Q4 2021 ServiceSource International Inc Earnings Call
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<unk> fourth quarter 2021 earnings call will begin momentarily. Thank you for your patience and please continue to standby.
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Good day and welcome to the service for its fourth quarter 2021 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
Ask a question during the session you will need to press Star then one and they've had some telephone.
If anyone should require assistance during the conference. Please press Star then zero on switching operator as a reminder, this call may be recorded I would now like to turn the call over to Elyse Crucell head of corporate Communications you may begin.
Thank you operator, we appreciate everyone joining us today and welcome to surface sources earnings call to discuss our results for the fourth quarter and full year ended December 31st 2021 .
On the call today are Gary Moore surface sources, chairman and CEO and Chad Lyne our CFO .
As a reminder, our SEC filings in the earnings release, we issued today after market closed are available on our website at Www Dot I, Our service force Dot Com and.
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.
All statements made during the call reflect our views as of today February 23rd 2022 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-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 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 Lee and thanks to everyone for joining us.
For our earnings conference call for the fourth quarter and full year 2021.
We closed the year on a strong note.
Demonstrating the power of our strategy the value of our solutions in the marketplace and the positive outcomes, we deliver for our client.
Revenue growth accelerated to more than 9% in the fourth quarter and was the strongest year over year compare since the first quarter up 2014.
Furthermore, we returned the business to full year revenue growth and more than doubled our annual profitability.
Adjusted EBITDA basis.
I am incredibly proud of how our teams performed throughout 2020 . One we built upon the foundational work from previous years and further improve the fundamentals of the business.
We executed well against our strategic objectives and priorities in pursuit of our long term vision.
And we made important strides on our multi year transformational journey towards our target model objectives.
Reflecting on this journey I am reminded her remarks I made on my first earnings conference call as Chairman and CEO three years ago in February of 2019.
Tried to be clear that we would not pursue a quick hit short term strategy, rather we would be methodical and disciplined as we sought to sustainably and durably and prove our execution financial results and enterprise value.
To accomplish these objectives I also shared with you that our time and energy we're going to be focused in three key areas, our people our clients and our operating and financial model.
Last week service source employees around the world came together virtually for our annual company kickoff as we reviewed our past performance and in line for the year ahead. It was clear to everyone on the progress we've made on those focus areas and the exciting opportunities we see in front of us.
We have built and fostered a world class organization that cares deeply about our culture and each other winning as a team and living our values of dedication collaboration trust and caring.
<unk> technology enabled services company. Our people are the most important aspect of our product from that Lynn I truly believe we have the best product in the market.
Based on what I hear from our clients. They feel the same way they trust and rely on our people to represent their products solutions and brands in the marketplace I will quote a chief customer officer from one of our clients who joined us at our kickoff last week.
When he told our teams it is.
Getting harder and harder to tell the difference between your team and my team. We are still integrated at this point you provide a great source of resources for us to scale as our journey continues and our growth accelerates in SaaS, we are counting on us we couldn't do it without.
Servicers as the demand for resources and qualified people is too high for us to fulfill on our own.
This kind of endorsement isn't given.
Yes, we consistently deliver for our clients for life mentality and approach our clients are at various stages of their own transformational journeys in an increasingly dynamic and competitive environment.
We have invested significant resources to ensure we are better aligned strategically position and more responsive to support their evolving needs.
We are seeing the results from this ongoing focus in terms of higher client satisfaction stronger retention rates and more growth and expansion opportunities from our installed base.
Allow me to paraphrase another client who joined US last week and Chief sales officer for one of our longest tenured partnerships, who highlighted the power of our strategic alignment with his business.
He said.
Our original partnership with service tours goes back to 2011, when you helped us make our last pivot, we're now making a similar kind of change and looking to make the next COVID-19 at all.
Our world evolves and changes we're really excited to have you as part of that journey with us.
This level of trust and alignment has to be bought for and earned every day.
Through consistent execution and exceeding expectations.
Our teams around the world have done a great job standardizing our solutions building globally, consistent processes and improving our day to day performance leading to operational excellence.
The progress here has been profound, particularly considering the disruption caused by the pandemic and the transformation required across our entire value chain.
We built an innovative virtual first operating model, we are ramping faster scaling smarter, improving client outcomes and accelerating our own financial results.
In recognition of the progress we have seen across our employee client and operational focus areas.
I'm thrilled to share with everyone that we.
We have elevated two senior executives to broader leadership roles in the business.
Martin a 10 year veteran of Servicers and most recently, our executive Vice President of global client delivery had during the role of Chief Operating Officer, Mike now leads our global delivery centers people and culture learning and development and information technology organization.
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Peter plan.
Then with service source for nine years has taken on the role of Chief revenue Officer with end to end accountability for our go to market teams, including marketing solutions design outside sales and global account management.
I think Peter had been instrumental in strengthening the fundamentals of our business and building our foundation for the future I look forward to the impact that they will have these broader roles to advance our innovation transformation and growth agenda.
Before I turn the call over to Chad to cover our operating and financial results.
Wanted to share with you why I am optimistic for the year ahead.
Many respects the broader macro environment continues to exhibit uncertainty and volatility in.
In the face of this however, I see tremendous opportunity for a longer term tailwind for services.
Companies in the technology industry.
A long list of initiatives, but CEO and board surveys consistently points to three strategic corporate priorities.
Digitally enabled growth customer engagement and satisfaction and competition for talent, our solutions and capabilities are squarely aligned with these objectives, we enable our clients to scale talented resources and capacity more rapidly than they can on their own we support them and executing.
Their go to market strategies more efficiently.
Global basis to allow them to outpace their competition, and we digitally and engage with their prospects and customers with proven playbook to identify and unlock higher levels of growth and retention.
We've talked a lot on previous calls about digital transformation and how the global pandemic caused many businesses to rethink their go to market models in order to build more valuable connections with their customers over.
Over the past year service source has been able to capitalize on that need the posture of better customer interaction intimacy and insight for our clients.
As we move through 2021, we began to see a shift in the industry from a defensive protect what we have mentality.
A more offensive mindset focused on gaining market share with this shift clients and prospects are increasingly focused on expansion opportunities that have opened because of digital disruption.
For example in the fourth quarter, we signed that brought onboard five new clients.
One of those new clients Goodie is a fast growing cloud based disruptor focused on the digital transformation of the corporate gifting market Goodies digital gifting services began as a consumer app and quickly move to operating corporate application for a business to business gifting.
To build the speed of <unk> client base Cody retained service source in North America to deploy a high velocity inside sales motion to convert interest into lead and qualified leads and activating customers.
Our team of staff trained and up and running in less than 30 days aimed completely at growing a new business line for goody speed to market matters when clients.
To capitalize on any new space and we provide the agility they need to continue to be a disruptive force in certain markets.
We are also seeing the digital transformation agenda propel our installed based clients and to new ways of working for a company like click who we have had the great opportunity to support for more than five years. We have played a central role in the redesign of their customer engagement strategy.
Clip has begun to move it solutions entirely to the cloud and is leaving that market and then evolution to recurring subscription and SaaS based business model.
Beyond the changes that the subscription model brings to things like contract length and pricing. The most important factor for a successful transition.
Is in how customers are managed and supported companies that have a unified view of the customer.
Stick approach to engagement throughout the customer journey and it makes up high touch and tech touch interaction channels are better able to accelerate their solutions to a subscription model.
Throughout our multiyear partnership with click we have supported them in successfully navigating this transformation, we have broaden what began as a transactional renewals motion focused on preserving the pace.
Until you more holistic customer success nurturing program tasked with growing value and expanding the base now we're on a path together to bring further innovation and velocity to other areas of their customer experience.
Client examples like these speak to the critical role, we play supporting new digital Disruptors and established industry leaders.
Our commitment to our clients' success is helping them accelerate the execution of their go to market priority.
And our unwavering focus on delivering our brand promise.
<unk>, our position as a trusted partner strategic adviser and growth enabler.
As we begin 2022 in the hope of entering a post pandemic world. We believe the technology industries need for easier faster and better ways of interacting with prospects and engaging with their customers will continue.
We have diligently positioned service source to address this need and to capitalize on the opportunity it presents for us and our clients and finally, the progress and performance we demonstrated in the past year give us confidence in our long term financial priorities and our ability.
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We remain focused on our strategy and the value. We believe successful execution can create for all of our stakeholders.
With that I will turn the call over to Chad.
Thank you Gary we appreciate everyone, taking the time to join US today I will echo Gary's comments that we are very proud of our global team.
2021 was an important year for server source as we inflicted back to growth and accelerated our progress toward our target model objectives. The.
The investments we have made in our people processes and platforms, coupled with our virtual first operating model and clients for life philosophy are differentiating us as a market leader and innovator.
Our commitment to our strategy our alignment to our client success and our focus on operational excellence enabled us to deliver improved financial performance throughout the year.
The progress we demonstrated in 2021 strengthen to the conviction we have in our long term targets.
We will maintain our focus and discipline as we seek to build on the passengers accomplishments going forward.
On today's call I plan to cover three areas.
First I will share some of the key business highlights and the operational metrics that underpinned our strong performance.
I will recap, our fourth quarter and full year 2021 financial results.
And third I will discuss our contextual outlook and expectations for the year ahead.
Let's turn to our key business highlights starting with our go to market activity and the gains we are seeing there.
Our unique value proposition underpinned by our integrated customer journey experience solution suite and outcome centric model is resonating well in the marketplace.
Companies are making larger and bolder investments behind their customer growth and retention initiatives.
Our capabilities expertise and global footprint enabled them to scale these investments with a more certain and compelling ROI.
Fueled by this dynamic.
Improved activity into outcomes throughout the sales pipeline and funnel.
Our account based marketing campaigns are elevating service sources brand awareness and activating a large addressable market.
Our business development teams are having more client discovery meetings and converting more leads into viable opportunities.
Our solution consulting teams are conducting the higher volume of sales performance analysis as they consult with more prospects to jointly develop compelling business cases.
And our outside sales and global account management teams are closing more of these opportunities securing new clients and expanding our scope within our installed base.
Allow me to summarize the results of this improved go to market activity under Peter Flynn leadership.
New bookings in 2021 were up approximately 13% year over year and more than 80% of the value. We signed was with high growth cloud and software companies.
We added eight new clients in 2021, including five wins in the fourth quarter alone.
We also earned expansions and ramp new programs and the largest clients, which contributed to more than 8% year over year revenue growth at our top five clients.
Our improved market momentum is directly tied to the strong performance of our global delivery teams.
For many of our clients we are entrusted to manage a large segment of their customer base and a meaningful portion of their revenue.
To ensure we deliver on that earn trust everyday Mike Norton and his leadership team have instilled end to end process discipline and operational rigor that have improved the consistency of our execution and the value our clients realize from us.
Our professional services teams have enhanced our implementation processes to support more program launches and ramping faster and green status.
Our people and culture and learning and development teams have re imagined our talent strategies to attract develop and retain a highly skilled remote workforce in the face of a tight labor market.
And our business intelligence data into I T teams have brought further differentiation to our solutions with more robust client insights analytics and automation.
In addition to the growth. These efforts are locked the impact is further reflected in record high client performance target metrics and in our contract renewal efforts.
That's fully renewed or extended approximately 87% of the contract value that was up for renewal during the year a solid gain from the approximately 81% we reported last year.
Factoring in the Upsells and expansions that we secured with some of these renewals our net retention rate for the year was approximately 94%.
Let's turn now to our financial results.
Beginning with our fourth quarter revenue.
Revenue of $55 $8 million was up $4 $7 million or nine 3% year over year.
This was the second consecutive quarter with year over year growth in each of our regional theatres.
On a year over year basis fourth quarter revenue in EMEA grew approximately 15% and.
And a P. J revenue was up approximately 13% and vanilla revenue increased approximately 5%.
Our fourth quarter non-GAAP gross profit was $22 3 million up $3 $2 million or 17% year over year.
Our non-GAAP gross profit margin was 40% of revenue up 270 basis points year over year, demonstrating the contribution flow through in our model when we scale revenue.
non-GAAP operating expenses were $15 4 million in the quarter and represented 27, 6% of revenue.
Favorably down 320 basis points year over year.
The combination of revenue growth disciplined expense management and cost reductions from our virtual first operating model drove strong bottom line performance.
Fourth quarter, adjusted EBITDA was $8 1 million up $3 $3 million or approximately 68% year over year.
Adjusted EBITDA was 14, 6% of revenue a gain of approximately 510 basis points year over year.
All told Q4 marked a very strong finish to the year with high single digit revenue growth and mid teens adjusted EBITDA margins.
With a longer term target model objectives, we have shared with you in the past.
Shifting to our full year 2021 results.
Revenue of $195 $7 million was up $1.1 million or 0.6% year over year.
Marking our first full year of revenue growth since 2016.
Revenue from program expansions and new client ramps sold during the year was the largest contributor to our performance and more than offset revenue lost from in your contractions or logo churn.
We generated year over year revenue growth at six of our top 10 clients.
And in aggregate revenue across the top 10 grew more than 7% through a combination of new scopes of work underlying growth for the products and services, we support for these clients and higher conversion rates and end user bookings.
Continuing down the P&L, our non-GAAP gross profit was $64 $3 million for the full year and reflected a margin of 32, 8% of revenue up approximately 20 basis points year over year.
Full year non-GAAP operating expenses of $59 $7 million were favorably down $5 $6 million year over year.
At 35% of revenue non-GAAP operating expenses were favorably down 310 basis points year over year.
On a combined basis, our non-GAAP cost of revenue and operating expenses were approximately two 7% lower year over year, driven by the acceleration of our virtual first operating model and a flatter and more efficient organizational structure.
Beyond the savings we are very pleased with the better results and the outcomes, we are seeing leveraged against the spend.
The gains here were also net of year over year expense headwinds, we faced including approximately $3 million of combined impact from FX and to lower COVID-19 related job support grants from the Singapore government.
For the full year of 2021, adjusted EBITDA was $9 $8 million or 5% of revenue more than double the $4 $3 million and two 2% of revenue we generated in fiscal 2020.
Moving onto the balance sheet and cash flow highlights.
We ended the year in a strong position with a healthy balance sheet and liquidity profile.
Cash flow from operations was $3 $6 million for the year.
Capex inclusive of capitalized internally developed software was $3 $9 million, resulting in free cash flow of negative $3 million compared to negative $7 $5 million in fiscal 2020.
Cash cash equivalents and restricted cash was $38 million at year end down $5 5 million from December 2020, as we reduced our borrowings on our revolver by $5 million during the year.
We ended the year with $10 million outstanding on the revolver and had total available liquidity as of December 31, 2021 of $46 $5 million.
In summary, we are incredibly proud of how the teams navigated through the challenges and opportunities during 2021 to return the business to a full year revenue growth to expand our margin profile and to deliver the accelerated results. We saw in the fourth quarter.
Before we open the call for any questions I want to take a few minutes to provide some context for how we are thinking about the year in front of us.
Consistent with our philosophy from last year, we do not intend to provide formal or specific financial guidance, either on an annual or quarterly basis.
Gary and I will continue with our approach of focusing on our long term strategy and objectives, while transparently sharing market data points and any headwinds or tailwind we may encounter as we work towards our target model ambition.
Although there is clearly a heightened volatility and uncertainty around the world.
Growth in global GDP and the industry is now expected to moderate this year, we will continue to align service source to serve dynamic growth companies and more rapidly expanding sectors.
Inflationary pressures and competition for talent or concerns for all companies.
But we believe our global footprint virtual first operating model and inclusive culture give us an opportunity to support our clients and new prospects as they work to navigate these forces.
The strategic shifts investments and moves we've made in recent years have all been directed at building a foundation for sustainable profitable growth.
As we scan the horizon for 2022, we are optimistic that we will build on the financial progress we demonstrated in 2020 one in a way that we believe will be valuable for our clients our employees and our stockholders.
With that operator, please open the line for questions and then we will have Gary come back after any Q&A to close the call.
As a reminder to ask a question. Please press Star then one.
If your question has been answered and you'd like to remove yourself from the queue press the pound key.
Our first question comes from Karl Bowser with Colliers. Your line is open.
Great. Thanks, I, Gary Chad Congratulations on the really strong results in EBITDA in the quarter.
So I think it's typical to your typical contracts are about one year and your success rate for renewals, it's been nearly 90% north of that for the year can you talk about how you've been able to maintain that edge.
And also when do you get visibility regarding our clients' decision to renew for for another year.
Yes, great and Kyle Thank you for the comments and certainly thank you for joining.
To be clear our contracts are typically one to three years in duration I think the important note here, though is it relationships tend to be long tenured. So when we get the scale with the client and when we deliver on our commitments and the ROI expectations that.
And that quite honestly, we've sold them. The average tenure goes up across our top 10 to 11 years.
No.
Around the renewals and extensions, we had 87% of the contracts that were up for renewal during the year.
But due to Upselling and I think a very important thing here is our net retention rate was about 94%. So we demonstrated really good success at Upselling and expanding some of the contracts during the renewal discussions which is always something that we tried to do especially in the ones, where we know we've outperformed.
So we start having renewal discussions to the last part of your questions early on in far in advance of the contract end date.
Improving these rates has been a really strong focus for us on a long term focus and areas, where we've made targeted investments like global account managers. The investments, we've made with RBI and data teams for driving customer and partner insights the additional training.
Scaling that we've put in place for our reps have all paid dividends. There. So we feel good about the direction, we're not exactly where we want to be but we feel very good about the progress we're making we're headed in the right direction.
Got it that's helpful and maybe switching to head count and the labor supply market, how has head count changed over the past 12 months and also as you scale do you add across the board or are there specific roles that you'll be targeting as you add.
Talent.
Yes. Another great question. So I think the market has ended we ended it has.
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We ended the year with about 2900 employees that's.
That's an increase of slightly more than 100.
Employees year over year, and that's to support the new client wins and other program expansion a lot of that change has to do with language requirements geographic locations et cetera. So we've been very methodical about flattening the organization where appropriate to allow leadership to be a lot closer to our people and our.
And we've been.
Disciplined about adding talent so.
That growth is typically with the rep area.
And not necessarily an overhead areas, we feel good about the leadership team. We have now not just at the VP level, but directors and managers, we have in our business really understand the business.
I think I mentioned before in my remarks that the biggest aspect of our product is really our people. So that's where we've really put the investment. So I remember when I was a client of Servicers that can buy Cisco days I was impressed with the caliber of people that.
Service tours had and I continue to be.
Impressed with the talent that we attract and retain here.
And I truly believe we have a world class team. So that tenure is also increasing our average tenure is about three five years. So we have a very experienced team with a lot of expertise and knowledge that they bring to bear for our clients.
I appreciate that and maybe following up if I may a couple more how has how has it been recruiting new talent and what's the labor market been like for service source.
Yes, it's clearly a tighter market now than it was three or four years ago, but I think our people and culture of learning and development teams have done a great job of Reimagining, how we recruit how we onboard and train new hires as well as the virtual first operating model. So as part of that virtual first model we have increased.
Our talent market by more than tenfold. So we previously had to hiring within 30 to 60 mile radius of our delivery centers and now we're able to attract talent in 10 states in the U S. As an example, and then the communities outside major Metros, where international offices are at so.
A much bigger pool, and really great talent and as I pointed out the training and development team has been able to really bring people onboard and up to speed very quickly.
Got it got it and then just lastly, as we look forward and contemplate.
Your goals, how shall we think about the key growth drivers I guess in particular, I'm thinking about cross selling within existing accounts and global expansion into emerging markets and new logos et cetera, just trying to understand.
How youre prioritizing each of these buckets. Thank you sure.
I'll tell you I'll, let Chad answer that one and then.
And we'll go from there.
Great Great Yeah, Thanks, Gary and Karl Thanks for joining us today again and thanks for the question there.
So yes, I think we do have within our earning supplement slide it and we've talked with you before as well our target model ambition over a three to five year horizon is to return the business to Durably and sustainably, having 10% plus year over year revenue growth. So we're pleased with the progress that we made in 2021, but still know that there's a ways to go.
So as we think through that that target model ambition, Kyle there's really really two levers that are commanding our attention a lot of focus the first one there is continuing to grow our new bookings, we're pleased to see the 13% year over year growth in bookings in 2021, and I mentioned in my remarks about just the good activity.
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But we're always looking for more and expecting to continue to accelerate the progression there on the new bookings front.
I'd say that that new bookings growth looking for that to be diversified as well. So we're pleased to add the eight new clients in 2021 up from the six that we added in 2020 and our full expectation is that we will accelerate that progress and have a higher number of new logos in 2022 as well while maintaining the focus that we've had over the <unk>.
Few years, Kyle of continuing to attract very marquee brands and high growth cloud and SaaS areas of the market.
I think the last day noted on that bookings growth piece as well as also making sure that it's diversified so not just on the new logo front, but making sure that we've got diversified growth across our installed base.
And our remarks about the growth that we stopped our top 10, so again, a great sign of the confidence that our clients are placing with us than the trust. We've earned through our performance to unlock those growth opportunities and we expect that to continue.
But we're very focused as well with the logos that we've added in the past the past several years.
Turning those into a true land and expand motion so whether its taken on more of the opportunity that they have within their business expanding into other geographies moving into other business units or products or a key focus as well as if we might be single threaded doing one sales motion for them being able to expand that across the customer journey.
<unk> solution suite that we've talked about so long answer there, but that's really a vector one if you will and then the second piece.
Important is making sure that we do a better job retaining what we have in getting churn to a more normalized level. So you get asked the question earlier about our renewal rates are pleased with the progress that we made in 2021.
Looking to continue to accelerate that we've talked for years now about our ambition and the target model objectives assumed that we get churn down to a 5% to 15% of prior year revenue range. So.
So make good progress this year, but our full expectation with the improved execution with the team that we have.
With how our solutions are resonating with our clients is to get that closer to the middle or lower end of that of that range. So across those two things new bookings and churn.
Clearly the priority is can be making sure that we're driving margin accretive growth and making sure that we continue and improve the tight alignment that we're seeing with our clients and generating a shared rois. So.
I, probably sound like a broken record here, but we wont sacrifice quantity for for quality. So we'll maintain vigilance.
About the types of clients that we bring on the types of scopes of work that we undertake.
During that things are set up for success from day one.
Oh, that's great and.
That's it for me. Thank you both and congratulations on the progress and results.
Great. Thank you thanks for the question Kyle.
There are no further questions I'd like to turn the call back over to Gary Moore for any closing remarks.
Thank you Michelle.
I'll be quick here I think I'd, just like to close by thanking.
Our employees for a great 2021.
Their focus was what led us to the results that we have and I know that we're already focused on making 2022 and even better year. So thank you again today to the sources that are out there.
Really pleased with the work that we've done to ramp new business faster scale, our capabilities smarter and really improving the customer outcomes through the clients for life initiative that we started last year I think in turn that's allowed us to accelerate our financial results.
So listening to our clients has allowed us to align our capabilities to address the pressing needs that they have and to repeat those digitally enabled growth customer engagement success and the competition for talent globally.
I think there's always going to be headwinds.
We believe firmly that if we focus on the things that we can control.
We are well positioned to take advantage of an increasing number of tailwind so I want to thank our investors and our clients.
For the trust and faith that they have in us and for those of you on the call. Thank you for joining us today have a great year.
Operator.
This concludes the program you may now disconnect everyone have a great day.
Okay.
Yes.
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Okay.
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