Q4 2020 ServiceSource International Inc Earnings Call
Ladies and gentlemen, thank you defend and by your conference call short again momentarily and standing by or on the call. So I begin momentarily. Thank you.
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Okay.
Ladies and gentlemen, thank you for standing by and welcome to the service to watch fourth quarter and full year 'twenty and 'twenty earnings Conference call. At this time, all participants on on listen only mode.
I think its reputation and there'll be a question and answer session.
Ask a question at that time. Please press Star then one on your touch tone telephone.
As a reminder, today's conference call is being reported.
I would now and turn the call it 70 health with at least myself.
And of corporate Communications and you may begin.
Yeah.
Yeah.
Thank you operator, we appreciate everyone joining us today and welcome to serve and sources earnings call to discuss our results for the fourth quarter and full year ended December 31 2020.
On the call today are Gary Moore surface sources, chairman and CEO and Chad Lyne our CFO.
As a reminder, our SEC filings and the earnings release, we issued yesterday after market closed are available on our website at www Dot IR Dot service source Dot com.
In addition, we have posted earnings slides to accompany our comments today.
Shortly after this call we will post an audio replay and a copy of our prepared remarks to our website.
Before we begin I would like to remind you that during the call we will make projections or forward looking statements that involve risks related to future events and.
All statements made during the call reflect our views as of today February 22, 2021 and are based upon the information currently available to us.
All projections and forward looking statements should be considered in conjunction with the cautionary statements and the earnings press release and the risk factors included in our SEC filings, including our report on form 10-K.
These documents contain and identify important factors that could cause actual events and results to materially differ from those contained in our projections and forward looking statements.
And 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 provide additional information to enhance the understanding of how management discusses the operating performance of the business the.
A reconciliation of the GAAP and non-GAAP measures can be found and the earnings release that accompany this call and.
And with that I'll turn the call over to Gary.
Thanks, so much and leaf and welcome everyone to our earnings conference call for the fourth quarter and full year 'twenty and 'twenty.
As we reflect on the accomplishments of 2020, it's important to first appreciate and acknowledge the global service Force team your perseverance drive to perform for brands we serve.
And the termination and the face of significant disruption caused by COVID-19, and allowed us to deliver for our clients and meet our commitments I have led companies through many economic cycles and external shocks. Yes. This has been a year like non on bus I've ever seen before and while.
And our teams have not been physically together for most of the year. Our company continues to demonstrate our values and dedication collaboration trust and caring.
As a team we enter 2021 stronger and better positioned to fulfill our vision of transforming the ability to be customer journey and experience and.
And the fourth quarter and over the course of 2020, our teams delivered for our clients during a time of wide range and disruption.
Through this period, we grew closer to the World class brands, we serve and improve the health of our partnerships, we fully committed to a virtual first operating model that will define how and where we deliver our solutions going forward and importantly, we demonstrated the strength and resilience of our.
Our people and our business was solid operating and financial performance.
Throughout the uncertainty of last year market, leading technology companies rely on service force to preserve the value of their existing customer relationships and enhance the return on their go to market and investments literally overnight and the customer journey and experience for beta be buyers and sellers what <unk>.
And digital.
As marketing events were canceled and sales pipelines dried up we saw customer success and renewals become board level priorities customer retention and quickly became the de facto growth engine for many technology companies at the same time with corporate travel cost and field sales teams Grau.
And it digitally enabled virtual selling and became the dominant form upbeat and the customer acquisition and engagement.
These shifts have been underway and talked about for some time, but the rapid disruption caused by COVID-19 accelerated several years' worth of digital transformation and to a couple of quarters span for many companies longer term. We believe these dynamics will play to our favor and.
We are well positioned to capture a large and growing market opportunity.
Two years ago on my first call with the investment community and service sources CEO.
And at my vision and strategy to reposition the company on a path to growth and improved profitability that would drive long term value for our stockholders.
And I was also transparent and offered a candid assessment that the journey would possibly be measured in years not quarters and that the trajectory would likely have some ups and downs and not be linear since then and despite the macro headwinds and.
Encountered last year, we have continued to make disciplined progress across the business you can see this and our performance and the fourth quarter and for the full year 2020.
On the financial front and the operating environment adversely impacted many of our clients and ultimately the revenue we realized from the outcomes we generate on their behalf.
And the face of this top line pressure, we took swift and decisive action to enhance productivity rationalize certain programs and engagement improved spans of control and.
And simplify our cost structure. The results of these actions are clear with meaningful year over year expansion of non-GAAP gross profit margin and both Q4 and the full year and adjusted EBITDA and also exceeded prior year results.
Although the year unfolded much differently than we had assumed coming into it and our commitment to our longer term playbook did not change our vision and values brought clarity of purpose for all of our employees and our strategic pillars of inspire success impact scale ignite sales.
And innovate solutions kept up a line and a team on the metrics and priorities that matter most.
We all had to find new ways of working interacting and engaging and 2020.
I am really proud on how our sources around the globe leaned into this new world of work.
As I have shared with you on the past my leadership team and I have been very focused on the culture of the company and ensuring that we offer a rewarding and fulfilling employee experience.
Burst and inclusive workforce. The outcomes. We are seeing here continue to be encouraging our employee net promoter score improved more than 12 points and are less global survey with our people, indicating and they feel more motivated appreciated and cared for this positive tone and carried over.
Over to our employee retention rate, where we had more than a 20% point.
Year over year improvement, reaching the highest level, we have seen and more than six years.
Importantly, our clients benefited by having this more tenured experienced and motivated team on the front lines engaging daily with their prospect customers and end users.
For the vast majority of our client the pandemic has had a more pronounced impact on their mid market and SMB customer base.
It budgets were frozen or cut back multiyear maintenance contracts were reduced in scope or duration purchase cycles, where and long dated and companies to push for more aggressive price concessions and discounting and from our clients on.
Our representatives and managers and an amazing job of handling these tough conversation on behalf of our clients, helping to preserve the value of their customer base and mitigate the risk to the revenue as much as possible, while a bit hard to measure I firmly believe our flexibility and responsiveness.
To best support our clients through these times has generated a great deal of goodwill.
And my conversations with our executive sponsors they increasingly see us as a strategic partner and enabler.
And May initially worked with US based on our customer journey and experience domain expertise global scale multi language coverage and two decades of process excellence, but what our clients truly value or the market and customer insights industry best practices and tactical recommendations, we uniquely provide.
And <unk>, which enable them to accelerate their own and go to market strategies and digital transformations.
Bringing this value to the forefront for both existing clients and new prospects is helping to bring better results and greater velocity to our land and expand that hurt after a disappointing first quarter of 2020, our new bookings from Q2 through Q4 increased more than 25%.
Compared to the same period and 2019, while the fourth quarter alone was our best Q4 since 2017.
We were thrilled to onboard two new logo clients and the fourth quarter. The first was the digital operations management platform provider and a high growth market leader. We are now live with a proactive customer success and renewals management program that is designed to help this client drive higher.
Our retention rates and minimize churn and.
And second win was with next day EMA, a unified communications as a service company that is growing more than 30% annually.
And now launched a customer acquisition and conversion program that will allow this client to improve their pipeline coverage and enhance the ROI on their marketing spend.
In total we had six new logo wins in 2020 double the number we achieved in 2019, we anticipate continuing to build on this momentum, particularly in the cloud and software vertical where we see greater growth opportunity and where our value proposition is resonating very well.
On the expansion front, we were awarded new business from seven of our current top 10 clients during the year demonstrating the value of the investments we have made and our global account management and outside sales teams and finally on the renewals front, we renewed or extended and approximately 81% of the and.
Contract value that came up for renewals are and at year and aggregate.
While our full year bookings and churn results were not at the levels, we plan for and we feel we executed well against the macro backdrop and did not lose business due to the performance of things more closely within our control.
As I wrap up here, it's worth revisiting what we spoke about with you last quarter, we shared how COVID-19 had time shifted out by several quarters, our expectation and returning to growth with another quarter behind US. We are encouraged by signs of market optimism and improving forecast for global technology spend.
However, we still see difficult operating environments within many of our clients' businesses. We expect these dynamics will continue to impact the books of business and customer opportunity set that we manage on our clients' behalf. While this will create some pressure on our financial results over the next couple.
Couple of quarters, we anticipate that we will see improvement and the back half of this year cleanup, putting us on a position to return to growth not withstanding. These factors, which we believe are market specific and shorter term in nature. We continue to have high confidence that we have there.
<unk> strategy team priority and focus to build a growing profitable and more valuable enterprise.
We have made and will continue to make substantive changes and the business to continue to improve our execution and accelerate our path forward. We are proud at how we closed 2020 on a positive note and many areas and we look forward to these areas of progress and our results as we get free.
Other into 'twenty, 'twenty, one and with that let's try and to Chad to cover the financials.
Thank you Gary and good day, everyone. It's a pleasure to join you today and I look forward to sharing more detail on our fourth quarter and full year 2020 financial results I'll also spend a few minutes, providing some context for how we are approaching 2021, as we position our company to address the opportunities and challenges that Gary shared.
On balance, we executed well and 2020 and finished on a strong note with clear indicators of progress across the business. Despite a challenging external operating environment our.
Our disciplined execution and expense rigor drove sequential and year over year improvements at many levels of our P&L.
Our focus on our people culture, and organizational structure contributed to meaningful gains and our productivity and unit economic metrics.
And our clients for life operating philosophy and market facing and investments resulted in higher satisfaction and new business wins and revenue growth at many of our largest and longest tenured clients.
We also pivoted and move quickly to course, correct any areas that were not in line with our internal targets.
Gary touched on our bookings and churn results not meeting our full year expectations, given the impact of COVID-19, and on our clients and prospects.
That said, we also saw opportunities to upscale our talent improve execution enhance our solutions and refine our pricing to better compete and win and the market.
We are encouraged by the early results and look forward to ongoing progress here.
Now, let me walk you through our Q4 and full year 2020 results.
Turning first to Q4, we.
We generated revenue of $51 1 million down $3 8 million or six 9% year over year.
We benefited from some strong sequential and seasonal growth at several of our larger clients cut.
Customers, who had been on the sidelines and delayed purchase of renewal decisions over the course of 2020 finally came to the table and transacted at year end.
This uplift on some of our pay for performance and engagements helped to offset more than $5 million of year over year contraction tied to churned or proactively rationalized accounts.
Our fourth quarter non-GAAP cost of revenue was $32 million.
<unk> down $4 2 million or 11, 6% year over year.
Average head count and the quarter was down more than 13% year over year contributing to a more than 7% increase and our revenue per employee metric.
Fourth quarter non-GAAP gross profit was $19 1 million for a margin of 37, 3% of revenue.
This was up approximately $400000 or 330 basis points year over year and marks our highest quarterly non-GAAP gross profit margin since Q4 of 2017.
Fourth quarter non-GAAP operating expenses of $15 $7 million were favorably down $1 9 million or 10, 8% year over year as we made further progress to align the cost structure to our current scale, while continuing to invest and our focus areas.
At the bottom line adjusted EBITDA and the fourth quarter was $4 8 million or nine 5% of revenue we.
We are very proud of how the team executed in Q4 to drive. This result, with an improvement of $2 $1 million and approximately 450 basis points compared to the fourth quarter of 2019.
Shifting to our full year 2020 results.
Revenue of $194 $6 million was down $21 5 million or 10% year over year.
More than half of this was from the large client and we've discussed with you on prior calls.
They shifted priorities and reduced their investment with us over the course of the year and response to changes and their business.
Approximately $5 million was due to a former client, which you will recall we spoke about in the past when we made the decision to proactively exit the suboptimal program in late 2019 to focus on higher margin work that better aligns with our strategy.
Beyond these two callouts and the remainder was due to other churn and contraction from 2019, and 2020 that was higher than the revenue recognized from new business wins and expansions.
Despite the impact of the pandemic on our clients, we demonstrated growth across our largest relationships.
As Gary mentioned, we sold new business to seven of our current top 10 clients and in total we had net bookings in excess of any lost business across these top 10 clients.
In terms of revenue when you normalize for the large client and I discussed a minute ago debt is still within our top 10 cohort. The other nine clients and aggregate grew revenue more than 5% year over year.
Moving to the rest of the P&L, we address the year over year revenue headwind aggressively and proactively reducing our non-GAAP cost of revenue by $17 $3 million or 11, 7% year over year.
Non-GAAP gross profit of $63 4 million was down $4 $2 million year over year.
Non-GAAP gross profit margin was 32, 6% up 130 basis points year over year.
Full year, non-GAAP operating and expenses were $65 3 million or 33, 6% of revenue.
Enabled by the acceleration of our virtual first operating model, we took deliberate and strategic actions to drive greater efficiency and lower our expense base by $5 $7 million year over year.
Our focus on improved operational execution higher productivity and expense discipline at all levels contributed to full year 2020, adjusted EBITDA of $4 3 million or two 2% of revenue.
Approximately $100000 and 30 basis points from the prior year, despite the lower top line profile.
Turning to the balance sheet and cash flow highlights, we maintained a solid cash and liquidity profile, while continuing to invest and areas that we believe will further differentiate our capabilities and accelerate growth enable automation and unlock future saving opportunities.
Dsos were 69 days up one day year over year and up three days sequentially from Q3.
Cash flow from operations for the full year 2020 was positive approximately $400000 down $12 million year over year due the impact of working capital and a lower revenue base.
Capex inclusive of capitalized internally developed software was $7 $9 million, and 2020 and down $2 $3 million year over year and this includes and large scale global refresh of our end point devices to enable our secure virtual first operating model.
Free cash flow was negative $7 $5 million and 2020 compared to positive $2 $3 million and 2019.
We ended the year with $36 $3 million of cash cash equivalents and restricted cash inclusive of $15 million outstanding on our revolving line of credit.
It'll available liquidity as of December 31, 2020 was $45 2 million.
With 2020 results behind Us I want to now spend a few minutes, providing additional context to the macro outlook that Gary discussed in his remarks.
We anticipate the first half of the year, we'll have more pronounced challenges from a year over year comparison standpoint, with a return to growth and the back half of the year.
There are two key factors at play here.
First is the normal seasonality that you see and our business given the size and timing of and customer contracts that we support for our clients.
This typically cause us first half revenue from our installed base to come and eight.
Net lower and second half revenue from the prior year.
The second factor relates to COVID-19 impact on the opportunity we have under management and how that book of business converts and decline in bookings, which drives our revenue and.
Across many of our clients the midmarket and SMB customer tiers, we manage are showing some signs of improvement, but generally continue to be under pressure.
We believe this segment specific pressure will begin to abate later this year as the economic recovery takes hold and buyer confidence and it budgets return and these tiers.
And the meantime, we remain focused on mitigating the impact of these factors through improved performance and other operational levers within our control.
Taking a step back and looking at the market more broadly we are encouraged by the anticipated growth and the various forecast we track.
Worldwide GDP is expected to rebound strongly particularly in the second half of the year.
Global it spend as measured by market research firm Gartner is forecast to track in line with the broader economy bouncing back from three 2% contraction in 2020 to six 2% growth and 2021.
Peeling back to the areas within it that we more directly address including software and hardware maintenance license and subscription revenue.
Research from IDC forecast these sectors will grow two 2% this year with the acceleration of nine 1% growth by 2024.
These outlooks provide structural tailwind to our business and underpin our conviction that we are positioned and an attractive market with long run growth upside.
And we believe we are bringing the right focus and actions to execute against this opportunity and a way that will allow us to build a business that delivers on our growth profitability and value creation priorities.
With that I'll hand, the call back over to Gary for any closing comments.
Thank you Chad.
Began on this call by thanking our employees for how their perseverance drive and performance allowed us to deliver on our brand promise and commitments to our clients.
I am incredibly proud of how this team showed up every day to generate the results. We just share I also want to extend my appreciation to our client partners, who place their trust and us to help ensure their businesses came through this period stronger and better positioned for the future.
And finally, thank you to our stockholders, who share our conviction for the future and our ambition for what we are building towards with that operator. Please open the call for questions.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press Star then one on you touched on and telecoms.
One moment please.
Yeah.
Our first question comes and Joshua <unk> Sidoti Sir Your line is open.
Thank you good morning, Gary and Chad.
And Josh.
Good morning.
First question.
No.
You took steps and you produced a very strong and impressive gross margin and for full year was up 130 basis points as well understanding there are quarterly fluctuations, but when you think about the margin profile of this.
This year and longer term.
Yes, I'll go ahead and take that and then pass it over to Gary for any other comments, but to your point, we are really proud of how we executed through the year not just on the top line and from the sales activity that Gary mentioned, but to be able to drive that that margin uplift not only in Q4, but like you mentioned.
On the on the full year and a lot of activity taking place behind the scenes to drive that obviously from a productivity standpoint really proud of how our teams executed and a pretty tough and dynamic macro environment given some of the headwinds that Gary mentioned, where the SMB segment and the big market categories that we work on.
Conversions were down and people just pushed pause on stack and make a decision whether to renew or buy for a mark from our clients. So that had some impact to us, but our teams continue to push through that drive greater productivity and you see that and some of the unit economics that debt, we mentioned, where our head count was down on the full year about 13% and year over year, but our revenue per employee was up seven.
So driving that greater productivity on a on a per unit basis and per person basis really help to drive that and we continue to take cost out of the business and other areas you had some nice tailwind from a travel and expense standpoint, but we did benefit from changing our model and the face of Covid.
Rationalizing the footprint that we have around facilities and are there.
And so really just grinding through a lot of stuff within the expense base and continuing to invest and the areas that we think will unlock growth opportunity going forward. So it's a proud of the results and the full year as we look forward I think Q4 really does show the benefit and the impact of scale on our business as well where incremental revenue dollars, where you see a several million.
And with incremental revenue Q4 versus Q3 falls fairly meaningfully to the bottom line because we continue to.
Drive, new bookings and reduce churn and get that incremental revenue coming into the business that is where youll see the leverage and our model both from a GP standpoint, and adjusted EBITDA are longer term that is what gives us confidence and the trajectory that run on over a multiyear horizon.
Gary and he can help to add Scott.
Sorry, Josh what day.
No I think John was asking if you had anything to add to that but that was very insightful. Thank you.
Yes.
I think.
Go ahead please.
Okay, Yeah, I was going to shift gears a little bit.
Well and 81%.
Renewal rate on.
<unk>.
Whatever contract value was coming up last year is pretty impressive and the overall scheme of things I was just curious how much revenue.
Trying to get a sense of the pipeline and coming into this year.
Revenue, 91% represent.
Hey, Jeff and I'll go ahead and take that.
Yeah, I'll go and take that first Gary suggests it's not a number that we pay out there and put out there publicly you know I think we are pleased to see the 81% on the full year, just given that broader macro.
But like we said and our prepared remarks, it wasn't to the level that we wanted to.
To be candid, we had higher performance and 2019, we expected to do even better than that in 2020, but obviously than the debt.
The pandemic hit and did cause some impact with some of our clients to make decisions that.
As there are rationalizing their expense base, and and repositioning and spend at the downstream impacts to us. So we're pleased with the 81% on the full year will look like it to be higher and we expect better results going forward into this year, but it is kind of the as we think about the looked and we provided as we think about the cadence through 2021 on more of a first half versus back.
On a half basis that is one of the components that does drive the first half compare it to be and that range that I talked about.
As the churn levels off and we have the impact on the large client that we mentioned and some of the other stuff that we proactively exited and the business.
Will net against that with the new wins that we had throughout 2020 and the new wins that we expect to bring in and 2021, but the timing on that does create a bit of a drag for another another quarter or two.
No that makes sense.
And I think.
Sorry go on Gary sorry.
Yes, no that's fine.
Just going to add.
To that.
Clearly, that's not and the targets that we had laid out and and.
All things considered the things that we had under our control I think we managed very well.
But clearly disappointing, but the pressures that some of our clients are under.
And made.
Made that make some decisions that.
Cost us a bit of business, but I think the major drag from the large client is behind us.
And we're planning for that so that doesn't mean, it won't happen, but I think we're in a much stronger position to get back to that target range that we've laid out the 5% to 15%.
And I think John Jordan.
Yes.
And one last one.
Tie off on there Josh and the teams are very focused on and we've talked over the past year plus about the investments that we've made and our global account management organization as well as other client facing roles and we're really seeing the benefits of that both from a churn and a new business standpoint, we talked earlier about the selling new business and to seven of our top 10 and some of those did have some business.
That went away or engagements debt reduced in scope, but being able to sell into 70% of our top 10, something that we're proud of and as we look at this year, you know really a fairly normal cadence with a bit more than half of our business coming up for renewal again in 2021 spread pretty evenly quarter to quarter, but we do feel feel proud we had our loss.
<unk> client was in that cohort and Q1, and we were able to get them here in January and renewed for another another three year term. So teams are out in front of it high area of focus and we feel pleased with progress that we're seeing so far year to date.
Yes, that's good to hear and I don't think you can get things to the fact of the events that took place last year. So the fact that you didn't.
Necessarily hit your targets.
But it was it was things that were not within your control. So I think that's understood.
And just I may have missed it and you did talk about but from that large client.
Revenue was down over $10 million year over year.
Is that anniversary fully or is there going to be additional topline pressure coming from that client early this year.
There is.
And that's it.
A great question and I think from our point of view the reasons that debt revenue has that business has declined with certain aspects of the work that we would go on and they felt they wanted to bring back and has we've also signed new revenue with that same client and there is still and our top.
And so on.
They're not insignificant relative to the size of revenue that we still have we have a great relationship and one of the highest net.
Net promoter scores that we get from any client and so I think if I understand their strategy and I was on the phone with them yesterday and <unk>.
Yesterday.
I think we're in pretty good shape with the planning that we have in place and.
It's always hard to call the bottom and when Theyre still economics, that's going on but.
There is work on as much economic as just shifts and their own business that is natural as well and things that they exist.
And they need to bring in house, but.
I feel very good about where we're positioned.
Great and just one more.
It seems like a very strong financial profile can you just talk a little bit about capital allocation and deployment priorities.
Are there any gaps and the portfolio from an M&A perspective, just general commentary around that.
Yes, I'll give that one day, Chad to talk a little bit but.
And the African and we have is to really focus on.
The cash that we have and the strength of our balance sheet, which which we feel very very comfortable with and.
And you know as we look at opportunities to partner.
And add to the portfolio, we will continue to do that but relative to <unk>.
M&A activity.
We would.
We wouldn't be opposed to <unk>.
Going after something and if it really made sense and was accretive to where to our value. So I think from from that point of view.
It's not we're focused on our core right now and we're going to continue to do that and.
Keep our eyes opened and the market share.
Yes.
No I would just I would echo all of that commentary, Gary Josh and that we do feel really like we do have a very solid balance sheet quake greater liquidity profile.
And even as you look at the 2020 results from a free cash flow standpoint, cash consumption et cetera generally in line with our plan and we actually took the opportunity through the pandemic to lean in on some investment priorities around our virtual first operating model. We mentioned some of the capex associated with the refresh of all of our endpoint technology devices to enable our <unk>.
To be more efficient and productive and and.
Engage and net new new world of work and so as we look forward longer term like are you said it will continue to be very disciplined around managing net cash given the broader macro it and some of the uncertainty that we still see out there over the next the next couple of quarters right now there's really no other intention for the use of that cash other than running the business and continuing to invest internally for that future.
So where would you see areas to lean in where we're seeing greater ROI from.
Things that clients are asking us to do we'll continue to do that but in the interim no no immediate view of doing anything around buybacks or dividends or M&A like Gary said, we do keep our are our eyes and ears open and are aware of opportunities and to the extent and he can make.
A lot of strategic sense.
And can accelerate things on and inorganic pathway will obviously consider those but right now focusing on the core operational and see 60 and create opportunity going forward.
Yes.
Oh, great Gavin and thanks for taking all my questions.
Josh. Thank you great question, Josh Thank you.
Thank you again, ladies and gentlemen, if you like that is a question. Please press Star then one on you touched on telecom.
One moment please.
Yes.
I'm showing no further questions at this time and lets turn the call back over to management for closing remarks.
Thank you very much so with no further questions today, and we'll go ahead and close the call.
Chad and I, certainly appreciate everyone joining us and we look forward to.
Hopefully speaking to many of you.
And some of the upcoming virtual investor conferences in March so thank you all very much.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect.
Paul.
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