Q2 2021 ServiceSource International Inc Earnings Call
Ladies and gentlemen.
Today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
[music].
Good day, and thank you for standing by and welcome to the second quarter 2021 earnings Conference call. At this time, all participants on a listen only mode. After the speaker's presentation there'll be a question and answer session. Please be advised that today's conference is being recorded to ask a question. During the session you will need to press star 1 on your telephone.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to Elise Raphael head of corporate communications.
Thank you operator, we appreciate everyone joining us today and welcome to serve resources earnings call to discuss our results for the second quarter ended June 30th 2.
1.
On the call today are Gary Moore service sources, Chairman and CEO and Chad Lyne our CFO.
As a reminder, our SEC filings on the earnings release, we issued today 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.
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.
All statements made during the call reflect on.
Our views as of today July 28th 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 in the earnings press release and the risk factors included in our SEC filings, including our report on form 10-Q.
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.
Natural measures, which we believe provide additional information to enhance the understanding of how management assesses the operating performance of the business.
The reconciliation of the GAAP and non-GAAP measures can be found in the earnings release that accompany this call.
And with that I'll turn the call over to Gary.
Thank you Elise and.
To everyone to our earnings conference call for the second quarter of 2021.
It's a pleasure to be speaking with you today and to update you on the progress we are making our second quarter results highlight areas of acceleration in the business and we expect our trajectory to continue.
Welcome to improve in the coming quarters.
We are confident in our strategy our capabilities and are squarely aligned to our clients' most pressing challenges and opportunities.
And our focused execution is driving stronger outcomes.
Last quarter.
We spoke about the lingering headwinds caused by COVID-19, and I would be remiss if I did not acknowledge that it continues to have an impact in particular markets and geographies.
Uncertainty persists, particularly in foreign markets.
But on balance.
The tone commentary and outlook from our clients has shifted more to the positive.
And within the small to mid sized segment that we primarily address for our clients. We are seeing encouraging signs that companies within this tier appear to be on relatively stronger.
<unk> footing compared to the start of the year.
We believe we stand the benefit.
As our clients and their customers continued to regain confidence the work we have done over the course of the past 2 years has improved our ability to be more responsive to the needs of the market.
<unk> we serve.
We've enhanced our solution suite and go to market strategy to be more focused and effective we've transformed our delivery model to be virtual first and more digitally enabled with.
We have streamlined our organization for greater speed and.
<unk>.
And we've invested meaningful time resources and capital to strengthen the foundation of the company to allow us to grow and scale more efficiently over the long term.
The impact of these changes is now becoming more evident in.
Our results are year over year and sequential revenue comparisons are moving in the right direction. Our sales engine is becoming more consistent and predictable and landing new logos and expanding the installed base and our unwavering commitment to our clients for life culture.
Is creating an environment, where our clients increasingly view.
<unk> us as a strategic partner and trusted advisor that can help them succeed on their own go to market transformations.
Across the technology sectors, we serve and the clients we support we see.
And here a recurring theme.
In an era of premium valuations intense competition and rapid disruption. It's no surprise that the top of mind priority is growth and not just faster growth, but also smarter growth.
That puts.
Customer at the center.
Sales on our relationship and not a transaction.
Our integrated customer journey experience solution suite assist our clients in achieving this growth mandate.
More effectively and efficiently on.
Our digital <unk>.
The <unk> solution allows for identifying qualifying and converting more new customers, ensuring our clients recognize maximum ROI on their marketing and sales investments at a lower cost of acquisition our customer's success on renewals solution enables our clients.
<unk> <unk> do recognize faster time to value, ensuring they use consume and buy more from our clients over a longer period of time.
And our channel management solution supports our clients indirect routes to market, ensuring their ecosystem of partners and resellers are equipped.
Cost of our clients win and retain market share.
Regardless of what solution, we deploy for our clients, we bring the power of humanity and personalized engagement to their b to b customer relationships.
On a high level.
To help our team of sources.
Every day as Servicers.
Allow me to spend a few minutes sharing some recent client stories I think those will help make what we do a bit more tangible and better illustrate our ability to drive results in areas that are strategic to the help.
Of our clients' businesses.
As covered in a recent press release, we brought onboard a great new client in the second quarter. This company is an industry pioneer in category creator and is widely recognized as a global leader in the cloud based team collaboration and communications.
<unk> space.
For born in the cloud SaaS companies like this growth rates are often 40% to 50% annually or higher.
But maintaining that growth often puts tremendous stress on the post sales organization.
<unk> focus naturally shifts to serving them.
On the Kay 14, larger enterprise subscribers, which typically results in higher churn and lower retention rates in the SMB tier overtime. This client was facing a similar dynamic but recognize the strategic imperative of better engaging with the smaller subscriber.
<unk> that had contributed to its initial growth and success.
Over the course of a multi quarter pursuit.
We assess the renewals performance baseline and structured and innovative solution with a compelling ROI.
Signed earlier in Q.
So we are now live supporting this client with a holistic program encompassing subscribers health checks contract quoting and renewables and the extension services.
We are seamlessly integrated into the client's customer success team to help build and protect their recurring revenue.
2 bricks and stream during their pursuit of above market growth in the new digital work are.
And although our initial deployment is on the smaller side. We are excited about the potential upside opportunity and supporting on a company with more than 100000 customers.
Tumors and run rate revenues in excess of a billion dollars.
Earlier in Q2, we also announced an expansion for a market leader in the cloud based enterprise identity and access management sector.
This example highlights that customers' success as.
Global priority.
Our initial deployment launched in early 2020 with our team managing end to end customer success program to enhance the lifetime value of North American based customers with $100000 or more on annual recurring revenue.
Our customer success.
Managers assume full accountability for these subscribers after the point of sale with a robust playbook of proactive engagement touch points ranging from week, 1 and welcome calls on boarding calls and health checks to quarterly success meetings and business reviews are building.
Interest and fostering relationships throughout their first year as customers our teams drove higher satisfaction and generated incremental upsell and cross sell opportunities delivering a strong 90 <unk>.
Percent plus net renewal rate across its important customer cohort.
<unk> true the practical demonstration of our brand promise of trusted business outcomes delivered we were asked by our clients to scale, our methodology and expertise to support their growth and retention objectives in EMEA.
And Asia Pacific and Japan, given their relationship a truly global footprint.
Footprint once the expansion is fully ramped we expect the value of this client partnership will increase approximately 50% over the contract 2 year term, providing a great example of us, earning the right to land and expand based on our performance.
The final example, I want to share highlights.
The market growth opportunity for our digital inside sales capability.
Late last year and executive we had previously supported at 1 company moved into a new role as Chief revenue Officer, and another organization that was growing more than 30% annually based on his prior.
Their experience with us and the results we delivered this executive engaged us to deploy a digitally enabled inside sales motion.
This would allow his internal team of sellers to focus on larger opportunities, while we would ensure that the rest of the pipeline and liens where appropriately covered.
Our initial launch delivered on the mandate to help this client win share and accelerate growth in the hyper competitive cloud communications space.
As we announced in the June press release based on the rapid success of our initial deployment, we agreed to triple the size of.
The engagement with an aggregate aggressive implementation timeline, we have now successfully ramp more than 50 professionals to support this clients high growth ambitions.
I share. These success stories as I believe they are a direct reflection of the improved execution we.
We are seeing across the business spanning our go to market client delivery account management and other supporting teams. We are operating more effectively using our proprietary high performance selling methodology, which our clients tell us is a unique differentiator for us in the market.
Our client performance targets, which are robust operational kpis aligned to our clients' unique objectives are at all time highs.
We're also engaging better with our client sponsors and executives using our client for life mentality.
This is best demonstrated in.
Simply complete the client satisfaction survey.
Our net promoter scores increased 17 points to all time High records.
Our progress in these areas has boosted our ability to launch new programs and expansion and green status and continue in a healthy relationship.
For the long term.
You can see examples of this progress and the business highlights from our earnings release our.
Our sales on the sales front, we carried forward from the strong results we shared in the first quarter on on a trailing 12 month basis through Q2, our bookings were up.
Approximately 7% compared to the prior trailing 12 month period, our wins in the quarter were also broad based across approximately 1 fourth of our client base.
Including expansion wins in access of $1 million each of the expected contract value with 3 of our top.
10 clients, we did have several attractive late stage opportunities pushing into Q3, and we look forward to public sizing and sharing these with you once we get them signed.
With respect to our installed base of clients through the first half of the year, we had more than $70 million.
Of contract value up for renewal and our teams did an extraordinary job executing on them, we successfully renewed or extended approximately 97% of this value and when factoring in expansions that accompany these renewals our net retention rate was in excess of 100.
Percent.
Client satisfaction and retention has been a key focus area for us and these outcomes are positive signs that our efforts are paying off.
I'm incredibly proud of our team around the world for the great outcomes here.
In closing our results through the first half of the year.
Give us confidence that we earn the right path first to return the business to growth later, this year and second to accelerate toward our long term financial objectives with that I'll hand, the call to channel to cover the financials.
Thank you Gary it's good to catch up with everyone today.
And thank you for joining us when.
When we spoke with you at the beginning of the year, we shared our expectation that the first half of 2021, we have more pronounced challenges from a year over year comparison standpoint, with the return to growth in the back half of this year.
The dynamics, we spoke about in first half cadence largely largely trended as we expected.
<unk>, if not a bit more favorably.
With 2 quarters under our belt, we are encouraged by the headway, we are making in the business and our stronger positioning to capitalize on our large and growing opportunity for our solutions.
Now, let's turn to our Q2 results.
Revenue of $46.3 million was.
It was down 1.
Today $3 million or 2.8% year over year, marking a sizeable shift from the 10, 2% year over year contraction, we reported last quarter.
Consistent with Q1, the new logos, we won in FY 2020 contributed approximately 3% to our second quarter revenue.
The single large client headwind.
We have spoken about in past quarters continued to weigh on our results as we have not yet lapped the tougher compare.
If you exclude debt client from both periods revenue in Q2 would have shown nominal year over year growth.
This is also the first time since 2018, where we can report topline growth from Q1 to Q2.
Wind down tends to be a seasonally softer quarter.
On a sequential quarter over quarter basis revenue was up 2.9%.
Walking down the P&L, our second quarter non-GAAP cost of revenue was $33.2 million and non-GAAP gross profit was $13.1 million from a margin of 28.
Which percentage of revenue down.
Down $1.2 million or approximately 180 basis points year over year.
As we previewed in our May call non-GAAP gross profit margins were impacted by higher recruiting and personnel related expenses as we added approximately 150 employees in the quarter to support new program launches in <unk>.
Pensions, including the examples Gary shared in his remarks.
Non-GAAP operating expenses were $14.7 million in the quarter and represented 31.7 percentage of revenue.
Favorably down $1.7 million or 10, 6% year over year.
Looking at both our non-GAAP cost.
Cost of revenue and non-GAAP operating expenses, our combined spend in Q2 was down approximately $1.8 million or 3.7% year over year.
Driven in large part by our flatter management structure lower facility related costs and travel savings enabled by our virtual first operating model.
These savings are also net of approximately $1.4 million of.
The year over year foreign exchange headwinds in the quarter, approximately 3 quarters of which hit cost of revenue and 1 quarter of which hit Opex.
At the bottom line second quarter, adjusted EBITDA was negative $200000 approximately 300.
Favorable year over year.
Our approach remains consistent here, we are intentionally choosing to not maximize profitability in the near term given our conviction around high ROI investment areas that we believe will support the achievement of our growth and longer term model ambitions.
Turning to the balance sheet and cash flow highlights.
We maintained a healthy cash and liquidity position.
Strong working capital management was led by Dsos of 67 days, a very impressive reduction of 9 days year over year and a 2 day improvement sequentially from Q1 strong performance.
Cash flow from operations was negative $500000 in Capex.
Inclusive of capitalized internally developed software was $1.1 million, resulting in free cash flow of negative $1.5 million.
Through the first half of the year free cash flow was negative $2 million compared to negative $5.7 million in the first half of 2020.
We ended.
Ex too with $34.8 million of cash cash equivalents and restricted cash.
As noted in an 8-K filing this afternoon last week, we paid off in full to $15 million outstanding on our 2018 revolving credit facility that was due to mature on July 30th.
Following that payoff on.
Ended Q 'twenty third we entered into a new revolving credit facility with bank of America.
This new facility has a 3 year tenor of $35 million commitment of $10 million uncommitted accordion and bears interest at a rate equal to <unk>, plus 2% to 2.5% per annum or an alternate base rate plus 1 to 1.5% per.
On July we are pleased to welcome Bank of America is a new financial partner and to successfully put in place on attractive credit facility to support our growth and working capital requirements going forward.
In summary, we are pleased with our performance in the quarter and the progression of our results through the first half of the year.
The strategic changes.
And long term focused investments we have made throughout the company are beginning to enhance our momentum in the marketplace.
We continue to see improvement in the trending of our operational Kpis, the health of our client relationships and the trajectory of our financials.
We are mindful that economic conditions remain fragile and outlooks are uncertain in many.
And throughout the world.
That said, we remain focused on the internal factors, we can control.
We are committed to building on the areas of internal progress, we see and believe we are tracking favorably to report year over year revenue growth in the third or fourth quarter.
With that operator, please open the call for questions and then we'll.
Any reach a come back after any Q&A to close the call.
And thank you and as a reminder to ask a question you will need to press star 1 on your telephone to withdraw.
All your question price to cap Pankey, please standby will be compile the Q&A roster and our first question.
I'll have Gary comes from Josh Vogel from Sidoti. Your line is now open.
Thanks, Good afternoon, Gary and Chad.
A couple high level ones first if I may you know I was just when we think about the marketplace and the opportunity out there.
Seeing.
Other companies and peers are talking about how larger enterprises are increasingly turning to outsourcing for a whole host of services. So on.
I was just thinking you know outside of your traditional small and mid size segment can you talk about what youre seeing in the marketplace and are you actively going after larger clients that's at all.
Hi.
Josh This is Gary.
Yeah, I mean, clearly theres opportunity you know that we talked about some near term opportunity that we did not close in Q2, but hope that Oh, we will close here in Q3 and hopefully early in Q3.
A couple.
Although it was on a larger clients the deals don't necessarily start out of the large deals, but if you look at R. R.
Our portfolio today, we already have some.
The largest enterprise tech companies and some of the health care in our portfolio.
Folio, so I would just say that the opportunities continue I think that.
The fact that we expanded 3 of our top 10 with million dollar plus.
On run rate revenue opportunity.
It is a good sign of that so you know there are still headwinds.
I think the not the concern, but I think while we have growing optimism, we still know that there's a tough road ahead in the marketplace not the least of which is is pushed on by you know uncertainty around tax rates here in the U S. Covid.
You know.
Just a number of different things that arent put to bed, yet so I would say that.
From from our point of view, where we're very pleased with the pipeline that we have and some of those.
Our clients.
Our ones.
With that heretofore weren't that interested in outsourcing, but they see the opportunity to really accelerate their internal sales as well as utilize <unk>.
Service source to drive not only customer success, but also go after on touched areas of their market.
Ones that community, let me, let Chad and a couple of things here. He's he's also a very very close to this.
Yes, no thanks, Gary and Josh Thanks for the question I think maybe the only.
Clarification too that I'd add to your question is as you think about our client base by and large all of that is what we would define as enterprise clients.
So whether it's a $50 billion in revenue company or a billion dollars on revenue company. Most of those are enterprise clients, but I think as we talk about SMB or the SMB tears, that's the cohort of customers that we're serving on our clients' behalf. So I just wanted to clean up that distinction between those 2.
Seriously I mean, as we look at the marketplace and size. It we see an opportunity of upwards of 300 to 400 companies that are squarely within our Tam.
With 501 billion plus of.
And again more companies moving towards subscription based models and recurring revenue streams, where our solutions are really resonating and with our current client base.
Approximately 40 still see plenty of headroom, there to run and penetrate within that market, while still growing and selling more into our current book of installed base clients like we'd highlight on the on the call earlier. So I would say generally would agree with your thesis on what you're hearing from other companies that by and large with the with the recovery in the economy.
With some of these feelings on stronger footing I think the they are opening the aperture and looking more aggressively at outsourcing when we've seen that in our pipeline and some of the wins that we highlighted this quarter. So.
To Gary's point, there's still a lot of uncertainty out there, but do feel good generally about the the tone and the commentary in the broader velocity that we're seeing in day in the marketplace.
Thank you for the clarification on really good insights there.
I guess you know even to your point about you know the general uncertainty out there is a delta variant makes its way around the world.
There there is a prevailing theme I know, we're still kind of early on and on earning season here, but a prevailing theme is.
Now talking about.
Any sense of urgency or pent up demand.
With clients in their agenda is today, so I wanted to get a sense of what youre seeing in your dialog with clients in our U and is this resulting in any notable compression in the sales pipeline as well as you know following a signed contract at the time it takes to ramp obviously, you're talking about on new.
On a S.
Yeah. So.
No we're optimistic to be to be clear about that.
Our pipeline.
Is as strong as it's ever been in terms of opportunity we have multiple pursuits.
Suits underway, we've been very fortunate too.
In Q2 signed yet another new logo.
And the expansions that we've talked about.
I think the opportunity.
Opportunity do we have is being driven based on our performance we are.
Having an all time high.
High net promoter score, it's up 17 points and that's a record high.
Customer performance targets and the focus that Mike.
Might not and then the delivery team has put on that.
Really yielding dividends for us from a.
From an expansion point of view as well as our.
Getting performance hit so I think the confidence in the long term and our ability to continue to return to growth is as a strengthened.
And again I keep underlying you know, there's some still some variables out there on some things that could hit us but I.
We feel very strongly about the opportunity and that opportunity is increasing.
Thank you it actually leads into my next question.
And your commentary about returning to growth can you can you maybe ballpark for me the level of year to year growth, we could see in the back.
Think of yearend and while Youre doing that can you remind me what drove the strong result in Q4 last year and given that it makes for a tougher comp and you think you'll see year over year growth in Q4, as well, it's basically implying a meaningful lift from from Q2 levels.
Yeah Josh.
Okay.
Okay.
Thank you Gary.
No go ahead.
Yeah, Josh I think.
Try to avoid putting putting specifics on it as we think about Q3 and Q4, but just kind of play back to what we did talk about coming into the year.
As we set up the context, because we thought the first half would be a tougher compare.
1 because of some of the churn that we had late last year debt would start to roll through from a revenue standpoint, the 1 large client headwind that we mentioned and then even coming back to your first question did see a strong recovery in enterprise. It spending early this year, but we knew that it would take or we suspected it would take a number of quarters for that level of confidence.
Sure.
And discretionary spend it from you all to come back into the SMB tiers that we serve so we have seen that level of strengthening that did contribute to some of the good progress that we made in Q2, but our view on the full year is still consistent with what we shared in February in May that we do expect to return to growth in the second.
Second half of this year, and obviously pushing as hard as we can.
And being prudent about.
Doing smart deals during the right deals and executing on our install base behalf to pull that sooner rather than later so.
That's probably about as specific as I want to get with that 1 Josh but I think Ian you. Our objective is not even just this.
Year or the next few quarters, but doing things that are going to set us up to deliver on our long term target model, which I think as you know we've talked for a while now about returning to the business on a consistent sustainable basis to show, 10% plus year over year growth. So we think that the groundwork that we've laid over the past 2 years the investments that we've made in the business the better results.
Alts were dragging for our clients better retention of our employees all of those different leavers are pointing us in that right direction and pleased with the debt.
Shape and shift of the revenue trajectory that we've seen so far and look forward to that continuing up into the right.
I appreciate that and.
I know you werent going.
To get too specific but I couldnt control myself I had to ask so.
I got 1 last 1 for the.
The slide and your comments around the gross margin.
There is some pressure there tied to the higher recruiting and personnel related expenses was that it or was it did mix have any playing it and then just lastly.
So how should we think about the gross margin profile of the business. Once you see some leverage from the recent investment and a return to topline growth.
Yes, I can start off here and then I'll, let Gary.
I'll, let you finish this up share, but I don't think well.
So net incorrectly or our long term view has not changed the long term model that we laid out there and our ability to grow 10% plus.
And drive.
38% plus.
Gross margins non-GAAP gross margin.
And.
And drive.
EBITDA in the 10 to 12 range once we get to a.
A higher revenue rate, we still believe strongly on that and I think as we look at the.
The impact of this last quarter some of that impact really came from the fact that we have signed some business we did.
Did some very fast ramping we Chad mentioned, the 1 the 1 client where we more than tripled.
The amount of people, we had on it and we were able to do that in a very short timeframe, but are a lot of those expenses were ahead of <unk>.
Where we Oh where are we.
5 star did receive in revenue because of that fast ramp.
And we had a couple of those so I'm comfortable with with making that kind of bet.
Because it's a long term high value revenue.
Chad.
Yes couple of points I'd add to that.
As you know Q2 does tend to be 1 of our seasonally softer quarters, both from a revenue standpoint, and a margin standpoint. If you look back 2 years Q2 of 2019 was about 28, 9%. So we're 50 basis points below that.
And in about 30 basis points below what we did in Q1 of this year. So we're mindful.
Josh that I know that we do have a lot of wood to chop and are focused on de lever for pulling to set us up to get to the 38% debt that Gary mentioned, but a couple of other pieces. There that drove the margin. This time, Gary you hit on the ramping that we undertook in the quarter I think that will continue to put a bit of a drag on GP margins as we look over the next.
Sinful out or 2 on again good problem to have because we are driving growth and expansion and so we are willing to make those investments.
To launch clients in grain on set them up for clients for life.
Return on that investment upfront.
Well worth it. So we will continue to do that the other pieces that are contributing to that a bit as you think through the year over year compare as.
Well it is last year, we had a a grant from the government of Singapore debt on the full year was about north of a million dollars of.
Have a good guy from the expense standpoint, that's largely wound down now as.
Covid has moved into the background a bit so we had about 100000 of Singapore grants recognized in the fourth.
First quarter of this year compared to about 400000 last year. So that's a bit of the headwind and then the third piece I've mentioned it briefly in my my prepared remarks is FX has clearly been a headwind in the business as well from from an expense standpoint, our revenue is fairly naturally hedged as we do bill an invoice predominantly in.
In USD, but given the scope of our international operations in 8 different countries.
Good amount of our expense obviously, it does have some exposure to forex.
Ex waned and so as we've seen strengthening of the euro or the British pound et cetera, compared to where it was in the first half of last year, that's had about a.
Million.
First half for <unk>.
Impact across both cost of revenue on Opex in Q2.
Okay.
Alright, great I appreciate all those data points.
For taking my questions and I look forward to chatting with you guys soon.
Thanks, John Thanks, so much I appreciate it.
Thank you for your question.
And I am showing no further questions I would now like to turn the call back to Gary Moore for closing remarks.
Hey, Thank you just didn't really appreciate it.
You know I'll be brief in closing here as you heard in my earlier remarks, and as highlighted in the financial results that channel share.
We believe we are nearing an inflection point in the business based on 3 key points I'd like to cover those first we're going after a large and attractive market opportunity. Our solutions are squarely aligned to the needs are in this market and what we have to offer is of growing importance for high growth.
Growth companies like the examples I sure shared earlier on on the call.
The challenge changes in forward focused investments we have made during the past 2 years are resulting in stronger and more consistent execution throughout the business.
As we said last quarter it will take time for this to fully.
Realized in our financial profile, but our results in Q2 are a good indicator of that positive shift and third the outcomes of our teams on our.
Current driving and the relationships, we've built are positioning us for a strategic partner with our clients.
While these companies.
We each have their own unique challenges and opportunities we are doing a better job, earning their trust to support their most important objectives and strategic priorities.
So we are pleased with our gains through the first half of the year and remain Super focused on the progress we need to achieve in the quarters to come.
So thank you to our stockholders for your continued support on our transformation journey, we look forward to speaking with many of you in the coming weeks with that Justin you may end the call.
Thank you Sir This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
<unk>.
[music].