 7,544
Amortization of internally-developed software (C) 1,741 1,100 3,428 2,189
Amortization of purchased intangible assets (D) 378 378 756 756
Restructuring and other (E) 2,988 3,739
Non-cash interest expense (F) 2,144 1,989 4,247 3,913
Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate (G) (295 ) 2,210   1,323   2,830  
Non-GAAP net income (loss) $ 1,086   $ (1,726 ) $ 590   $ (2,502 )
 
Diluted Net Loss Per Share
GAAP net loss per share $ (0.06 ) $ (0.16 ) $ (0.17 ) $ (0.28 )
Non-GAAP adjustments:
Adjustments to revenue (A)
Stock-based compensation (B) 0.03 0.03 0.06 0.09
Amortization of internally-developed software (C) 0.02 0.01 0.04 0.03
Amortization of purchased intangible assets (D) 0.01 0.01
Restructuring and other (E) 0.04 0.04
Non-cash interest expense (F) 0.03 0.02 0.05 0.05
Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate (G)   0.03   0.02   0.03  
Non-GAAP diluted net income (loss) per share $ 0.01   $ (0.02 ) $ 0.01   $ (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 85,413   85,072   85,747   84,665  
 

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 and $0.2 million of revenue was not recognized for the three and six months ended June 30, 2015, respectively. At June 30, 2016 we have fully realized the impact of this adjustment in our non-GAAP net revenue presentation.

(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) Restructuring and other expense. Included in our GAAP presentation, we incurred expenses related to our restructuring effort to better align our cost structure with current revenue levels. Restructuring and other expenses consist primarily of employees' severance payments, related employee benefits, stock-based compensation related to accelerated vesting of certain equity awards and charges related to cancellation of contracts. These are one-time in nature costs that are not indicative of our core operating performance.

(F) 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.

(G) 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,
2016   2015 2016   2015
 
Net loss $ (5,218 ) $ (13,452 ) $ (14,359 ) $ (23,667 )
Income tax provision 249 1,134 1,537 1,313
Interest expense and other, net 1,700 2,739 3,209 4,584
Depreciation and amortization 3,827   3,300   7,564   6,800  
EBITDA 558 (6,279 ) (2,049 ) (10,970 )
Stock-based compensation 2,336 2,977 5,195 7,544
Adjustments to revenue 84 194
Restructuring and other   2,988     3,739  
Adjusted EBITDA $ 2,894   $ (230 ) $ 3,146   $ 507  

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

Source: ServiceSource International, Inc.

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