Q1 2020 Earnings Call
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Thank you for standing by welcome to the service sources first quarter 2020 earnings call.
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I would now with him a couple times your speech today chat line executive Vice President strategy corporate development.
Thank you. Please go ahead Sir.
Thank you operator, and good day, everyone. Thank you for joining us and welcome to serve resources first quarter earnings call to discuss our results for the quarter ended March 31st 2020 on the call today, our Gary more servers, chairman and CEO.
And rich Walker our CFO.
As a reminder, our FCC filings in the earnings release, we issued yesterday after market close are available on our website at www Dot IR dots Servicesource dot com.
In addition, we have posted earnings slides to accompany our comments today.
Shortly after this call we'll post an audio replay of this call. It a copy of our prepared remarks to our website.
Before we begin I'd like to remind you that during the call, we'll make projections or forward looking statements involve risks related to future events.
All statements made during the call reflect our views as of today, maybe 2020 are based upon the information currently available to us.
All projections and forward looking statements should be considered in conjunction with a cautionary statements in the earnings press release and risk factors included in <unk> SEC filings, including a report on form 10-Q.
These documents contain and identify important factors that could cause actual events and results to materially differ from those kicks in or projections and forward looking statements.
We disclaim any duty to revise or update any forward looking statements.
In addition, during the call. We will also be discussing certain non-GAAP financial measures, which we believe provides additional information to enhance the understanding of called management assesses the operating performance of the business.
A reconciliation of the GAAP and non-GAAP measures can be found in the earnings release that accompany this call.
With that I will turn the call over to Gary.
Thank you Chad and welcome everyone to our earnings conference call for the first quarter of 2020.
Before diving in here, we would just like to offer our heartfelt sympathies to those who have been personally affected by the code at 19 and dynamic.
As well so express our deepest appreciation to the healthcare workers first responders and others, who are on the front line to this battle.
All about sort of nearly dealing with unprecedented times, but we're incredibly proud of how the service source team has rallied together to support each other our priority has been and we'll continue to be on the safety health and wellbeing of our employees around the world, while ensuring we fulfill.
Our brand promise and deliver on behalf of the client who had been trusted us with their business.
As you see in our results, we executed well against the things within our control and delivered solid financial performance for the first quarter in the past few weeks, however, things outside our control like the duration or severity of the crisis.
I mean or magnitude of economic impact and whether or how these factors will affect our clients and their customers have created a higher degree of uncertainty and they potentially wider range of outcomes as a result, and inline with our commitment to transparency. We believe it is prudent.
To withdraw and actual outlook that we previously provided for the full year, our business remains strong and resilient and we're confident in our ability to execute to our internal objectives and priorities. We will continuously monitor the environment, we are in and revisit our out.
Well once we feel there's a greater clarity and visibility.
Moving onto the rest of our agenda for todays call.
I plan to cover a couple of topics with you.
First I will share an update on the activities and actions. We've taken then response because of it and then I will go into our accomplishments during Q1 and that demonstrable progress we continued to make across the organization I.
I will then hand, the call over to rich to provide a deeper review of our financial results before I close is out and open the call for questions.
Starting first with what I am sure is top of mind for many of you.
It's what we've done to position the company and what is obviously, a fluid and dynamic environment. Our proactive efforts throughout Q1 enabled us to mitigate risk we're disruption to the business to care for employees and to sustain the mission critical work, we do for client beginning early.
In February we formed a cobot security and incident response team and properly began testing our business continuity plan in close collaboration with our clients. We began taking action in early March we made rapid wholesale changes to our infrastructure system.
Processes and policy to enable in entirely virtual operating model.
Within a matter of days and prior to government restrictions in lockstep locked down we successfully transition our entire global workforce say, 100% remote work from home environment.
For our clients our dedication allowed them to have a strong close to their month or quarter.
I had heard a lot of positive feedback from our clients and believe we have earned goodwill due to how we supported them and their customers. It goes without saying that there is nothing unusual.
About the current environment, but our proactive in early response allowed us to effectively maintain business as usual into first quarter and we continued to recruit onboard train and operate through our new model recognizing that many companies are facing very pronounced disruptions.
We feel very fortunate that we've been able to maintain full delivery capability for client and better our employees and continues to earn a living in an environment that it's safe is for them their families and their communities.
With that context, I will now speak to our typical Q1 activities and highlight.
We are proud at how well our teams executed to deliver financial results above our internal expectations. During what has been a challenging period as we discussed on our February call, we anticipated a tougher year over year revenue comparable given the actions we took last year.
The margin rightsize our portfolio.
We knew we would continue to face a topline trade off as we ramp new revenue, while rolling off more revenue from churned, we're proactively accident engagement that said, we managed well through these cross currently in the first quarter generating revenue of $50.1 million down less than.
10% from Q1 up last year.
In anticipation of the lower revenue base, we demonstrated rigorous cost management and expense discipline to drive non-GAAP gross profit margin expansion year over year and maintain positive, albeit modest adjusted EBITDA in the quarter.
And as we've discussed in the pad.
We have not backed off from the target didn't investments, we're making throughout the business that aligned to our longer term strategic roadmap. We will continue to reduce span in some areas in order to fund priority initiatives that we believe will strengthen our value proposition further differentiate.
Our offering and enhance our client relationships and outcome.
Moving on from the financials, we continued to progress and momentum from last year, when our food, we're transformational pillars of inspire success impact scale ignite sales and innovate solution.
First on our people.
We are seeing the benefit from our investments in talent acquisition training leadership development and culture.
Employee loyalty and retention continued to show strong gains.
With average tenure now at 3.1 years up approximately 25% in the same period last year.
And with a more tenured and experienced workforce, we are realizing improvement and productivity and efficiency.
Revenue per employee is up nearly 9% year over year, well total headcount is down 17%.
Shifting to the delivery organization, we made extensive changes last year to simplify and streamline and strengthening poor aspects of our business.
The impact on our operations continues to be encouraging.
We are demonstrating more agility responsiveness and clients syntricity that is earning enough to see to the table as a strategic or enabler and trusted partner.
Our teams are showing up differently and we're seeing improvements in several key areas as a result.
Q1 was expected to be our single largest quarter. This year in terms of contracts coming up for renewal with approximately $55 million expiring in the quarter, we successfully renewed or extended approximately 95%.
The contract that you.
So it's been a great start to the year there.
And then looking at our largest relationship on a trailing 12 month basis, we grew revenue with six separate top 10 clients.
Excluding the impact from one top 10 clients, where we're currently seeing some pronounced contraction and they reprioritize submit their go to market span. The other nine client collectively grew approximately 4.8% on a trailing 12 month basis.
On the sales front, we remain focused on improving our pipeline size quality and diversity and velocity.
We have made a good amount of progress here, that's still had more to go to get the growth engine firing on all cylinders.
That said the traction we are seeing so for this year is encouraging if you recall, we signed a total of three new logos throughout all of fiscal 2019.
Year to date today, we have already won three new logos on our February call. We mentioned in early Q1 win with absolute the leader in endpoint resilience software, which we are now in the process of ramping in April we welcome to additional brands to our client.
Roster PTC, a leading provider of digital transformation software solutions for global manufacturers and Firefly educate a leading provider of I.T. training programs and educational content from an installed base perspective, we close multiple expansion wins signing increase.
Mental business with four of our top five clients in summary, we are encouraged by what is in a relatively strong start to the year. We saw continued progress and momentum building in all of the foundational heavy lifting we did last year.
The underlying fundamentals of the business are helping the work we do on behalf of our clients is relevant and important our business model is resilient and we are executing from a position of relative strength with a well capitalized and healthy balance sheet with that I would turn the call.
All over to rich to walk you through our financial and then I will come back to close in South before we open up for Q on a rich.
Thank you Gary and good morning to everyone.
As highlighted in Gary's remarks, we're proud of how we executed in the quarter not just in terms of our financial results, but also more holistically and how we support of our clients and employees through the evolving uncertainty of the covert empaque.
Many of the initiatives and actions, we undertook last year were key enablers to allowing us to adapt and pivot our business to operate in the current environment.
Although global macro uncertainty remains high we believe we're well positioned to build a stronger and more valuable company through this period.
There are three things I plan to cover with you today.
First I will walk you through the piano highlights.
And year over year comparisons to Q1 of last year.
Second I will review key balance sheet cash flow and liquidity items.
And third I'll provide some perspective on what we're seeing in the current environment in light of coded and our decision to withdraw the full year contextual outlook that we shared with you in February.
With that backdrop, let's move into the specifics in the first quarter, we generated revenue of $50.1 million.
Down $5.4 million or 9.7% year over year.
The entirety of this variance is tied to logos that were churned, we're proactively exited in 2018 or 2019.
We generated $5.4 million of revenue from these logos in Q1 of last year, but had zero revenue contribution in Q1 to 2020.
As Gary mentioned in his commentary and as we've shared transparently with you during the past year, where appropriate we are willing to make a near term revenue tradeoff in order to optimize our portfolio.
This is allowing us to free up capacity and resources to support new scopes of work and higher growth areas, which are in the sweet spot of our growth strategy and that we believe can be more margin accretive over time.
Although we estimate most of the rationalization work is now behind us rather than in front of US we anticipate facing similarly challenging year over year Comparables for a couple of more quarters.
Shifting to cost of revenue in gross profit our non-GAAP cost of revenue was $34.3 million favorably down $4.2 million or 10.8% year over year.
Our focus on expense management productivity utilization and spans of control allowed us to generate non-GAAP gross profit of $15.9 million and a margin of 31.6% of revenue.
An improvement of 80 basis points from the first quarter of 2019.
Moving further down the piano you will see that we remain vigilant and managing our expense base. Our objective is to be responsive to our current topline profile. While also ensuring we continue to invest appropriately in the initiatives programs technologies and team.
James that we believe will position us for a return to long term sustainable growth.
Our non-GAAP operating expenses in the first quarter of this year were $17.3 million favorably down approximately $800000 were roughly 4.5% from last year's Q1.
From a bottom line standpoint, we generated adjusted EBITDA of approximately $140000, 4.3% of revenue compared to approximately $950000 and 1.7% of revenue in the first quarter of 2019.
Now, let me turn to the balance sheet and cash flow highlights our balance sheet and liquidity profile remains strong.
So it came in at 78 days Favourably down five days on a year over year basis.
Cash flow from operations was negative $5.7 million compared to positive $2.1 million in Q1 to 2019, primarily driven by shifts in working capital.
Capex inclusive of capitalized internally developed software was $1.6 million this quarter a reduction of approximately 46% from the $2.9 million spent in last year's Q1 free cash flow was negative 7.2 million dollar.
This quarter compared to approximately negative $800000 in Q1 2019.
We entered this year with $29.4 million of cash cash equivalents and restricted cash on the balance sheet as.
As you saw in our earnings press release.
And the 10-Q, we filed yesterday, we made a decision in March to further enhance our balance sheet and liquidity.
We thought it was prudent to take advantage of our access to our 40 million dollar revolving line of credit given some of the volatility we were seeing the broader credit markets.
We drew down $27 million through a six month borrowing on this line to bring our cash cash equivalent unrestricted cash balance at quarter end to $49.5 million.
Although we do not currently anticipate any needs for uses for this capital given the uncertainty of Cobots impacts on the economy or financial markets. We felt it was a wise course of action to preemptively strengthen an already solid cash and liquidity position.
So to summarize our Q1 financings, we had a nice start to the year with good execution throughout the business and we are positioned with the strong balance sheet to continue to invest in our strategic priorities.
Now, let me take a step back to cover in more detail Gary's earlier comment about our decision to withdraw our directional full year outlook as well as some broader context and what we're seeing as we look forward.
We want to be clear that although the covert pad dembeck has created multiple areas of uncertainty for all companies, we remain confident and the underlying fundamentals of our business.
In good times, driving recurring revenue investing customer success and ensuring high renewal rates are all important mandates the clients we serve.
And the in challenging environment that many companies are currently facing.
His priorities take on even greater importance visibility and criticality, given our domain expertise and the scope of arc capabilities and solutions suite. We believe we're well positioned with a very strong platform to help our clients navigate through the challenges. They are now in calendar.
Yeah.
As you would expect there are various factors in circumstances outside our control that may limit our visibility in the current environment.
The dynamic and rapidly evolving nature of the pandemic and any resulting downstream impact you may have on our clients and their end users remains unclear.
Global GDP and technology spending forecast to be been revised downward and many of our larger publicly traded clients have bridger withdrawn their revenue and earnings guidance on the other hand, we're excited and encouraged as we see areas of growth and heightened demand from client.
Since sectors like collaboration cyber security and cloud workloads.
We have analyzed and modeled a variety of upside and downside scenarios to our original outlook.
Put simply and transparently at this point in time, we don't have enough clarity to either lower maintain or raise the expectation we had coming into the year. As you can appreciate new information and data emerges on a near real time basis, and we will evaluate and assessed.
These inputs as they become available.
Once we get greater clarity on the economic recovery.
Outlook for the technology industry as a whole and the trajectory for our clients specifically, we anticipate providing a subsequent update to our full year financial expectations on our Q2 call.
With that let me pass the call back over to Gary.
Thank you rich we're pleased with what we're seeing in the business, we executed and deliberate well in Q1, particularly since we accomplished what we did even as we pivoted the entire organization to a new distributed work from home model, we're extremely proud of the level of interaction and.
Engagement of the teams the speed a decision, making and everyone's relentless focus on driving an exceptional outcomes for clients.
So in a word a public thanks and appreciation to our people for doing a great job, taking care of our business and our clients. During this time.
The cobot pandemic may have served as a catalyst to change where or how we do things, but it hasn't changed who we are as a company our value proposition in the marketplace or near term priorities or long term strategy.
Our strategic focus and vision remains the same we will continue to build upon the stronger foundation, we have established as we strive to create a growing profitable and more valuable company that we are all proud.
Although there's a high degree of uncertainty in the broader environment, we have tremendous confidence in the health strength and resilience of our business across both intermediate and longer term horizon. We believe we have the right priorities and they're doing the right things throughout the business to ensure.
We are prepared and position the come through this period even stronger.
With that operator, please open the call to questions.
Thank you as a reminder to ask a question we need to press star one of your telephone.
To withdraw your question pressed the penalty.
Sanbolic composites Rooney roster.
Our first question comes from Zach Cummins B. Riley FBR Your line is open.
Oh, Hi, good morning, everyone. I hope everyone is staying healthy and surviving these unprecedented times, but congrats just first off on the strong quarter.
Given all the changes that you saw beginning in March but Gary can you talk about their attention metric in the quarter I mean very impressive considering all the changes on the environment can you speak to how that compared to internal expectations and what really drove the strong performance there and this quarter.
Yeah.
By the way exact your comments look you know I'm sure we're getting some lift from a you know just what's going on with Cobot 19, but we you know done a lot of things I think Patricia and her team.
HR and then the leaders around the world, we invested pretty heavily and leadership and develop Matt I won't be the work that's been Dod relative to.
The the amount of.
Training that we're giving people the amount of the way we're looking at.
Trying to reward people for doing the job that they have I think is really helped and you know we don't have we don't have turned over where we'd like to get it but we are making significant progress I think the the opportunity to can.
10, you to have the right people joining the company to give them superior training.
And give them opportunity for growth is what's what's really exciting people.
Got it got to that's helpful and then I.
I guess just here in the startup Q2, I mean through April and the first week here and they can you just described what you're seeing in the market, thus far our customers kind of starting to get their bearing that didn't react to the current market environment or what are you seeing across your broad based appliance.
I think you know again these are certainly not usual times it that much.
And my comments, but I think.
The approach that we're taking.
Is that there's a cross really three areas the broader macro I think GDP impacting Q1 in the primary regions, where we operate and the there's an expectation that yeah.
I expect that in Q2, and I think a though our customers feel the same way the global GT GDP outlook for quite 20 is going to continue to reset lower.
That causes people to want to pause, but from a client point of view.
Thank you have to remember we are clients are very large well capitalized.
Enterprises, most of them had been through this stuff before I.
I think if you just look at the top 10 of our clients they have a half a trigger dollars.
So you know that state.
I'll just leave it that Oh, so I think it's important.
That harder, we don't really durable relationships with those clients and we'd been with them through Barry.
Very economic and business cycles, and and this one is tough.
But again, our top 10 clients have been with as for an average 10 years I think many companies are facing reduced sales in our pipeline.
Thank the new booking metrics.
Our impacting things like cancellation of events conferences, and those kinds of things but.
I think its place an even greater emphasis or protecting their base focusing on renewals and customer success.
Remember when I was running services at Cisco and went through the two away into a nine.
We had.
Six or seven quarters, where hardware sales were really stifled and the services business continued to grow continue deliver high profitability and gotten through that and so that's what we do for our clients. So we feel very good about how we're positioned.
We have seen some heightened demand for our piece.
We've seen some companies that are benefiting from the work from home TRID. There's a lot of investment right now the amazing collaboration tools cyber security virtualization cloud computing et cetera. So you know it's not like you know we're in the hospitality industry or some of the others that have just really been hit hard.
I think the outlooks for the fiscal year.
Our clients become less certain that's for sure I think approximately half of our publicly traded clients have withdrawn their died and to be clear.
Overall business.
This is.
Going to the you know questionable so.
That's one of the reasons, we decided to withdraw architectural guidance because we saw our clients doing math.
But there are customers and their end users I think it's still too early to.
To draw any conclusions on on the trend lines I think as a general.
We don't have a great deal of exposure that's it some of the harder hit markets that I mentioned like retail travel and hospitality.
I think.
From a software Hsas and hardware products point of view, what we support operationally medical mission critical to those companies. So we'll see you less discretionary spend but on the other hand.
Don't see a significant reduction or at least short term.
I think pockets of demand weakness.
Around that said the market and state and local government for clients will yes, it's too early to tell I think.
I think you know all we can do is focus on the things that we can control and make sure that every day every day, we're focused on delivering 100% for clients and that's what we're doing.
That's it's rich I'd I'd add on that as we said in the script, we're running a virtually real time scenarios.
Different.
Potential outcomes, we know what key metrics, you're monitoring you're gonna be leading indicators.
And we're going to have immediate visibility, but more importantly.
We know what levers we will pull.
Going to navigate through.
Got it got to that's helpful. I really appreciate all the via email color and Gary I know you mentioned in her script that you had excluding one client your top 10 clients or where do you actually relatively well and growing over 4% on a trailing 12 month basis, but can you speak to the one top 10 clients thats.
So you're seeing a contraction.
Let me provide anymore insight as to what's really going on that situation.
Yeah.
One you know you know we don't.
Really are getting into detail about specific clients. They look when you have a large client and and there are markets changing their shifting what they're selling.
To some degree and they've been on a path to.
The way that they go to market with some some of the work that we're doing poor we've also signed.
Mansions with them so its not like they're going away, but they've shifted some pretty significant business over the last year and.
We have signed some additional business with them and that the additional businesses business hasn't caught up.
So what's gone away.
But again, a there's still a very strong client of ours, we have a great relationship with them and I think we'll continue to win business there.
Got it got it that's really helpful and in terms of new logo and impressive to see that you're citing basically be essentially the same amount of logos here in 2020 that you did an all of 29 seeing can you give us an update on that would be expected ramp time of some of these new logo and it sounds like you're making some progress.
On the absolute software deal just kind of whats the expectations and when you are starting to recognize revenue from from some of these new logos.
Yeah, Yeah. So so yeah, I think denzel and Peter when in the sales team have really that's really focused heavily on expansions of existing clients as well as really attacking the new logos I think you remember last year.
The second half the year, we made that a big focus it's paying dividends. Obviously I think you know the ramp will and a couple of them are already like but lie with a slower ramp to get to a full full volumes a lot of these clients are growing very fast.
So we knew that on the going in that.
The initial revenue might be might be lower than than where we expect to be but.
We'll see.
I think the opportunity for us to continue to grow those.
Over multiple years is really high and so you know our job now to make sure that we ramp them up.
Turn 'em online and the between our professional services team and ended delivery organization, they've done a criminal incredible job of getting people by the way we hired over 85 people in the quarter and trained.
So we moved from.
From a hiring and training point of view completely virtual really impressive by our HR team.
That's helpful. And then final question for me, that's maybe geared more towards rich, but what's what's really the approach that costs and expenses here versus the investments that sounds like you're continuing to invest in some of your key areas that can drive some of this long term value as you've laid out in some of your longer term targets.
Can you give us a little more detail into areas, where you're going to continue to invest in it and some other areas in the business, where you can potentially extraction costs as you get more visibility into the environment.
Yeah. Thanks for the question.
I would tell you I think there there's more to go.
While we're pleased with Margaret made and see some nice improvement I think theres incremental progress in days past your revenue.
And your Opex environment.
All of 2019, reduce our opex soundness and sent.
We continued that trend specifically in first quarter.
More in Opex, almost a million dollars you just under 5%.
If you look at what we did over a two year horizon Q1, and 2018, we said about $11 million more Saturday. So good progress to this point, but the combination of some improved productivity.
Very pleased particularly at the gross margin level.
The ability to increase our year over year gross margins by 80 basis points.
Head count is 17% lower revenue for employees, 9% higher and to your point, we're still investing in the business, we have a particularly in cost of revenue a lot of incremental technology license.
What are going through so the combination of balancing wouldn't make the investment.
Still delivering a positive return we're satisfied and leads to see some of those results, but as we've talked about what we're building too.
Even higher margin profile, both at the gross margin.
EBITDA alone.
[laughter].
Understood well I think that's all the questions I have for now, but thanks again for taking my questions and congrats on the strong starts for the year looking forward to tracking your progress in the coming borders.
Zach Thanks very much.
Thank you Sir I'm showing no further questions at this time, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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