Press Release

ServiceSource Reports Fourth Quarter and Fiscal Year 2016 Financial Results

 

Signed 12 new clients in 2016

Expanded FY2016 gross margins by 3 percentage points

SAN FRANCISCO--(BUSINESS WIRE)-- ServiceSource® (Nasdaq: SREV), a global leader in customer success and revenue lifecycle management solutions, today announced financial results for the fourth quarter and full year ended December 31, 2016.

"Our investments in 2016 in our people, platforms, and global Revenue Delivery Centers improved the results we delivered for our clients and helped us win 12 new logos last year. As we accelerate our digital transformation in 2017, we believe our solutions around customer success, inside sales, channel management, and renewals will drive even deeper value for new and existing clients. While we were strengthening our foundation with these investments, we also drove a 3 percentage point improvement to gross margin for the second year in a row and increased adjusted EBITDA by $11.5 million," said Christopher M. Carrington, CEO of ServiceSource. "The foundation we built this past year will serve us well moving forward as we expand our offerings to help clients find, convert, grow, and retain revenue at all points along their customers' journey."

GAAP revenue was $68.7 million in the fourth quarter, representing a 5.7% increase from the $65.0 million delivered in the same period in the prior year. Non-GAAP revenue was $68.7 million, reflecting a 5.6% increase from the same period in the prior year.

For the fourth quarter of fiscal year 2016, GAAP net loss in the quarter was $8.5 million, or $0.10 per share, compared with GAAP net loss of $6.0 million, or $0.07 per share, for the same period last year. Non-GAAP net income in the quarter was $1.7 million compared with Non-GAAP net income of $0.3 million for the same period last year. Non-GAAP net income was $0.02 per basic and diluted share, compared with non-GAAP net income of $0.00 per basic and diluted share for the same period last year. Adjusted EBITDA was $5.7 million, compared with $2.3 million for the same period last year.

For the full year 2016, GAAP revenue was $252.9 million, compared with $252.2 million for fiscal year 2015. GAAP net loss for the year was $32.1 million, or $0.37 per share, compared with a GAAP net loss of $40.6 million, or $0.48 per share for 2015. Non-GAAP net income for the year was $3.6 million, compared with non-GAAP net loss of $4.2 million in 2015. Non-GAAP net income for the year was $0.04 per basic and diluted share, compared with non-GAAP net loss of $0.05 per basic and diluted share for 2015. Adjusted EBITDA was $12.9 million, compared with adjusted EBITDA of $1.4 million for fiscal year 2015.

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

With respect to Q1 and full year guidance, while ServiceSource remains confident in its market position and future growth prospects, in the first quarter of 2017 the Company has experienced churn substantially above industry norms driven by several clients. This churn is having an impact on revenue in Q1 and will materially affect 2017 growth expectations.

For the first quarter of fiscal 2017, ServiceSource is providing the following guidance:

  • Revenue of $55 million to $58 million
  • GAAP gross margin of 26% to 29%; non-GAAP gross margin of 31% to 34%
  • GAAP operating expenses of approximately $27 million; non-GAAP operating expenses of approximately $23 million
  • GAAP net loss of $11.5 million to $14.5 million; non-GAAP net loss of $1.5 million to $3.5 million
  • Adjusted EBITDA loss of $1 million to $4 million

For the fiscal 2017, ServiceSource is providing the following guidance:

  • Revenue of $248 million to $258 million
  • GAAP gross margin of 32% to 34%; non-GAAP gross margin of 38% to 40%
  • GAAP operating expenses of $109 million to $117 million; non-GAAP operating expenses of $92 million to $98 million
  • GAAP net loss of $35.5 million to $39.5 million; non-GAAP net income of $2 million to $5 million
  • Adjusted EBITDA of $11 million to $15 million

Please see the fourth quarter presentation on the Events and Presentations section of the Investor Relations web site (http://ir.servicesource.com/events) for a reconciliation between GAAP and non-GAAP measures in our guidance.

Quarterly Conference Call

ServiceSource will discuss its fourth 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: 56067655. 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 our forward-looking statements. Those risks and uncertainties include: a decline in client renewals, the loss of one or more of our key clients or the contraction in our revenue from one or more of our key clients, in each case resulting in churn, or our clients not expanding their relationships with us; the risk of problems implementing our technologies or that our technologies will not meet customer expectations; that the market for our solution is underdeveloped and may not grow; errors in estimates as to the renewal rate improvements and/or service revenue we can generate for our customers; 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; 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; problems encountered by our clients in their business cause them to cancel or reduce their business with us our ability to achieve our expected benefits from international expansion; economic or other adverse events or conditions affecting the technology industry; our ability to protect our intellectual property rights; the risk of claims that our offerings infringe the intellectual property rights of others; 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 International, Inc. (NASDAQ:SREV) helps the world's leading brands grow closer to their customers. As a global leader in outsourced inside sales, customer success and recurring revenue growth and retention solutions, ServiceSource expands customer lifetime value by helping companies to more efficiently and effectively find, convert, grow and retain their B2B customer relationships. Trusted by global market leaders in the cloud/XaaS, software, technology hardware, medical device & diagnostic equipment and industrial IoT sectors, ServiceSource sells, manages or renews $9 billion of revenue annually on behalf of its clients. Leveraging a robust technology suite, predictive data models and more than 3,000 revenue delivery professionals speaking 45 languages, only ServiceSource brings to market nearly 20 years of expertise and the ability to drive recurring revenue growth to more than 170 countries. To learn more, visit 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

 
ServiceSource International, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
 
    Three Months Ended   Twelve Months Ended
    December 31,   December 31,
    2016   2015   2016   2015
Net revenue   $ 68,654     $ 64,960     $ 252,887     $ 252,203  
Cost of revenue (1)   42,502     40,293     165,069     171,369  
Gross profit   26,152     24,667     87,818     80,834  
Operating expenses:                
Sales and marketing (1)   11,345     12,419     41,972     44,086  
Research and development (1)   2,212     3,538     8,344     16,480  
General and administrative (1)   14,763     12,521     52,995     46,299  
Restructuring and other       (75 )       3,662  
Total operating expenses   28,320     28,403     103,311     110,527  
Loss from operations   (2,168 )   (3,736 )   (15,493 )   (29,693 )
Interest expense and other, net   (3,204 )   (2,218 )   (8,704 )   (9,316 )
Impairment of cost basis equity investment   (2,200 )       (4,500 )    
Loss before income taxes   (7,572 )   (5,954 )   (28,697 )   (39,009 )
Income tax provision   924     68     3,429     1,584  
Net loss   $ (8,496 )   $ (6,022 )   $ (32,126 )   $ (40,593 )
Net loss per share, basic and diluted   $ (0.10 )   $ (0.07 )   $ (0.37 )   $ (0.48 )
Weighted average common shares outstanding, basic and diluted   87,481     86,318     86,318     85,417  
 
(1) Includes stock-based compensation expense as follows:                
 
    Three Months Ended   Twelve Months Ended
    December 31,   December 31,
    2016   2015   2016   2015
Cost of revenue   $ 338     $ 466     $ 1,484     $ 2,666  
Sales and marketing   852     950     3,004     3,393  
Research and development   138         586     1,299  
General and administrative   1,983     1,166     5,678     6,029  
Restructuring and other   $     $     $     $ 2,579  
Total stock-based compensation   $ 3,311     $ 2,582     $ 10,752     $ 15,966  
 
ServiceSource International, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
         
    December 31,   December 31,
    2016   2015
Assets        
Current assets:        
Cash and cash equivalents   $ 47,692     $ 72,334  
Short-term investments   137,881     136,378  
Accounts receivable, net   63,289     56,563  
Deferred income taxes       97  
Prepaid expenses and other   7,607     8,167  
Total current assets   256,469     273,539  
Property and equipment, net   38,180     25,903  
Deferred income taxes, net of current portion   64     1,759  
Goodwill and intangibles, net   7,932     9,444  
Other assets, net   3,445     6,919  
Total assets   $ 306,090     $ 317,564  
         
Liabilities and Stockholders' Equity        
Current liabilities:        
Accounts payable   $ 1,916     $ 1,067  
Accrued taxes   1,388     1,112  
Accrued compensation and benefits   21,579     22,116  
Deferred revenue   4,152     5,770  
Accrued expenses  

5,892

    4,716  
Other current liabilities  

2,959

    2,327  
Total current liabilities  

37,886

    37,108  
Obligations under capital leases, net of current portion   113     198  
Convertible notes, net   134,775     126,051  
Other long-term liabilities  

6,382

    6,232  
Total liabilities  

179,156

    169,589  
Stockholders' equity:        
Common stock   8     8  
Treasury stock   (441 )   (441 )
Additional paid-in capital  

344,521

    331,922  
Accumulated deficit  

(216,363

)   (183,941 )
Accumulated other comprehensive income   (791 )   427  
Total stockholders' equity  

126,934

    147,975  
Total liabilities and stockholders' equity   $ 306,090     $ 317,564  
 
ServiceSource International, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
    Twelve months ended
    December 31,
    2016   2015
Cash flows from operating activities        
Net loss   $ (32,126 )   $ (40,593 )
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation and amortization   16,052     13,736  
Amortization of debt discount and issuance costs   8,724     8,048  
Accretion of premium on short-term investments and other   1,091     (101 )
Deferred income taxes   1,924     969  
Stock-based compensation   10,752     13,387  
Restructuring and other       2,579  
Impairment of cost basis equity investment   4,500      
Changes in operating assets and liabilities:        
Accounts receivable, net   (7,156 )   12,002  
Deferred revenue   (1,589 )   (1,204 )
Prepaid expenses and other   (673 )   (1,825 )
Accounts payable   872     (1,562 )
Accrued taxes   269     (539 )
Accrued compensation and benefits   (119 )   2,706  
Accrued expense   1,182     (3,940 )
Other liabilities   833     (66 )
Net cash provided by operating activities   4,536     3,597  
Cash flows from investing activities        
Acquisition of property and equipment   (26,421 )   (11,975 )
Restricted cash       (1,244 )
Purchases of short-term investments   (102,130 )   (95,421 )
Sales of short-term investments   98,028     82,351  
Maturities of short-term investments   1,525     1,095  
Net cash used in investing activities   (28,998 )   (25,194 )
Cash flows from financing activities        
Repayment on capital lease obligations   (131 )   (170 )
Repurchase of common stock   (8,921 )   (1,212 )
Proceeds from common stock issuances   10,866     5,703  
Minimum tax withholding requirement   (877 )   (974 )

Net cash provided by financing activities

  937     3,347  
Net decrease in cash and cash equivalents   (23,525 )   (18,250 )
Effect of exchange rate changes on cash and cash equivalents   (1,117 )   202  
Cash and cash equivalents at beginning of period   72,334     90,382  
Cash and cash equivalents at end of period   $ 47,692     $ 72,334  
                 

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, litigation reserve, impairment of cost basis equity investment, non-cash interest expense and applying an income tax rate of 40% on non-GAAP adjustments as well as the impact of normalizing the effective income tax rate. 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, litigation reserve, impairment of cost basis equity investment 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   Twelve Months Ended
        December 31,   December 31,
        2016   2015   2016   2015
Net Revenue                    
GAAP net revenue       $ 68,654     $ 64,960     $ 252,887     $ 252,203  
Adjustments to revenue   (A)       75         350  
Non-GAAP net revenue       $ 68,654     $ 65,035     $ 252,887     $ 252,553  
                     
Gross Profit                    
GAAP gross profit       $ 26,152     $ 24,667     $ 87,818     $ 80,834  
Non-GAAP adjustments:                    
Adjustments to revenue   (A)       75         350  
Stock-based compensation   (B)   338     466     1,484     2,666  
Amortization of internally-developed software   (C)   2,076     1,100     6,943     4,483  
Amortization of purchased intangible assets   (D)   247     247     988     988  
Non-GAAP gross profit       $ 28,813     $ 26,555     $ 97,233     $ 89,321  
                     
Gross Profit %                    
GAAP gross profit       38 %   38 %   35 %   32 %
Non-GAAP adjustments:                    
Adjustments to revenue   (A)   %   %   %   %
Stock-based compensation   (B)   %   1 %   1 %   1 %
Amortization of internally-developed software   (C)   3 %   2 %   3 %   2 %
Amortization of purchased intangible assets   (D)   %   %   %   %
Non-GAAP gross profit       42 %   41 %   38 %   35 %
Certain totals do not add due to rounding                    
Operating Expenses                    
GAAP operating expenses       $ 28,320     $ 28,403     $ 103,311     $ 110,527  
Stock-based compensation   (B)   (2,973 )   (2,116 )   (9,268 )   (10,721 )
Amortization of internally-developed software   (C)   (242 )   (291 )   (691 )   (542 )
Amortization of purchased intangible assets   (D)   (131 )   (131 )   (525 )   (525 )
Restructuring and other   (E)       75         (3,662 )
Litigation reserve   (F)           (1,500 )    
Non-GAAP operating expenses       $ 24,974     $ 25,940     $ 91,327     $ 95,077  
                     
Net loss                    
GAAP net loss       $ (8,496 )   $ (6,022 )   $ (32,126 )   $ (40,593 )
Non-GAAP adjustments:                    
Adjustments to revenue   (A)       75         350  
Stock-based compensation   (B)   3,311     2,582     10,752     13,387  
Amortization of internally-developed software   (C)   2,317     1,390     7,634     5,025  
Amortization of purchased intangible assets   (D)   378     378     1,513     1,513  
Restructuring and other   (E)       (75 )       3,662  
Litigation reserve   (F)           1,500      
Impairment of cost basis equity investment   (G)   2,200         4,500      
Non-cash interest expense   (H)   2,260     2,092     8,724     8,057  
Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate   (I)   (234 )   (127 )   1,059     4,390  
Non-GAAP net income (loss)       $ 1,736     $ 293     $ 3,556     $ (4,209 )
                     
Diluted Net Loss Per Share                    
GAAP net loss per share       $ (0.10 )   $ (0.07 )   $ (0.37 )   $ (0.48 )
Non-GAAP adjustments:                    
Adjustments to revenue   (A)                
Stock-based compensation   (B)   0.04     0.03     0.12     0.16  
Amortization of internally-developed software   (C)   0.03     0.02     0.09     0.06  
Amortization of purchased intangible assets   (D)           0.02     0.02  
Restructuring and other   (E)               0.04  
Litigation reserve   (F)           0.02      
Impairment of cost basis equity investment   (G)   0.03         0.05      
Non-cash interest expense   (H)   0.03     0.02     0.10     0.09  
Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate   (I)           0.01     0.05  
Non-GAAP diluted net income (loss) per share       $ 0.02     $     $ 0.04     $ (0.05 )
Certain totals do not add due to rounding                    
Shares used in calculating diluted net income (loss) per share on a non-GAAP basis       87,481     86,318     86,318     85,417  

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 $0.4 million of revenue was not recognized for the three and twelve months ended December 31, 2015, respectively. At December 31, 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) Litigation reserve. The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with accounting for contingencies. As of December 31, 2016, the Company has accrued a $1.5 million reserve relating to our potential liability for currently pending disputes. These reserves are one-time in nature charges that are not indicative of our core operating performance.

(G) Impairment of cost basis equity investment. In 2013 we made an equity investment in a private company for $4.5 million, which represented less than 5% of the outstanding equity of the company. We carry this investment on a cost basis and periodically evaluate its recoverability to determine if there is an impairment in the carrying value. Based on unfavorable growth trends and declining financial performance of this investee, the Company determined that its investment was impaired during the third quarter of 2016 and recorded a $2.3 million impairment charge. During the three months ended December 31, 2016 the Company determined that the investment was further impaired and recorded a $2.2 million impairment charge at December 31, 2016. This equity investment is not an asset that supports or is use in our core operations and the impairment charge is not indicative of our core operating performance.

(H) 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.

(I) 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, G and H 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   Twelve months ended
    December 31,   December 31,
    2016   2015   2016   2015
             
Net loss   $ (8,496 )   $ (6,022 )   $ (32,126 )   $ (40,593 )
Income tax provision   924     68     3,429     1,584  
Interest expense and other, net   3,204     2,218     8,704     9,316  
Depreciation and amortization   4,529     3,416     16,165     13,736  
EBITDA   161     (320 )   (3,828 )   (15,957 )
Stock-based compensation   3,311     2,582     10,752     13,387  
Litigation reserve           1,500      
Impairment of cost basis equity investment   2,200         4,500      
Adjustments to revenue       75         350  
Restructuring and other (1)       (75 )       3,662  
Adjusted EBITDA   $ 5,672     $ 2,262     $ 12,924     $ 1,442  
 
(1) Restructuring and other includes $2.6 million of stock-based compensation in the twelve-months ended December 31, 2015.

 

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

 

Source: ServiceSource International, Inc.

 

 

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