Q2 2020 ServiceSource International Inc Earnings Call
Ladies and gentlemen figure standing by today, so that was kept them get momentarily again, thank you Sandy buying your conference call. It.
Thank you.
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Ladies and gentlemen, thank you were saying to buy a local food service towards the second quarter earnings Conference call. At this time off just Mike I'll listen only mode.
After the speakers presentation, there will be a question answer session.
Asked the question during the session. Please press Star then one on your Touchtone telephone.
I would I turn the call somebody whos.
With the Childline head of Investor Relations, Sir you may begin.
Thank you operator, and good day, everyone. Thank you for joining us walking to service, Turkey second quarter earnings call to discuss our results for the quarter ended June Thirtyth 2020 on the call today are anymore. So.
First as chairman and CEO enrich Walker our CFO.
As a reminder.
Finally, the earnings release issued yesterday after market close are available on our website at www Dot our dog so the first dot com.
Are there shouldn't be put the current slides to accompany our comments today.
<unk> walking this call will take an audio replay of this call. It a copy of my prepared remarks to more like sorry.
Before we begin I'd like to remind you that during the call, we'll make projections or forward looking statements that involve risks related to future events.
Statements made during the call receptor views as of today July Thirtyth 2020 are based upon the information.
But to us.
Projections and forward looking statements should be considered in conjunction cautionary statements in the earnings press release and risk factors included in our 65.
Maybe I'll report on form 10-Q.
These documents contain and identify important factors that could cause actual events or results to maturity to differ from those contained in our projection <unk> looking statements and we disclaim any duty to revise or update any forward looking statements.
In addition, during the call will also be discussing certain non-GAAP financial measures, which we didn't provide additional information to enhance the understanding what's called the instrument assesses the operating performance of the business.
Reconciliations to GAAP and non-GAAP measures can be found in the earnings release and accompanying this call.
And with that I'll turn the call over to Gary.
Thank you Chad and welcome everyone to our earnings conference call for the second quarter of 2020.
Before we jump in I want to address the organizational change that we announced last night.
Yeah, I'd be dyno, who has served as our COO since late 2018, well be leaving the company in Q3 can take on a new assignments.
I've had the good fortune of working with Debbie for many years first stream my time at Cisco and subsequently since I helped recruit her to Servicesource.
During her time here she built and mentor is a strong leadership team with a deep bench tenured and experienced professionals that has strengthened many facets of our operating model key members of this team will continue and their roles on my executive leadership team and.
We will assume expanded scope and responsibility and we work to continue the important progress, we're making as an organization.
On behalf of the board and my leadership team, we wish Debbie the very best and her next endeavor.
For those who joined our call in that first quarter, you will recall that we highlighted our rapid response to the code at 19 pandemic and our strong execution on behalf of our clients admits heightened uncertainty and volatility.
Although we are operating through a time of ongoing an unprecedented economic disruption in the second quarter. We continue to demonstrate the resilience of our business model and the value of our solutions in the market our teams embraced our new virtual operating model and execute.
You did well with a client first mentality delivering year over year gain on multiple financial and operational metrics.
For todays call. There are two main topics I plan to cover first I want to share some context from what we are countering in the market and second I will review, our strategic priorities and the things we're doing to make further progress through the business from there I will hand it over to.
Rich to take you through our second quarter financial results before we open the call for questions.
Turning first to the market context that perspective.
Current recessionary environment has caused disruption and dislocation through out the economy.
Although we are seen instances of near term challenges and headwinds. We're also encouraged by areas of longer term opportunities and tailwinds.
As you would expect the technology sectors, we serve are not even from the broader macro headlines. According to industry analysts level like T. Spending is expected to decline anywhere from 5% to 10%. This year. It's obviously can have downstream applications.
To expand and investment priorities for many tech companies, we have experienced some of this pressure with sales cycles that had been prolong or put on hold and budget that had been relocate reallocated or reduced.
That said.
We've also seen upside instances, where the environment has prompted companies to re evaluate.
Their in House and third party partner Matt.
Where we encounter these situation our business model and value proposition resonate well, we're able to commit to driving better outcomes with a variable performance based pricing model that delivers a very compelling ROI.
Prior to the pandemic they shift to as they service offering subscription pricing plan and cloud based delivery models, what's causing companies to rethink their customer acquisition engagement growth and retention strategies business leaders knew they would need to find ways.
Ways to be more customer centric in order to gain share and went into markets, where choice and competition, we're becoming more prevalent.
The current environment has brought this focus on the customer to the forefront as I T buyers and end users are scrutinizing and rationally designed a lot of thing. There's then we hear from market participants that many companies are facing weaker sales pipeline.
Lower product usage and higher customer churn. These themes are more.
Often more pronounced and their midmarket for SMB customer tier where the effects of the economy.
Contraction are being felt more acutely. Although this has impacted our own operating environment. We believe it also creates a catalyst for greater opportunity.
In recent years, we haven't methodically expanded the scope of our solution suite from a renewals only business to one that now addresses the full customer journey experience for companies dealing with pipeline challenge of our digital sales solutions can generate greater but.
The performance throughout all stages of their sales funnel for companies experiencing lower adoption rates our customer success solution can ensure that their users are onboarding with a wife luck treatment to position now for success and grow from day one.
Huh.
And for companies now encountering higher level, the churn or pricing discounting our renos expertise can help stem attrition and expand customer lifetime value.
Capabilities underpinning our value proposition are important for all of our client in the economic cycle.
And disruptive times like me, however, we hear that our offerings and proven ability to execute are becoming even more mission critical as they see pretty emerge from the recession in a positive position of strength.
And any operating scenario there always is a measure of uncertainty and trying to assess the relative impact from various headwinds and tailwinds like the ones I just discussed.
In the current environment, however, waiting probabilities and predicting outcomes have become more challenging for many companies Servicesource included.
Today, we believe we have taken balanced and appropriate measures in face of this greater uncertainty. We will continue to focus on the things that we can directly influence while also taking steps to ensure we can respond to future unforeseen circumstances.
With that over reaching contacts and market backdrop, I will now touch on our Q2 highlights and strategic priorities.
When the financial front, our teams performed well and we helped our clients navigate through some challenging circumstances, although revenue was down 9% year over year to $47.6 million, we carry forwards the cost discipline and productivity improvements that you saw.
Last quarter.
And our new virtual operating model, we remotely hard trained and ramp up more than 140, new employees in the quarter.
Average headcount was down approximately 17% year over year 20 net basis.
Primarily tied to noncore engagement that we exited over the course of the past several quarters. This allowed us to improve revenue per employee by more than 9% year over year and contributed to our non-GAAP gross profit margin expansion year over year.
Adjusted EBITDA improved slightly compared to Q2 last year, and we accreted net cash in the quarter.
Rich will provide additional color on the financials when we get the his section.
But I would sum it up as a solid quarter and exceeded our internal expectation, particularly in light of some fairly choppy market condition.
On the strategic priority front, we continued to make good strides on our four key pillars of inspire success impact scale ignite sales and innovate solutions.
As I've done in the past allow me to speak first about inspiring success with our people.
Throughout my career I've been fortunate to lead some great organizations and teams and from my first stay here at Servicesource I was very impressed by the caliber of our people and the death of our leadership bench I saw an organization that has great potential in our human capital, but we needed to do better.
But developing and subsequently retaining our talent.
One metric my leadership team and I have been very focused on his employee retention overtime distinct clearly drive a financial benefit through lower recruiting and training costs, but the real ROI isn't having more tenured and experienced staff that consistently deliver.
We're at a higher level for our clients.
Although the current labor markets are likely having some influence we were very encouraged to see our employee retention rate increased again this quarter, we intend to continue investing meaningful resources to ensure that servicesource isn't inclusive and diverse workplace, where our people.
And build fulfilling and rewarding long term careers.
Turning now to our impact scale pillar, our focus remains on redesigning processes, and leveraging technology to drive greater standardization and consistency in our execution.
This pillar is both cost and revenue oriented.
Outside of the Ledger, our progress here is evident in the employee productivity and profitability metrics I touched on in my earlier remarks.
On the revenue side the broader objective is to ensure we deliver business outcomes that promote higher levels of client satisfaction reference ability and growth.
We are encouraged by the progress we're making.
We recently completed our annual client net promoter score survey, where we had an increase in our NPS score and an uplift in client satisfaction rate.
Importantly, we are seeing improved sentiment from the survey turned into real world results year to date through Q2, we successfully renewed or extended more than 90% of the contract value that came up for renewal and on a trailing 12 month basis, we grew revenue with five.
Our top 10 clients.
Shifting to the ignite sales pillar.
Our go to market team did a good job on both the new logo and expansion front. Despite the pandemics disruption to the business travel conferences and related marketing events.
We did see some decision put on hold or opportunities push out of the pipeline is executives confronted changes in their markets and business, but overall, we continued building momentum from the first quarter. We signed two new logo wins in Q2 that we discussed with you when our main.
Paul both of which are now alive and production.
And at three of our largest clients, we signed new expansions in the quarter that were each worth more than $1 million for a productivity software client, we add a sizeable European delivery capability for a storage and networking company, we expanded into a separate business.
Okay and for an open source cloud provider, we added a high touch customer Onboarding and health check program, our sales bookings performance in the second quarter improved both on a year over year basis, and subsequently from Q1 2020.
And so far in Q3, we continue to track good early progress.
That said, we are also maintain an appropriate degree of caution.
Knowing that a resurgent pandemic and any prolonged economic uncertainty could adversely impact purchase decisions or timeline.
Finally on the innovate solutions pillar our teams continue their work to product type and launch new our value added services and internal enhancements, including our Salesforce pork health management offering our digital commerce capabilities and a robotic process automation tool.
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We're also laying the groundwork for a robust.
Alliances and partnerships ecosystem, which we believe will be a valuable force multiplier for our go to market effort. We look forward to sharing more on these efforts in the subsequent quarters as we anticipate seeing greater traction down the road.
In summary, I will reiterate what I shared with you on our last call. Despite any more difficult economic environment than anyone envisioned at the started the year. We feel we are executing well against the things we can control and influence.
We will also continue to take actions to be responsive to things that may arise outside of our current field of view many companies within our end markets are facing near term challenges, but this also provides an opportunity for us to demonstrate that the work we do on our clients behalf.
That is even more meaningful and important to their success the fundamentals of our value proposition the nature of our business model and our results through two quarters highlight the resilience of our company.
Although we see areas of potentially greater uncertainty in the second half of the year. We enter this period with a healthy balance sheet and then unwavering focus on our longer term objectives.
With that I will hand, the call over to rich to walk you through our financials before we open the line for QNX rich.
Thank you Gary and good day everyone.
During our first quarter earnings call. We shared held the cobot 19 pandemic was creating multiple areas of uncertainty for many companies.
But in the face of a fluid and dynamic environment, we remain confident in the underlying fundamentals of our company and the opportunity we have built a stronger business through this period.
Viewpoint is the same today.
We see buried headwinds and tailwinds impacting our clients and their customers, which naturally drives a wider than normal range of potential outcomes for the balance of the year.
So consistent with our philosophy from last quarter and given the reduced level of clarity, we will not be providing more specific financial outlooks for the year beyond their contextual backdrop, the Gary shared in his remarks.
As we demonstrated with our results in second quarter. However, we believe we're bringing the right focus and attention to execute well in light of these challenges.
Turning to our results in the second quarter, we generated revenue of $47.6 million down $4.7 billion or 9% year over year.
Similar to last quarter's profile contraction was primarily driven by logos that were churn or proactively exited in prior periods as we rebalanced our portfolio.
We also continued to have meaningful overhang on our results from one large client who is facing discrete cost pressures in the current environment.
These two dynamics on our tempering some of the growth we've seen from other new logo wins and installed base expansions.
And these revenue headwinds will likely persist as we look out to the coming quarters.
Shifting to cost of revenue and gross profit our non-GAAP cost of revenue was $33.2 million.
Favorably down $4 million for 10.7% year over year.
Our portfolio optimization efforts, and resulting productivity and efficiency improvements were the primary levers here, which allowed us to expand non-GAAP gross profit margins year over year by a 130 basis points to 30.2% of revenue.
Continuing down the ERP you know we remain committed to ongoing investments in our employees client relationships and technology Differentiators.
While also lowering our overall expense structure, given our current revenue base.
This vigilance throughout the organization allow this to reduce non-GAAP operating expenses year over year by $1.6 million were 8.7% to $16.4 million.
At the bottom line adjusted EBITDA was negative $400000 roughly in line with last year's Q2 results.
Moving to the balance sheet and cash flow highlights we maintained a strong balance sheet second quarter, we managed well through any potential downstream impacts of the economic environment.
On our accounts receivables and cash collections.
So those were 76 days up two days year over year, but favorably down two days sequentially from the first quarter of 2020.
Other favorable working capital swings contributed to $2.6 million of positive cash flow from operations in the quarter.
Capex inclusive of capitalized internally developed software was $1 million as we shifted some larger items that were more discretionary in nature. So later in the year.
Free cash flow returned to positive territory in the second quarter.
$1.6 million.
From $1.4 million Q2, 2019 in a very nice improvement from this year's first quarter results of negative $7.2 million.
We ended Q2 with a solid cash position and liquidity profile cash cash equivalents in restricted cash was $43.2 million a decrease of $6.3 million in the quarter as we decided to pay down $7 billion of borrowings on our revolving.
Line of credit.
We also took advantage of the favorable credit environment to refinance the remaining $20 million of borrowing.
Lowering our effective borrowing rate by nearly 100 basis points.
Given the current market backdrop.
We do not have you need greater clarity on the depth and duration of the recession or when and how rapidly the business environment recover.
Despite this we are confident in the overall health bird business the strength of our operating model and the flexibility that our cash flow liquidity position afford us to weathered these turbulent times.
In investing in the business for the longer term.
To that end, we continue to believe our three year target model objectives remain reasonable and attainable and we expect to take ongoing actions that position the business to achieved and attractive growth and margin profile over that horizon.
With that let me pass the call back over to Gary for any closing comments.
Thank you rich I will be brief here throughout my career I've witness, many economic cycles and external shocks to the system. This pandemic induced global recession is certainly unique but in my experience companies with compelling strategies resilient operating model and the focus on execution.
Our able to turn disruption and uncertainty and to new opportunity and potential I believe we have those characteristics and mindset here at service source. We will continue to stay focused on the present, while ensuring we strengthened our foundation for the future.
With that operator, please open the call for questions.
Thank you again, ladies and gentlemen, if you like that's a question press Star then one when you touched on telephone.
I'm also pleased for questions.
Okay.
Our first question companies that comment the B. Riley.
We are your line is open.
Yeah, good boarding Gary Retuned, Chad Thanks for taking my questions I know congrats on the solid results in a tough Q2.
Thanks that.
Oh, absolutely there is just starting with retention I mean, another pretty solid quarter here at 90%.
And can you talk about how this track versus your internal expectations and kind of the I guess room, you see to continue to approve upon this as we go through say the next six to 12 months.
Yeah, I think Bob.
Appreciate the question.
We feel.
I'm pretty comfortable that.
Well we.
Really taken a more conservative.
Cautious outlook, if you will about what's going on I think our teams have stayed focus we've made.
Great strides relative to.
The engagements, we have with our clients the executive spots that we put in place global account managers. So I.
I really feel good about how we're executing against those things the first half renewal activity having.
Behind it now.
Nothing throughout Outfront relative to Q3 to four contracts I think economic situation with some of our clients has put.
Cost pressure on them that that is going to make for tougher negotiations or some of those have already started I've been involved at one level.
So we remain very focused along on providing value on ROI and I preach that every time, we get a chance to talk to the sales team and our delivery people I think I can't name and the client, but we had one of our.
Fairly like decline spring and a large consulting firm to evaluate whether or not.
They should bring more more their business in house.
And they make a determination that there's no way and this is in other words no way they could deliver all the incremental bookings or performance added since December investment level, and I think thats a great case study and this is client happens to be very referenceable for us. So.
We hope to use reference ability at all I can tell you that our net promoter scores that came back.
Just recently improved and customer sat scores in the recent client survey I think that service proxies for rough Referenceability and the future send intention as clients. So I think churn will never go away and I've talked about that both on the call.
And follow up calls, it's never going to be there, but our goal is to get quotes into the middle part of that 5% to 15% target.
As I started here, our new global account managers, maybe the structure that we haven't place with our global services delivery teams are all aimed at client for light initiative and the people and technology investments we're making.
Thats execute a much better metrics here so you.
You know again.
At times, but my expectation is weak.
Stay focused here and if we do that will be okay.
Got it kind of that's helpful. And then could you talk about progress Youve added ramping up the new logo wins that you side in Q2 or the progress that your proceeds unpleasant gone live.
Yeah as a matter of fact.
All of them part alive.
I think too.
The very clear here.
We have we signed a those logos.
And one Q2, we won three new logos in the first half a one within Q1.
Two.
Two.
And.
And again thank you.
Thats as many as we did all of last year. So I think the pivot that we've made.
With the sales leadership.
It's proving Oh, we also closed a million dollars plus expansion and with three of our largest financing Q2. So I think from that point of view, our trajectory is heading into right direction.
Got more to go and the level or not only the level, but also the velocity of we want to accelerate that cell cycle as well, it's a ramp than I think that the relationship between sales and delivery continues to improve and hands Austin and I've talked about.
I've talked about.
More.
More value and seen so faster weekend hands that closed the sale and ramp up the better off we are so.
We're adapting and navigating through some of the Cove and related headwinds.
But as we've seen.
You will sales cycles that some of them are taken longer and some are put on hold but.
We're looking for better ways to engage in so the clients and going a lot of virtual meeting setting up virtually Bcs.
Et cetera. So.
I'm very pleased with where we're at this point and and thus the net flows that.
Got it kind of that's helpful and then.
Probably either for Gary or rich in terms of the portfolio rationalization.
Can you give us a sense of where you're at in that process. It seems the based on your commentary in the first tabs that that really a majority of it was behind you while they're still maybe some ahead it sounds like at least the bigger portion of that works now behind the company going forward.
Yeah I think.
I'll give rich a chance to jump in here so I.
I think.
Overall, the rationalization process is one that has allowed us to hit some of the metrics that that we were able to put in the in now.
And I think Thats, a good proof point, but but remember we you know well were printing were also have a heavy focus on rebuilding that client base. So although we proved out.
Some business we've also added.
And those are really nice logos with.
And then need to grow them so rich.
But let you jump in here if you'd like.
Yeah, I would I would simply add Zack.
Your comments are spot on I think where we've gotten legacy relationships that.
Weren't meeting our financial objectives, we've largely have those in our rearview mirror.
Gary alluded to and it's his comments we do have.
Business, that's coming up for renewal and those negotiations are active.
And we're going to hold firm in those negotiations to extend and renew those relationships on terms that make sense to us as well I don't feel good about where we are in that process that we're going to maintain our vigilance through those renewal discussions as well.
Understood and then just final question the dairy I really appreciate all the context around the what you're seeing an environment thus far.
I mean can you give us a sense, maybe some of the areas, where you're seeing strengthen your business whether that be bi specific vertical or even just the I guess product offering this versus other areas of weakness.
And second part of that question I would just be curious to see.
What you saw just over the past four months just say from the start of Q2 in April two what you've seen so far in the first month of up to three here in July.
Yeah.
In fact I.
[laughter] the impacts of the on the business from co but.
That's not exactly the question asked but but I think what we're seeing as you know the the.
Vertical from a vertical point of view at his service cloud businesses security, that's certainly a desktop.
Software and control systems et cetera. Those are the businesses that are growing obviously the conferencing people are are all jockeying for for market share et cetera. So I think from from my point of view I think.
It's such a.
'cause it at a time that.
That around the world and thank God for first responders right and I think that just as you think you're getting things under control you know the situation kind of dynamic and fluid again across the board I think thats really causing some Paul.
I don't know.
With any reasonable clearly you know how this is sort of process through the second half of our here.
Governor will or won't be as possible and that will have an impact on the economy, what we do know.
We're in a global recession for sure.
I think the forecast is an 8% and traction and that's why 20 global why keep Ita spend has decelerated to just under 10% year over year net forecasted by analysts that Gartner, who I have a lot of confidence in.
Business of every size in nearly every sector that family impacted.
By the adjustment they've had to make with their staff their budgets or investment priorities et cetera, and a publicly traded companies have withdrawn or guidance and so when they withdraw their guidance in a lot of them as you know where our clients. It gives us pause to to reinstate or guidance and that's what we did do.
One other reasons.
I think theres a whole lifts the thing here, but I think the fact that are what we do know where virtual operating model is working we've been able to deliver the same result uninterrupted you know we've been able to make sure our balance sheet is not only the liquid but still.
Oh and leadership team is focused and a lot of experience leading through the uncertainty that exists out there. So we're seeing a good mix of puts and takes play out.
I think a higher maintenance contract renewals from some of our clients.
Customers and.
They are delaying while they may just delaying purchases and tech refreshes they are making sure that they have the right maintenance and services.
Greater demand for digital digital and virtual sales.
Capabilities and then growth so.
[laughter].
Some of the things that.
Trying to offset the lower sales active longer sales cycles, and the things I mentioned earlier.
Well as.
You know something.
Contract.
Fluctuations if you will work.
Furloughed or like people.
And.
We worry about you know the impact that could have on China, but that overall I'm cautiously optimistic and we're going to stay focused on the things that we can control that we always do and and are not hope for the that but the aware to where we're at what are the market gone or not.
I will make whatever adjustments need to be made to make sure that the taught me an appliance and our shareholders are successful.
Well, thank you for that Gary I really appreciate context, thanks for taking my questions and the best of luck here in the second half the year.
Hi, Thanks.
Thank you I'm showing no further questions at this time.
Ladies and gentlemen that concludes today's conference. Thank you participating you may all disconnect have a great day.
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