Press Release

ServiceSource Reports Second Quarter 2014 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, 2014.

"Despite some great expansions and new customer additions, our results this quarter reflect the execution challenges of our hybrid operating model," said Mike Smerklo, Chairman & CEO of ServiceSource. "As such, we are announcing plans to create two separate business units for our Managed Services and SaaS operations and to align our customer-facing teams along these different efforts. I am confident that our plan to separate our business across these distinct offerings, right size our spend levels and re-focus on our Managed Services operations will put us back on track to growth and profitability."

GAAP revenue was $66.0 million in the second quarter, representing a 2.5% decrease from the $67.7 million delivered 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 $66.3 million, reflecting a 2.0% decrease over prior year.

For the second quarter of fiscal year 2014, adjusted EBITDA was a loss of $9.7 million, compared with a gain $4.4 million for the same period last year. GAAP net loss in the quarter was $21.1 million, or $0.25 per share, compared with loss of $4.9 million, or $0.06 per share, for the same period last year. Non-GAAP net loss in the quarter was $7.3 million compared with non-GAAP net income of $1.5 million for the same period last year. Non-GAAP EPS was $0.09 loss per basic and diluted share, compared with $0.02 income 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 second quarter of 2014 results and provide 2014 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: 75456311. 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 the benefits of ServiceSource offerings, our managed services, our Renew OnDemand cloud platform and application, and/or our Scout 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 our software offerings or their failure to meet customer expectations; migrating customers to Renew OnDemand and other 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; 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, Scout or other 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; 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 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.

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Trademarks

ServiceSource, Renew OnDemand, Scout Analyticsand 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,
    2014   2013   2014   2013
                         
Net revenue   $ 65,997     $ 67,697     $ 132,813     $ 128,818  
Cost of revenue (1)   48,518     38,620     96,113     77,118  
Gross profit   17,479     29,077     36,700     51,700  
Operating expenses:                        
Sales and marketing (1)   17,212     15,367     32,883     30,175  
Research and development (1)   6,881     6,794     13,597     13,042  
General and administrative (1)   12,256     10,783     25,121     22,004  
Total operating expenses   36,349     32,944     71,601     65,221  
Loss from operations   (18,870 )   (3,867 )   (34,901 )   (13,521 )
Other (income) expense:                        
Interest expense   (2,471 )   (50 )   (4,860 )   (104 )
Other, net   275     (245 )   90     (299 )
Loss before income taxes   (21,066 )   (4,162 )   (39,671 )   (13,924 )
Income tax provision   26     744     161     1,437  
Net loss   $ (21,092 )   $ (4,906 )   $ (39,832 )   $ (15,361 )
Net loss per share, basic and diluted   $ (0.25 )   $ (0.06 )   $ (0.48 )   $ (0.20 )
Weighted average common shares outstanding, basic and diluted   82,784     77,275     82,432     76,447  
                         
(1) Includes stock-based compensation expense as follows:                        
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2014   2013   2014   2013
Cost of revenue   $ 1,099     $ 688     $ 2,133     $ 1,420  
Sales and marketing   1,583     2,449     3,420     4,982  
Research and development   736     519     1,437     1,005  
General and administrative   1,932     1,767     3,942     3,936  
Total stock-based compensation   $ 5,350     $ 5,423     $ 10,932     $ 11,343  
                                 
ServiceSource International, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
             
    June 30,   December 31,
    2014   2013
Assets            
Current assets:            
Cash and cash equivalents   $ 115,576     $ 170,132  
Short-term investments   124,911     105,001  
Accounts receivable, net   60,142     73,113  
Deferred income taxes   412     412  
Prepaid expenses and other   6,570     6,295  
Total current assets   307,611     354,953  
Property and equipment, net   28,574     27,998  
Deferred income taxes, net of current portion   2,035     2,035  
Other assets, net   16,392     8,626  
Goodwill and intangibles, net   28,987     6,334  
Total assets   $ 383,599     $ 399,946  
Liabilities and Stockholders' Equity            
Current liabilities:            
Accounts payable   $ 4,737     $ 3,610  
Accrued taxes   1,638     1,134  
Accrued compensation and benefits   21,801     19,610  
Deferred revenue   5,329     5,905  
Accrued liabilities and other   12,317     9,509  
Total current liabilities   45,822     39,768  
Convertible notes, net   117,220     113,915  
Deferred revenue, non-current   109     367  
Other long-term liabilities   4,828     5,199  
Total liabilities   167,979     159,249  
Stockholders' equity:            
Common stock   8     8  
Treasury stock   (441 )   (441 )
Additional paid-in capital   301,091     286,526  
Accumulated deficit   (86,082 )   (46,250 )
Accumulated other comprehensive income   1,044     854  
Total stockholders' equity   215,620     240,697  
Total liabilities and stockholders' equity   $ 383,599     $ 399,946  
                 
ServiceSource International, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
    Six months ended
    June 30,
    2014   2013
Cash flows from operating activities            
Net loss   $ (39,832 )   $ (15,361 )
Adjustments to reconcile net loss to net cash provided by operating activities:            
Depreciation and amortization   6,322     6,028  
Amortization of debt discount and issuance costs   3,636     24  
Accretion of premium on short-term investments   40     347  
Deferred income taxes       545  
Stock-based compensation   10,932     11,343  
Income tax charge from stock-based compensation       264  
Changes in operating assets and liabilities:            
Accounts receivable, net   15,504     4,040  
Prepaid expenses and other   (45 )   (1,204 )
Accounts payable   1,030     (558 )
Accrued taxes   315     752  
Accrued compensation and benefits   1,936     3,291  
Accrued liabilities and other   70     2,156  
Net cash (used in) provided by operating activities   (92 )   11,667  
Cash flows from investing activities            
Acquisition of property and equipment   (5,577 )   (2,224 )
Cash paid for acquisition, net of cash acquired   (32,551 )    
Purchases of short-term investments   (46,926 )   (26,647 )
Sales of short-term investments   23,134     3,154  
Maturities of short-term investments   3,943     1,250  
Net cash used in investing activities   (57,977 )   (24,467 )
Cash flows from financing activities            
Repayment on capital leases obligations   (212 )   (161 )
Proceeds from common stock issuances   3,569     13,612  
Income tax charge from stock-based compensation       (264 )
Net cash provided by financing activities   3,357     13,187  
Net (decrease) increase in cash and cash equivalents   (54,712 )   387  
Effect of exchange rate changes on cash and cash equivalents   156     448  
Cash and cash equivalents at beginning of period   170,132     76,568  
Cash and cash equivalents at end of period   $ 115,576     $ 77,403  
                 

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, 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 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,
        2014   2013   2014   2013
Net Revenue                            
GAAP net revenue       $ 65,997     $ 67,697     $ 132,813     $ 128,818  
Adjustments to revenue   (A)   314         760      
Non-GAAP net revenue       $ 66,311     $ 67,697     $ 133,573     $ 128,818  
                             
Gross Profit                            
GAAP gross profit       $ 17,479     $ 29,077     $ 36,700     $ 51,700  
Non-GAAP adjustments:                            
Adjustments to revenue   (A)   314         760      
Stock-based compensation   (B)   1,099     688     2,133     1,420  
Amortization of internally-developed software   (C)   505     838     1,036     1,658  
Amortization of purchased intangible assets   (D)   348         623      
Non-GAAP gross profit       $ 19,745     $ 30,603     $ 41,252     $ 54,778  
                             
Gross Profit %                            
GAAP gross profit       26 %   43 %   28 %   40 %
Non-GAAP adjustments:                            
Adjustments to revenue   (A)   %   %   1 %   %
Stock-based compensation   (B)   2 %   1 %   2 %   1 %
Amortization of internally-developed software   (C)   1 %   1 %   1 %   1 %
Amortization of purchased intangible assets   (D)   1 %   %   %   %
Non-GAAP gross profit       30 %   45 %   31 %   43 %
Certain totals do not add due to rounding                            
Operating Expenses                            
GAAP operating expenses       $ 36,349     $ 32,944     $ 71,601     $ 65,221  
Stock-based compensation   (B)   (4,251 )   (4,735 )   (8,799 )   (9,923 )
Amortization of internally-developed software   (C)   (83 )   (432 )   (141 )   (883 )
Amortization of purchased intangible assets   (D)   (212 )       (377 )    
Acquisition related costs   (E)   (175 )       (728 )    
Non-GAAP operating expenses       $ 31,628     $ 27,777     $ 61,556     $ 54,415  
                             
Net loss                            
GAAP net loss       $ (21,092 )   $ (4,906 )   $ (39,832 )   $ (15,361 )
Non-GAAP adjustments:                            
Adjustments to revenue   (A)   314         760      
Stock-based compensation   (B)   5,350     5,423     10,932     11,343  
Amortization of internally-developed software   (C)   588     1,270     1,177     2,541  
Amortization of purchased intangible assets   (D)   560         1,000      
Acquisition related costs   (E)   175         728      
Non-cash interest expense   (F)   1,877         3,665      
Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate   (G)   4,907     (268 )   8,725     1,453  
Non-GAAP net income (loss)       $ (7,321 )   $ 1,519     $ (12,845 )   $ (24 )
                             
Diluted Net Loss Per Share                            
GAAP net loss per share       $ (0.25 )   $ (0.06 )   $ (0.48 )   $ (0.20 )
Non-GAAP adjustments:                            
Adjustments to revenue   (A)           0.01      
Stock-based compensation   (B)   0.06     0.07     0.13     0.15  
Amortization of internally-developed software   (C)   0.01     0.02     0.01     0.03  
Amortization of purchased intangible assets   (D)   0.01         0.01      
Acquisition related costs   (E)           0.01      
Non-cash interest expense   (F)   0.02         0.04      
Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate   (G)   0.06         0.11     0.02  
Non-GAAP diluted net income (loss) per share       $ (0.09 )   $ 0.02     $ (0.16 )   $  
Certain totals do not add due to rounding                            
Shares used in calculating diluted net loss per share on a non-GAAP basis       82,784     81,855     82,432     76,447  
                             

Footnotes to GAAP to Non-GAAP Reconciliation

(A) Adjustments to revenue - Due to purchase accounting rules, upon acquisition, we recorded an adjustment of $1.65 million to reduce the balance of deferred revenue related to the assumed client contracts acquired from Scout Analytics. As a result of this adjustment, $0.3 million of revenue was not recognized for the three months ended June 30, 2014 and $0.8 million for the six months ended June 30, 2014. Therefore, revenue is adjusted by an increase of $0.3 million to arrive at non-GAAP revenue for the three months ended June 30, 2014 and $0.8 million to arrive at non-GAAP revenue for the six months ended June 30, 2014.

(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) 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 and F 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,
    2014   2013   2014   2013
         
Net loss   $ (21,092 )   $ (4,906 )   $ (39,832 )   $ (15,361 )
Income tax provision   26     744     161     1,437  
Other expense, net   2,196     295     4,770     403  
Depreciation and amortization   3,293     2,814     6,322     6,020  
EBITDA   (15,577 )   (1,053 )   (28,579 )   (7,501 )
Stock-based compensation   5,350     5,423     10,932    

11,343

 
Adjustments to revenue   314         760      
Acquisition related costs   175         728      
Adjusted EBITDA   $ (9,738 )   $ 4,370     $ (16,159 )   $ 3,842  
                                 
ServiceSource International, Inc.
Reporting Segments
(In thousands)
(unaudited)
         
    Three Months Ended June 30,
    2014   2013
    Managed Services  

Cloud and Business
Intelligence

  Managed Services  

Cloud and Business
Intelligence

Net Revenue   $ 58,575    

$

7,422     $ 63,045     $ 4,652
Cost of Revenue   42,589     5,929     36,103     2,517
Gross Profit  

$

15,986

   

$

1,493

   

$

26,942

   

$

2,135

                               
                               
    Six Months Ended June 30,
    2014   2013
    Managed Services  

Cloud and Business
Intelligence

  Managed Services  

Cloud and Business
Intelligence

Net Revenue   $ 117,144     $ 15,669     $ 121,384     $ 7,434
Cost of Revenue   83,895     12,218     72,221     4,897
Gross Profit  

$

33,249

   

$

3,451

   

$

49,163

   

$

2,537

 

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

Source: ServiceSource International, Inc.

 

 

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