Market Overview

ServiceSource Reports Second Quarter 2018 Financial Results

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Strong Execution Drives Outperformance Relative to Guidance

Full-Year Outlook Reaffirmed

ServiceSource (NASDAQ:SREV), a global leader in outsourced inside
sales, customer success and recurring revenue growth and retention
solutions, today announced financial results for the three months ended
June 30, 2018.

"ServiceSource had another solid quarter that exceeded our top and
bottom line expectations, as our teams delivered impressive results for
our clients and executed well against our strategic priorities," said
Christopher M. Carrington, CEO of ServiceSource. "We turned in revenue
growth that showed strong sequential acceleration, secured more great
new logos and valuable client expansions and added to our inside sales
and customer success portfolio. Throughout the business, we are seeing
continued positive momentum that reaffirms our outlook for the
full-year."

Key Financial Results

  • GAAP revenue for Q2 2018 was $61.1 million, an increase of 4.9%,
    compared with $58.3 million reported for Q2 2017.
  • GAAP net loss for Q2 2018 was $8.9 million or $0.10 per diluted share,
    favorable compared with GAAP net loss of $13.1 million or $0.15 per
    diluted share reported for Q2 2017.
  • Non-GAAP net income for Q2 2018 was $0.8 million or $0.01 per diluted
    share, compared with non-GAAP net income of $1.5 million or $0.02 per
    diluted share reported for Q2 2017.
  • Adjusted EBITDA for Q2 2018 was $3.2 million, compared with $4.7
    million reported for Q2 2017.

A reconciliation of GAAP to non-GAAP financial measures is provided
following the Consolidated Financial Statement tables contained within
this press release.

Key Business Highlights

  • Solid Q2 sales results with 19 transactions, including 16 expansions
    and three new logo wins.
  • Strong uptake for the high growth solutions portfolio, with more than
    half of new sales transaction value generated from inside sales and
    customer success.
  • Over 60% of revenue from clients with multi-year agreements.
  • Nearly 50% year-over-year growth in team size across the Manila,
    Sofia, Kuala Lumpur and Okinawa locations.
  • Key leadership addition with appointment of Denzil Samuels to the role
    of Chief Marketing and Growth Officer.

Third Quarter 2018 Outlook

For Q3 2018, ServiceSource is providing the following guidance:

  • Revenue of $60.0 million to $61.0 million.
  • GAAP net loss per share of $0.03 to $0.04; non-GAAP net income per
    share of $0.01 to $0.02.
  • Adjusted EBITDA of $3.5 million to $4.5 million.

Fiscal 2018 Outlook

ServiceSource is reaffirming the following full-year guidance metrics
that are based on a number of assumptions that management believes are
reasonable at the time of this earnings release:

  • Revenue of $246.0 million to $249.0 million.
  • GAAP gross margin of 34.0% to 35.0%; non-GAAP gross margin of 36.5% to
    37.5%.
  • GAAP operating expenses of 37.9% to 38.7%; non-GAAP operating expenses
    of 32.0% to 32.5%.
  • GAAP net loss of $18.8 million to $21.8 million; non-GAAP net income
    of $8.0 million to $10.0 million.
  • GAAP net loss per share of $0.20 to $0.24; non-GAAP net income per
    share of $0.09 to $0.11.
  • Adjusted EBITDA of $19.0 million to $22.0 million.

Please see the second quarter 2018 Earnings Call Deck on the Events and
Presentations section of the Investor Relations website (http://ir.servicesource.com/events)
for a reconciliation between GAAP and non-GAAP measures in our guidance.

Quarterly Conference Call

ServiceSource will discuss its second quarter 2018 results and financial
guidance today via teleconference at 1:30 p.m. Pacific Time. To access
the call within the U.S., please dial (877) 293-5486, or outside the
U.S. (914) 495-8592, at least five minutes prior to the start time.
Conference ID number: 7659649. In addition, a live webcast of the call
will also be available on the Investor Relations section of the
ServiceSource website under Events and Presentations. A replay of the
webcast will also be available on the Company's website at http://ir.servicesource.com.

Forward-Looking Statements

This press release contains forward-looking statements, including
statements regarding our expectations for financial and operational
performance, whether our go-forward model will produce anticipated
benefits, and whether our improved execution and emerging capabilities
will translate into desired results. These forward-looking statements
are based on our current assumptions and beliefs, and involve risks and
uncertainties that could cause our results to differ materially from our
forward-looking statements. Those risks and uncertainties include: a
decline in client renewals, the loss of one or more of our key clients
or the contraction in our revenue from one or more of our key clients,
in each case resulting in churn, or our clients not expanding their
relationships with us; the risk of problems implementing our
technologies or that our technologies will not meet customer
expectations; that the market for our solution is underdeveloped and may
not grow; errors in estimates as to the renewal rate improvements and/or
service revenue we can generate for our customers; changes in market
conditions that impact our ability to sell our solutions and/or generate
service revenue on our customers' behalf; the possibility that our
estimates of service revenue, opportunity under management, and other
metrics may prove inaccurate; our ability to keep customer data and
other confidential information secure; our ability to adapt our solution
to changes in the market or new competition; problems encountered by our
clients in their business that may cause them to cancel or reduce their
business with us; our ability to achieve our expected benefits from
international expansion; economic or other adverse events or conditions
affecting the technology industry; our ability to protect our
intellectual property rights; the risk of claims that our offerings
infringe the intellectual property rights of others; and other risks and
uncertainties described more fully in our periodic reports filed with
the Securities and Exchange Commission, which can be obtained online at
the Commission's website at http://www.sec.gov.
All forward-looking statements in this press release are based on
information currently available to us, and except as may be legally
required we assume no obligation to update these forward-looking
statements.

About ServiceSource

ServiceSource International, Inc. (NASDAQ:SREV) helps the world's
leading brands grow closer to their customers. As a global leader in
outsourced inside sales, customer success and recurring revenue growth
and retention solutions, ServiceSource expands customer lifetime value
by helping companies to more efficiently and effectively find, convert,
grow and retain their B2B customer relationships. Trusted by global
market leaders in the cloud/XaaS, software, technology hardware, medical
device & diagnostic equipment and industrial IoT sectors, ServiceSource
sells, manages or renews $9 billion of revenue annually on behalf of its
clients. Leveraging a robust technology suite, predictive data models
and more than 3,000 revenue delivery professionals speaking 45
languages, only ServiceSource brings to market nearly 20 years of
expertise and the ability to drive recurring revenue growth to more than
170 countries. To learn more, visit http://www.servicesource.com.

Connect with ServiceSource:

http://www.facebook.com/ServiceSource

http://twitter.com/servicesource

http://www.linkedin.com/company/servicesource

http://www.youtube.com/user/ServiceSourceMKTG

 
ServiceSource International, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
       
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
2018 2017 2018 2017
Net revenue $ 61,111 $ 58,262 $ 119,696 $ 114,970
Cost of revenue(1) 42,463   39,517   84,187   80,926  
Gross profit 18,648   18,745   35,509   34,044  
Operating expenses:
Sales and marketing(1) 9,252 8,620 18,490 16,960
Research and development(1) 1,780 1,243 3,296 3,485
General and administrative(1) 13,157 13,505 26,046 27,486
Restructuring and other(1) 156   5,715   209   5,715  
Total operating expenses 24,345   29,083   48,041   53,646  
Loss from operations (5,697 ) (10,338 ) (12,532 ) (19,602 )
Interest expense and other, net (2,776 ) (2,646 ) (5,622 ) (4,717 )
Impairment loss on investment securities     (1,958 )  
Loss before income taxes (8,473 ) (12,984 ) (20,112 ) (24,319 )
Provision for income tax expense (414 ) (117 ) (427 ) (406 )
Net loss $ (8,887 ) $ (13,101 ) $ (20,539 ) $ (24,725 )
Net loss per share, basic and diluted $ (0.10 ) $ (0.15 ) $ (0.23 ) $ (0.28 )
Weighted average common shares outstanding, basic and diluted 91,323   88,813   90,843   88,600  
 
(1) Reported amounts includes stock-based compensation
expense as follows:
 
For the Three Months Ended
June 30,
  For the Six Months Ended
June 30,
2018 2017 2018 2017
Cost of revenue $ 279 $ 294 $ 558 $ 584
Sales and marketing 833 970 1,719 1,852
Research and development 58 (35 ) 122 65
General and administrative 2,257   2,466   4,139   4,411  
Total stock-based compensation $ 3,427   $ 3,695   $ 6,538   $ 6,912  
 
 
ServiceSource International, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
   
June 30, 2018 December 31, 2017
Assets
Current assets:
Cash and cash equivalents $ 184,320 $ 51,389
Short-term investments 137,181
Accounts receivable, net 50,583 56,516
Prepaid expenses and other 6,081   6,112  
Total current assets 240,984 251,198
 
Property and equipment, net 34,471 34,119
Contract acquisition costs 3,294
Deferred income taxes, net of current portion 68 70
Goodwill and intangible assets, net 6,334 6,419
Other assets 4,252   3,566  
Total assets $ 289,403   $ 295,372  
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,219 $ 4,574
Accrued taxes 165 651
Accrued compensation and benefits 17,517 19,257
Convertible notes, net 149,091 144,167
Deferred revenue 1,282
Accrued expenses 6,433 6,625
Other current liabilities 4,696   2,104  
Total current liabilities 180,121 178,660
 
Other long-term liabilities 5,903   4,603  
Total liabilities 186,024   183,263  
 
Stockholders' equity:
Common stock 8 8
Treasury stock (441 ) (441 )
Additional paid-in capital 366,125 359,347
Accumulated deficit (263,037 ) (246,207 )
Accumulated other comprehensive income (loss) 724   (598 )
Total stockholders' equity 103,379   112,109  
Total liabilities and stockholders' equity $ 289,403   $ 295,372  
 
 
ServiceSource International, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
  For the Six Months Ended June 30,
2018   2017
Cash flows from operating activities:
Net loss $ (20,539 ) $ (24,725 )
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 9,744 10,801
Amortization of debt discount and issuance costs 4,923 4,557
Amortization of contract acquisition costs 930
Amortization of premium on short-term investments (1,197 ) (114 )
Deferred income taxes 148
Stock-based compensation 6,538 6,912
Restructuring and other 482 2,901
Impairment loss on investment securities 1,958
Other 56
Changes in operating assets and liabilities:
Accounts receivable, net 5,593 12,239
Deferred revenue 174 (1,119 )
Prepaid expenses and other (434 ) (37 )
Contract acquisition costs (878 )
Accounts payable (2,515 ) (825 )
Accrued taxes (472 ) (664 )
Accrued compensation and benefits (1,647 ) (5,164 )
Accrued expenses (1,339 ) (1,508 )
Other liabilities 1,025   (364 )
Net cash provided by operating activities 2,402   3,038  
Cash flows from investing activities:
Acquisition of property and equipment (7,268 ) (9,080 )
Purchases of short-term investments (480 ) (37,806 )
Sales of short-term investments 133,920 33,457
Maturities of short-term investments 4,240   3,025  
Net cash provided by (used in) investing activities 130,412   (10,404 )
Cash flows from financing activities:
Repayment on capital lease obligations (156 ) (34 )
Proceeds from issuance of common stock 447 616
Payments related to minimum tax withholdings on restricted stock
unit releases
(417 ) (322 )
Net cash (used in) provided by financing activities (126 ) 260  
Net increase/(decrease) in cash, cash equivalents and restricted cash 132,688 (7,106 )
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
243 (922 )
Cash, cash equivalents and restricted cash, beginning of period 52,633   48,936  
Cash, cash equivalents and restricted cash, end of period $ 185,564   $ 40,908  
 

Use of Non-GAAP Financial Measures

To supplement its Condensed Consolidated Financial Statements presented
in accordance with generally accepted accounting principles, or GAAP,
ServiceSource provides investors with non-GAAP gross profit, net income
(loss), net income (loss) per diluted share and Adjusted EBITDA. A
reconciliation of these non-GAAP financial measures to the closest GAAP
financial measure is presented in the financial tables below under the
heading, "GAAP to Non-GAAP Reconciliation."

ServiceSource believes non-GAAP financial information provided in this
release can assist investors in understanding and assessing its on-going
core operations and prospects for the future and provides an additional
tool for investors to use in comparing ServiceSource's financial results
with other companies in the industry, many of which present similar
non-GAAP financial measures to investors.

Non-GAAP gross profit consists of gross profit plus adjustments to
stock-based compensation, amortization of internally-developed software
and amortization of purchased intangible assets.

Non-GAAP net income (loss) consists of net income (loss) plus
stock-based compensation, amortization of internally-developed software,
amortization of purchased intangible assets, restructuring and other
related costs, impairment loss on investment securities, amortization of
contract acquisition costs related to the initial adoption of ASC 606,
non-cash interest expense and applying an income tax rate of 26.5% and
40.0% as of June 30, 2018 and June 30, 2017, respectively, on non-GAAP
adjustments as well as the impact of normalizing the effective income
tax rate. Stock-based compensation expense is expected to vary depending
on the number of new grants issued, changes in the Company's stock
price, stock market volatility, expected option lives and risk-free
interest rates, all of which are difficult to estimate.

EBITDA consists of net income (loss) plus depreciation and amortization,
interest expense and other income/(expense), and income tax benefit
(expense). Adjusted EBITDA consists of EBITDA plus non-cash stock-based
compensation expense, amortization of contract acquisition costs related
to the initial adoption of ASC 606, restructuring and other related
costs and impairment loss on investment securities. ServiceSource uses
Adjusted EBITDA as a measure of operating performance because it assists
the Company in comparing performance on a consistent basis, as it
removes the impact of the Company's capital structure and other non-cash
or non-recurring items from operating results.

These non-GAAP measures should not be considered a substitute for, or
superior to, financial measures calculated in accordance with GAAP.

ServiceSource International, Inc.
GAAP To Non-GAAP Reconciliation
(in thousands, except per share amounts)
(unaudited)
       
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
2018 2017 2018   2017
Net revenue
GAAP net revenue $ 61,111   $ 58,262   $ 119,696   $ 114,970  
Non-GAAP net revenue $ 61,111   $ 58,262   $ 119,696   $ 114,970  
 
Gross profit
GAAP gross profit $ 18,648 $ 18,745 $ 35,509 $ 34,044
Non-GAAP adjustments:
Stock-based compensation (A) 279 294 558 584
Amortization of internally-developed software (B) 2,830 2,986 5,509 5,483
Amortization of purchased intangible assets (C)   247   55   494  
Non-GAAP gross profit $ 21,757   $ 22,272   $ 41,631   $ 40,605  
 
Gross profit %
GAAP gross profit 30.5 % 32.2 % 29.7 % 29.6 %
Non-GAAP adjustments:
Stock-based compensation (A) 0.5 % 0.5 % 0.5 % 0.5 %
Amortization of internally-developed software (B) 4.6 % 5.1 % 4.6 % 4.8 %
Amortization of purchased intangible assets (C) % 0.4 % % 0.4 %
Non-GAAP gross profit 35.6 % 38.2 % 34.8 % 35.3 %
Certain totals do not add due to rounding
Operating expenses:
GAAP operating expenses $ 24,345 $ 29,083 $ 48,041 $ 53,646
Non-GAAP adjustments:
Stock-based compensation (A) (3,148 ) (3,401 ) (5,980 ) (6,328 )
Amortization of internally-developed software (B) (214 ) (378 ) (367 ) (676 )
Amortization of purchased intangible assets (C) (131 ) (30 ) (263 )
Restructuring and other (D) (156 ) (5,715 ) (209 ) (5,715 )
Amortization of contract acquisition costs - ASC 606 initial adoption (F) (420 )   (846 )  
Non-GAAP operating expenses $ 20,407   $ 19,458   $ 40,609   $ 40,664  
 
Net income (loss)
GAAP net loss $ (8,887 ) $ (13,101 ) $ (20,539 ) $ (24,725 )
Non-GAAP adjustments:
Stock-based compensation (A) 3,427 3,695 6,538 6,912
Amortization of internally-developed software (B) 3,044 3,363 5,876 6,159
Amortization of purchased intangible assets (C) 378 85 756
Restructuring and other (D) 156 5,715 209 5,715
Impairment loss on investment securities (E) 1,958
Amortization of contract acquisition costs -ASC 606 initial adoption (F) 420 846
Non-cash interest expense (G) 2,502 2,316 4,932 4,557
Income tax effect on non-GAAP adjustments and impact of normalizing
the effective income tax rate
(H) 129   (876 ) 339   494  
Non-GAAP net income (loss) $ 791   $ 1,490   $ 244   $ (132 )
 
Diluted net income (loss) per share
GAAP net loss per share $ (0.10 ) $ (0.15 ) $ (0.23 ) $ (0.28 )
Non-GAAP adjustments:
Stock-based compensation (A) 0.04 0.04 0.07 0.08
Amortization of internally-developed software (B) 0.03 0.04 0.06 0.07
Amortization of purchased intangible assets (C) 0.00 0.00 0.00 0.01
Restructuring and other (D) 0.00 0.06 0.00 0.06
Impairment loss on investment securities (E) 0.00 0.00 0.02 0.00
Amortization of contract acquisition costs -ASC 606 initial adoption (F) 0.00 0.00 0.01 0.00
Non-cash interest expense (G) 0.03 0.03 0.05 0.05
Income tax effect on non-GAAP adjustments and impact of normalizing
the effective income tax rate
(H) 0.00   (0.01 ) 0.00   0.01  
Non-GAAP diluted net income (loss) per share $ 0.01   $ 0.02   $ 0.00   $ 0.00  
Certain totals do not add due to rounding
Shares used in calculating diluted net loss per share on a non-GAAP
basis
(I) 91,323   88,813   90,843   88,600  

Footnotes to GAAP to Non-GAAP Reconciliation

(A) Stock-based compensation. Included in our GAAP presentation
of cost of revenue and operating expenses, stock-based compensation
consists of expenses for stock options, awards and purchase rights under
our stock purchase plan. We exclude stock-based compensation expense
from our non-GAAP measures because some investors may view it as not
reflective of our core operating performance as it is a non-cash expense.

(B) Amortization of internally-developed software. Included in
our GAAP presentation of cost of revenue and operating expenses,
amortization of internally-developed software reflects non-cash expense
for certain software purchases and software developed or obtained for
internal use. We exclude these expenses from our non-GAAP measures
because we believe they are not indicative of our core operating
performance.

(C) Amortization of purchased intangibles. Included in our GAAP
presentation of gross margin and operating expenses is amortization of
purchased intangible assets. We believe amortization of
acquisition-related intangible assets, such as the amortization of the
cost associated with an acquired company's research and development
efforts, trade names and customer relationships, are items arising from
pre-acquisition activities and therefore are properly determined at the
time of an acquisition. Although these intangible assets are continually
evaluated for impairment, amortization of the cost of purchased
intangibles is a static expense, one that is not typically affected by
operations during any particular period.

(D) Restructuring and other. Included in our GAAP presentation,
we incurred expenses related to our restructuring effort to better align
our cost structure with current revenue levels. Restructuring and other
expenses consist primarily of stock-based compensation related to the
accelerated vesting of certain equity awards, employees' severance
payments, related employee benefits, related legal fees, asset
impairment charges and charges related to leases and other contract
termination costs. These are one-time in nature costs that are not
indicative of our core operating performance.

(E) Impairment loss on investment securities. Included in our
GAAP presentation, this impairment of available-for-sale investment
securities is equal to the difference between the fair value and
amortized cost basis of the securities and was recognized in net loss
(amounts were previously recorded in Other comprehensive income (loss)
as an unrealized loss) due to our intent to sell these securities to
repay our $150.0 million convertible notes due August 1, 2018. This
charge is not related to or indicative of our ongoing core operating
performance.

(F) Amortization of contract acquisition costs - ASC 606 initial
adoption.
Upon adoption of Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606) ("ASU 606") using the
modified retrospective approach, we capitalized approximately $3.3
million of previously expensed sales commissions from 2015, 2016 and
2017. Amortization of these amounts are included in our GAAP
presentation as sales and marketing expense. We believe this non-cash
amortization expense is not related to or indicative of our current or
future operating performance.

(G) Non-cash interest expense. Under GAAP, we are required to
separately account for liability (debt) and equity (conversion option)
components of the $150.0 million convertible senior notes that were
issued in August 2013. Accordingly, for GAAP purposes we are required to
recognize effective interest expense on our convertible senior notes
which includes interest cost related to the amortization of debt
issuance costs and the contractual 1.5% interest rate of the note. The
difference between the effective interest rate expense and the
contractual interest rate expense is excluded from our assessment of our
operating performance because we believe that this non-cash expense is
not indicative of ongoing operating performance. We believe that the
exclusion of the non-cash interest expense provides investors a view of
our core operating performance.

(H) Income tax effect on non-GAAP adjustments as well as the impact
of normalizing the effective income tax rate
. This adjusts (i) the
provision for income taxes to reflect the effect of the non-GAAP items
A, B, C, D, E, F, and G noted above on our non-GAAP net loss; and (ii)
the income tax rate to a normalized effective tax rate of 26.5% for the
three and six months ended June 30, 2018 and 40.0% for the three and six
months ended June 30, 2017, respectively.

(I) Shares used in calculating diluted net income (loss) per share on
a non-GAAP basis.
Due to net losses in both periods, the share count
for basic and diluted earnings per share is the same.

   

ServiceSource International, Inc.
Reconciliation of
Net Loss to Adjusted EBITDA

(in thousands)
(unaudited)

 

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2018   2017 2018   2017
 
Net loss $ (8,887 ) $ (13,101 ) $ (20,539 ) $ (24,725 )
Provision for income tax expense 414 117 427 406
Interest expense and other, net 2,776 2,646 5,622 4,717
Depreciation and amortization   4,941     5,669     9,744     10,775  
EBITDA (756 ) (4,669 ) (4,746 ) (8,827 )
Stock-based compensation 3,427 3,695 6,538 6,912
Amortization of contract acquisition asset costs - ASC 606 initial
adoption
420 846
Restructuring and other 156 5,715 209 5,715
Impairment loss on investment securities           1,958      
Adjusted EBITDA $ 3,247   $ 4,741   $ 4,805   $ 3,800  
 

Our total depreciation and amortization expense was comprised of
the following (in thousands):

 

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2018 2017 2018 2017
Purchased intangible asset amortization $

$ 378 $ 85 $ 756
Internally developed software amortization 3,044 3,363 5,876 6,159
Property and equipment depreciation   1,897     1,928     3,783     3,860  
Depreciation and amortization 4,941 5,669 9,744 10,775
Adjustments and other  

   

401

 

 

      26  
Total depreciation and amortization $

4,941

  $ 6,070   $ 9,744   $ 10,801  

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