ServiceSource's CEO Discusses Q1 2014 Results - Earnings Call Transcript

ServiceSource International, Inc (NASDAQ:SREV)

Q1 2014 Results Earnings Conference Call

May 01, 2014 04:30 PM ET


Mike Smerklo - Chairman and CEO

Ashley Johnson - Chief Financial Officer

Erik Bylin - Investor Relations


Stan Zlotsky - Morgan Stanley

Matt Coss - Piper Jaffray

Mark Rosenkranz - Northland

Ed Maguire - CLSA

Peter Lowry - JMP Securities

Raghavan Sarathy - Dougherty & Company


Good day everyone and welcome to the ServiceSource First Quarter 2014 Earnings Results Conference Call. This call is being recorded. With us today from the company is Mike Smerklo, the Chairman and Chief Executive Officer; Ashley Johnson, the Chief Financial Officer and Erik Bylin from Investor Relations.

At this time, I would like to turn the call over to Erik. Please go ahead.

Erik Bylin

[Technical Difficulty] for joining us. Before we begin, I'd like to remind you that during the course of this webcast and call, we may make projections of or forward-looking statements that reflect our views as of today, and are based upon the information currently available to us. This information will likely change overtime. By discussing our current perception of our market and the future performance of our company and our solutions with you today, we are not undertaking an obligation to provide future updates.

We caution you that such statements are just projections, and actual events and results may materially differ from what we discuss. Please refer to documents we have filed with the SEC. These documents contain and identify important factors that could cause actual results to materially differ from those contained in our projections and forward-looking statements.

During the course of this call, we will also be discussing certain non-GAAP financial results. We direct your attention to the reconciliation between GAAP and non-GAAP measures, which can be found in today's earnings press release posted on the Investor Relations portion of the ServiceSource website.

And with that, I'll turn the call over to Mike.

Mike Smerklo

Thank you, and welcome to our call today. Thanks everyone for joining us. As you saw on our earnings release, we reported results near or below the low end of our guidance for Q1, and Ashley will be sharing revised outlook for the second half of the year. As a results, I want to use time today communicate what we are seeing in our business and what we have learned over the last 18 months accommodating in today’s disappointing announcement.

And we also share the direct in the decisive actions we are taking immediately to incorporate those earnings into our operations. Let me start a little bit of history to explain how we got to where we are today. To remind you three years ago, right about the time we went public, we accelerated our journey to build the SaaS offering to address the unique opportunity we saw in the market.

18 months later in early 2013, we announced our flagship renew on demand SaaS applications to serve that market. At the same time, we announced a significant change in our go to market strategy. Historically, we sold our solution on a bundled basis pricing on various managed services, combined with our technology stack on a pay per performance basis.

Our decision to unbundle the solution last year reflects or believe then and now that our customers want greater choice as to how do they address their recurring revenue management needs. Beside it showed great early success and customers such as Dell in other Fortune 50 companies embrace the flexibility provided by this unbundled approach.

These early proof points gave us confidence to build on this strategy. We continue to invest in our SaaS business and we expanded our initial customer wins across a number of new logos and expansions in 2013. During this time period our managed service business continued to deliver good results and sign new customers, despite an extended period of under investment as we ramped up our cloud and data services business.

We knew this transition would be difficult and that there will critical learnings along the way. As we review the results of Q1 and look back at the key learnings over the last 18 months, we recognized that our unbundling and launching of SaaS solution increased our customer facing value and expanded our market opportunity, these changes also exactly the large tool on the operational efficiency of both businesses.

For example, we now recognized the importance of addressing distinct differences in the sales and go to market motions of a SaaS business versus a pay per performance service business. These key learnings reflected in the slowing ACV growth and in the second half of 2013, which continued into Q1.

We now recognized the different requirements of the two businesses from sales, marketing, channel and pricing strategies to town acquisition, customer success and delivering motions.

We also recognized that our shared infrastructure operating model is not addressing these distinct requirements in an optimized fashion. The requirements became even more evident after our acquisition of Scout Analytics which threw in the sharper focus of different motions required for our two businesses.

More fundamentally, our two businesses managed services and cloud and data services have very different operating models. Managed services are operationally intensive with modest and steady growth and needs to have a primary focus on innovation to drive global consistency, outstanding operating results and corresponding profitability.

Our cloud and data service business is in hyper growth mode with an emphasis on innovation and product development requiring go-to-market and deliver strategies for rapidly evolving market needs.

As you know today we operate these two businesses in a hybrid model, coming together under a shared sales marketing, customer success and deliver umbrella. Our key learning of this approach has sub optimized both businesses, resulting in deteriorating operating metrics and market capture.

During the next 90 days we will develop and begin to execute a strategic plan designed to address the challenges I just outlined. Our goal is to realign our operations into two separate business lines. Measuring and investing in each based on the metrics relevant to that business and restructuring our cost base to be more reflective of these distinct benchmarks. I plan to report back in 90 days with our progress.

While we’re still developing the specifics of this plan, I can share with you some of the areas we will be focusing on. For managed services, as we’ve discussed in the past this is a business had suffered from under investment over the last three years as we ramped up our cloud and data service business. It’s important to understand the impact of this, given the size of this part of our business and the results we saw in Q1.

Like any business goes for long period of under investment you would expect to see a reduction in output and quality. For by way of example, this is meant that our key sales reps are forced to do more without the requisite tools, training, and support to optimize performance. To this point, areas we’re exploring automation to improve customer performance and associated margins optimizing customer unique economics, improving sales rep training in other ways to lower overall cost to serve, all with a focus on maximizing EBITDA and increasing value to our customers. To net it out, our managed service business has had a long history of generating a high return on invested capital.

And we believe this is a fixable problem, but it will take time. For cloud and data service, we will reevaluate appropriate engineering, product management, and professional service investments. With a focus on better market capture and rapid innovation.

With this sizable shift to recurring revenue across a broader ray of industry verticals, there is a market need and we are the best company positioned to address it. However, to maintain our leadership role and to sustain the rapid growth in our subscription business, we will need a product roadmap that flexes across different customers, verticals and business models.

For our overall go-to-market, we will reassess how to best align our teams and sales motions with the unique proposition of our two distinct businesses. This includes marketing, pricing, pacific value prepositions, sales and territory alignment, and compensation models.

For our overall cost structure, we will benchmark each business unit and our business as a whole, against industry benchmarks and establish specific targets and timelines to meet or exceed these benchmarks.

In summary, during the mix of 90 days, we will design and begin to implement a strategy addressing four key challenges and opportunities in our business. First, our managed service operating model, second our cloud and data product and marketing strategy, third our overall go-to-market strategy and tactics, and fourth our overall cost structure.

Before I turn it over to Ashley, I want to close by reviewing some of the very positive highlights from the first quarter. We achieved some phenomenal expansions in the first quarter, including with a Fortune 50 customer renew, With several long standing customers like Red Hat, NetApp, Telus, and with new customers like PerkinElmer. Nothing could be more reflective of the strength of our value proposition that our existing customers giving us more business to execute on their behalf.

This quarter we also delivered the winter release of renew on demand. A major achievement on our journey as the SaaS business, this release delivered significant improvements to user experience and a post release survey show that more than 80% of users are highly satisfied with the increase functionality we delivered.

Over the last year, we have made great improvements to our product development engine. Increasing the productivity of our engineering team, fivefold. In addition we implemented test automations to enable faster releases and increasing our parallel development capabilities. In sum our engineering teams have made great strides over the last year and are already looking forward to the some release.

We are also very had with our Scout acquisition that we closed this quarter. Scout moves us deeper into the SaaS market and greatly expands our total available market by adding information services in digital media purpose verticals. Scout allows customers to gain greater access to and inside from their usage data to further optimize customer success management. For example, we recently announce a technology partnership with Marketo a leader in the SaaS marketing automation space, to allow for greater account held scoring and campaign management based on Scout usage analytics. While we are in early integration of this business, we are very excited by the feedbacks from the market.

Overall, our enthusiasm is [muted] only by the knowledge, but our hybrid operating model has handicapped our ability to deliver at our full potential. Both operationally and in our topline growth in market capture. We believe that the realignment of our business is essential to restructure and address these operational inefficiencies. And in 90 days, we will share details of our plans to improve the overall health and performance of the business.

We have hurdles to overcome and I'm convinced with our strategy and our market opportunities. I also believe we know what needs to be fixed, we will build the plan to get back on track and we have the team in place to make that happened.

Delivering this message is not easy. In our life as a public company, we have typically exceed both our guidance and consensus estimates, our key financial metrics. As we take action to address the challenges ahead of us, let me underscore what, we'll not change with ServiceSource.

Our commitment to leadership in the recurring revenue market, I believe that the market we serve is strong and growing, our depth of understanding and expertise in maximizing recurring revenue opportunities, our relationships with our customers and the ROI we consistently deliver for them and finally the alignment of our people bring all of this to there the profit of our customers.

I look forward to reporting on our plans and progress during the second quarter earnings call. Ashley, over to you.

Ashley Johnson

Thanks Mike. I'd like to take a moment to provide some commentary on our quarterly results as well as update guidance for Q2 and fiscal year 2014. I will follow to the same format for guidance as I did for our Q4 earnings results, providing a view to our consolidated business, as well as guidance by segment. There are also slides posted to our IR website, but the details for our guidance as well as GAAP to non-GAAP reconciliations.

Before we dive in, please note that this quarter we referenced non-GAAP revenue which excludes the impact of the haircut to deferred revenue from our acquisition of Scout as required by purchase accounting.

As a reminder, the remainder of our non-GAAP metrics do not include non-cash expenses related to stock-based compensation the amortization of internally developed software, amortization of intangibles acquired from our acquisition of Scout, acquisition-related costs to non-cash and interest expense related to the issuance of convertible notes. As always you can find a reconciliation of GAAP to non-GAAP metrics in today’s press release and on the Investor Relations section of our website.

Now let me turn to our first quarter results. As Mike already highlighted our Q1 results were below our expectations across most key metrics, due to the operational challenges we’ve been facing in our business. Starting with bookings, while we don’t provide updated ACV for managed services on a quarterly basis because this metric is an estimate of how we believe new business will perform. We added several extensions to our managed services portfolio with some of our blue chip customers. We also added approximately $1 million of new SaaS subscription ARR in the quarter which was below our expectations and reflective of some of the operational challenges in our hybrid selling motion Mike alluded to earlier.

While our churn rate was in line with our goal of 90% ACV dollars retention this remains an area of our business where we see significant room for improvement.

Now turning to revenue. Non-GAAP revenue was $67.3 million reflecting a 10% increase over prior year. This result was at the low end of our guidance due primarily to miss-execution in our managed services business. I will go into more detail on each of these business segments separately.

Revenue in North America grew 13% year-over-year as new business signed in 2013 began to ramp. International regions grew more slowly at 2% to 3% year-over-year, due primarily to the slow acquisition of new business in region. In the near to medium term we expect growth internationally to be challenged until we improve the execution of our overseas sales engine.

Non-GAAP gross margins for consolidated business were 32% below our guidance and down 8 points year-on-year, the compression in margins was driven in March part by the lower revenue and operational challenges and managed services.

In addition our corporate gross margins have been negatively impacted by the change in expense classifications for some of our teams previously accounted for as R&D and now as professional services. As the activities of these employees shifted from product development to specific work. On a more positive note the pressures on gross margin have been offset by the improved scale we’ve seen in our SaaS business, and to a lesser degree by the higher gross margins of Scout.

I’ll turn now to the segment view, starting first with managed services. Q1 revenue for managed services was $58.6 million flat year-over-year and below guidance as close rates in resolution rates came-in below expectations. Non-GAAP gross margins for managed services were 31% also below our guidance.

We believe there are two primary factors compressing our gross margin in this side of the business. First as we have mentioned previously we have restructured some of the installed based customer contracts to include a subscription to SaaS platform and a performance based commission to our managed services.

While this reduces our managed services revenue and reduces gross margin by approximately 3 percentage points for the segment. Our overall corporate gross margins are largely unaffected by this contractual changes. The larger driver of margin compression has been the lack of investment in technology, productivity enhancing tools, and training causing inconsistent performance and resulting in higher labor cost, high overhead cost and low productivity.

As Mike mentioned we are taking steps immediate rate to address this operational issues globally, but we will continue to see compression in both our managed services and corporate gross margins of near-term.

Turning now to cloud and data services, non-GAAP subscription revenue for our SaaS business in Q1 was $8 million, an increase of 254% year-over-year and at the high end of our guidance range.

Non-GAAP gross margins for our SaaS business was 75% a significant improvement over the prior year, due to a combination of the increased base of revenue and operational scale efficiencies of the platform. Q1 professional services revenue was approximately $700,000 in line with our guidance of approximately $1 million.

Gross margins for professional services were negative as expected, as our teams work closely with our early deployment to help drive adoptions and increased customer reference ability.

Moving onto profitability our non-GAAP operating cost are generally in line with our expectations of the quarter. R&D came in slightly lower than expected as we capitalized the small portion approximately $500,000 for development efforts related to extend this functionality on the core platform and applications.

As we move from stabilizing the current platforms to building out new features and functionality, we expect to continue to capitalize a portion of our development cost, although not at the same levels as we have seen in prior years. We will update our CapEx guidance on the year to these changes.

G&A expenses were slightly higher than expected also a reflection of the operational inefficiencies Mike referenced earlier.

For the consolidated business, adjusted EBITDA for the first quarter was a loss of $6.4 million, versus a loss of $0.5 million in Q1 of 2013. As a result of the revenue and margin performance in managed services, higher G&A expense and the acquisition of Scout.

On the bottom line, our non-GAAP net loss in the first quarter was $5.5 million or $0.07 per share, compared to a loss of $1.5 million or $0.02 per share in Q1 of 2013.

Turning to a quick review of the balance sheet and cash flow metrics. DSOs in Q1 were 87 days, in line with Q1 of 2013. We had a couple of large payments slip to the first two days of Q2, had we receive those payments on time, our DSOs, would have been 82 days in the quarter.

With that said, we continue to look for ways to improve our collection processes and systems. Our cash flows from operations were $2.4 million in Q1, down year-over-year reflecting the lower profitability in the quarter. Capital expenditures were $1.3 million, including approximately $500 of capitalized development cost, resulting in free cash flow of $1.3 million after adjusting for exchange rate. We ended the quarter with $246 million of cash, which reflects the cash purchase of Scout Analytics.

Moving on now to guidance. In light of the context Mike provided earlier, we're providing detailed guidance for Q2 and our a revised view to the full year. Please note that the initiatives we are undertaking to realign and optimize across our two businesses are not accounted for in this guidance, as we are still working through strategic plan.

We expect these changes to have minimal impact if at all on Q2. However, we do expect to have an updated view on the outlook for the full year reconvene in 90 days.

With that said, let me begin with our guidance for Q2. We expect consolidated revenue to be in the range of $67 million to $72 million on a non-GAAP basis, reflecting roughly flat to 6% growth over Q2 of 2013. The primary factor underlying the reduced growth rate is the under investment, inconsistent performance and operational efficiency in our managed services.

For reasons similar to what we outlined for Q1 we expect our consolidated non-GAAP gross margin to be in the range of 30% to 33% in the second quarter. We expect operating expenses as a percentage of revenue to remain in line with Q1 resulting in adjusted EBITDA loss of $4 million to $8 million for the quarter. This assumes the capital revision rate for R&D similar to what we saw in Q1 and does not factor in any restructuring charges we may take as we realign the business.

We forecast non-GAAP net loss of $4 million to $6 million, or negative $0.05 to $0.07 per share. This assumes the basic share count of 83 million shares and a normalized tax rate of 40%.

Finally we anticipate negative free cash flow in the quarter of $7 million to $13 million, attributable to the seasonality of revenue and lower profitability. As we improve the execution in managed services and address our operational inefficiency we expect these results to improve. However, we don’t anticipate effecting these changes in time to meaningfully impact the second quarter.

On a business segment basis we currently forecast managed services revenue of $60 million to $64 million in the quarter, reflecting flat to declining growth year-over-year and non-GAAP gross margins of 31% to 34%. We expect subscription revenue in the range of $7.25 million to $7.75 million up 163% to a 182% year-on-year with non-GAAP gross margin at 72% to 74%. Professional services will sustain costs similar to Q1 as we continue to focus on adoption and referenceability. However we only anticipate recognizing revenue of approximately $200,000 in the quarter which will result in pressure on our overall cloud and data services gross margins.

As I turn to guidance for the full year, I would like to reiterate that this guidance reflects the business as it is operating today and does not yet reflect our strategic plans to realign and restructure the operations. However we wanted to provide a high level view at this time to reset expectations around growth and profitability. Overall we expect consolidated non-GAAP revenue growth in the range of 7% to 11% and consolidated non GAAP gross margins in the range of 35% to 37%.

We forecast managed service to remain flat to last year or grow modestly around 3% with non-GAAP gross margins of 35% to 37%. Due to the slow subscription ARR growth in Q1 we are also lowering our expectations around non-GAAP subscription revenue to $33 million to $34 million or 162% to $170% growth year-over-year with non-GAAP gross margins in a range of 73% to 76%.

Finally we anticipate limited revenue from professional services in the range of $2 million to $3 million with costs in line with or slightly reduce from our Q1 run rate resulting negative margins to that portion of our business. While we are working through the realignment and evaluating our cost base by business lines, we expect adjusted EBITDA to be negative for the year at or below the low end of our prior guidance.

CapEx will remain in line with our prior guidance of $8 million to $10 million due to the reduction in our assumptions on new facilities build out requirements offset by the capitalization of R&D. Our prior guidance on free cash flow has reduced by approximately $5 million to $10 million due to lower profitability.

As we work through our strategic plan to restructure our operations. We will be able to provide more specific guidance for the full year in 90 days. In the meantime our aim is to provide investors with both contexts and the view to the changes we are marking to improve the overall health and operations of our business for the long term. And with that, I would like to open the lines for Q&A.

Question-and-Answer Session


(Operator Instructions). Our first question is from Jennifer Lowe of Morgan Stanley. You may begin.

Stan Zlotsky - Morgan Stanley

Hey, good afternoon guys. This is Stan Zlotsky sitting in for Jennifer and thank you for taking my question. So to kick it off, I think we all understand that there are some underperformance in the business, but has any of it been as a result of the transition you had in the sales in the head of sales position?

Mike Smerklo

What it is, this is (inaudible) assurance is no. I think that that was a catalyst for some of this discussions we mentioned in the script that we have seen three quarters a row now of slowing ACB growth and that really force us to take a hard look at what’s working and what’s not working and actually being that some of the new sales leadership and some of the strategies we put in place has furthered our thinking on this in a good way, and kind of the fresh set of eyes coming in and looking at what’s working and what’s not working. And that’s really brought us forward as we talked about, taking a harder look in go to market and how do we align the selling motions of the two distinct and unique businesses with value proposition and customer needs. So, in some regards, I think it was a bit of a foreshadowing that made us take a harder look, but also a fresh set of eyes that's probably helped us get a little more clarity and begin us on this path in a different direction.

Stan Zlotsky - Morgan Stanley

Okay. So maybe I'm looking at it another way. Is there anything specific, maybe that happened in the quarter that kind of opened your eyes or was just continuation of the trend and you decided that you needed to take action?

Mike Smerklo

I would say Q1 unfortunately was a combination if you will, the some trends that we've been seeing in the business now and we shared with the Street. So, you've seen us talk about [ACB] growth slowing, we sell that in H2 of last year, as I mentioned we're continuing in Q1. This is our first revenue mess as a public company and we also highlighted that this was a lot because of some inconsistency and performance on our managed service business, which has been, I'd say that's certainly something new for us and made us take a harder look. All of which allowed us to step back and as I said it's a bit of a combination, let’s dig into determining the strategy to go forward.

The good news here is that, it's clear to us that that market needs both of our solutions. And that we are convinced in the opportunity, in terms of what we're doing in the business, but yes, we need to get focused on how we have locked this potential and now we have netted out to say our focus here is how do you take two businesses and make them both great. And the current reality is they are both sub-optimized.

Stan Zlotsky - Morgan Stanley

Okay. And then just a last one for me. How has the churn been within the sales organization and how did the actual sales kick-off go in the quarter? Thank you.

Mike Smerklo

Yes. So on the sales kick-off we mentioned forward I think there was a decent on enthusiasm we brought so forth and really saw messaging in terms of where renew is and that’s helped with the when to release. I think the addition to Scout in terms of the portfolio has been very well received. And I think the partnerships that we have highlighted in the past help us expand our marketplace. So all the things you have heard us mention before really brought good momentum into the sales teams. I would say that on your question it is hard and one of the reasons it accelerated is we have seen a pickup in some sales turnover, it hasn’t been wide spread but we’ve seen some pick up. It’s hard if you had three quarters where you haven’t hit your plan, you’re going to start to see sales team look around I mean it’s a competitive market. And that’s another one of the reasons why we’ve accelerated if you will this plan.

We’ve talked in the past with investors that we expected to look to realign our go-to-market at the end of this year. But the urgency of the situation has forced us to bring this forward. And frankly I think we are going to come out with the better solution and I do believe it will be well received by our field once we get the actual plan in place which will take us to next 90 days.

Stan Zlotsky - Morgan Stanley

Okay. Thank you, guys.

Ashley Johnson

Thanks Stan.


Thank you. Our next question is from Mark Murphy of Piper Jaffray. You may begin.

Matt Coss - Piper Jaffray

Hi, good afternoon. This is Matt Coss on for Mark Murphy. Just continuing on the same subject, as you get through some of the organizational changes and plans that you want to put in place. I mean, do you anticipate an updated guidance metrics to further revise revenue downward and costs upward? I mean the reason I asked about costs going up is if you’re looking at having a separate maybe separate go-to-market for Renew OnDemand and managed services. It seems like there'd be no way around it, or am I thinking about that the right way?

Ashley Johnson

So what I'd say that is we're giving you the best estimate of the business that we have today. And one of the considerations that we're looking at is any incremental investment that would be required to execute against this plan. But as Mike said, we're also looking at where we have frankly just become inefficient and we believe there is opportunity to take costs out.

So, at this point, the guidance I've given is the best information that we have.

Matt Coss - Piper Jaffray

Okay. And then, on Scout Analytics, is it fair to say that the contribution was roughly between $1.5 million and $2 million in the quarter?

Ashley Johnson

So, we don't break that revenue out separately. So I don't have that at fingertips.

Matt Coss - Piper Jaffray

Okay. And then, just finally, is there anything that investors have been that you've been, I guess talking to investors about that maybe they're are missing or just anything that the Street is missing on how we should be thinking about list the transition right now?

Mike Smerklo

Well, I would say, I would net out this way, which is what we know today is again, if there is good news here is that, we don't see it is a market issue and it really is execution related to this hybrid model. We started this at the start of last year, we aimed to go to market with one salesforce, one combined marketing offering and one customer success organization and really we try to take an ala carte message to the market, that has proved challenging. I'd say the other message that is on the positive side is the shift we're seeing in recurring revenue and the interest in what we're doing hasn't dissipated.

So, that's a little bit of the conflicting messages that we've been working through, which is how can you continue to see demand and pipeline build, but those rates suffer, and then we also step back and say we have injected a lot of changes in this business, and we unbundled our solution in just four quarter or five quarters, we focus on launching the SaaS business and we’ve highlighted in under invested managed services that is still doing okay, just not great and we acquired a company.

So when you step back and think about the change we put in place, it is a little bit hate to see we’re by puller but the market opportunity and the interest we are seeing is still quite strong, our fundamental belief is that our we have not optimized our business or businesses to capitalize on that opportunity. And I think there is a lot of questions we will be getting from investors.

So I don’t know if they are surprised, but I think when we come forward with this plan and we focus on how we improve managed services and get that back to great. How we look at cloud and data services really un-tether it from managed services and give it more flexibility and then we’ll miss in the market, how we realign our selling motions and then also benchmark our cost structure, I think when we do those four things and come forward with specific plan I personally hope that investors are enthusiastic about what we are doing.

And I am certainly acknowledgeable and continue acknowledge this is going to take time to make that plan a reality.

Matt Coss - Piper Jaffray

All right, thanks Mike and Ashley.

Ashley Johnson

Thank you.


Thank you. Our next is from Scott Berg of Northland. You may begin.

Mark Rosenkranz - Northland

This is Mark Rosenkranz in for Scott Berg. Just a few quick questions. You've touched on the operational difficulty in the managed service business. Can you comment a little further on the current pipeline strength in that segment?

Mike Smerklo

Yes, I mean the pipeline strength continues to be good, one other things that we realize is that, we have seen a lot of interest from existing customers, as they bought the bundle solution they enjoying on more than a year and half ago, we are performing well for the most part. We've got global inconsistency and so we continue to see expansion opportunities. We see a still a strong interest in how we provide a solution. And I hope that we can despite this distraction have a strong Q2 I’d highlighted the partnership, the key partnership on the go-to-market side, that we mentioned in the past with Accenture continues to gain momentum. And that's both introducing us to renew opportunities, as well as overall managed service opportunities.

And so I net it out to say again, back to my comment I just made it, so a little bit of a bipolar nature which is the pipeline and the market opportunity seem to be as strong as they have ever been. But having a commingled selling motion, marketing message and sales team isn't serving us well and that's really what we are talking about here.

Mark Rosenkranz - Northland

Got it. And then could you just discuss maybe the cross-sell opportunities you're seeing between Renew OnDemand and Scout, if you're seeing anything yet today?

Mike Smerklo

Well, on the cross-sell opportunity, it's probably more across our entire portfolio base and that's one of things we have to work through in this strategic planning process, which is how do you capitalize on our overall customer base, I think there is a lot of interest, when we step back with Scout 90 days in, one of the most exciting part has been, I think the market opportunity interest is even greater than we've thought.

We've worked through in the first 90 days of pretty good integration plan, as planned and we'll continue on Q2 and we really need to step up our sales efforts there. So, I think from a interest level, it's good, now it's about taking a company that literally had almost no investment sales trouble charging that, getting that employees and really letting that, hopefully take off in H2.

Mark Rosenkranz - Northland

All right. That is all I have for now. I'll jump back in the queue. Thanks a lot guys.


Thank you. Our next question is from Ed Maguire of CLSA. You may begin.

Ed Maguire - CLSA

Hi. Good afternoon. I was wondering if you could talk about what the trends in your underlying MSS contracts are. I noticed the comps are going up for a few reasons and you discussed ACV. But, you know what's the quality of the underlying contracts, and I would say, the mix of business that you are chasing for your customers? Have you seen a change, or is the disruption purely in your view based on the shifts from MSS to Cloud?

Mike Smerklo

Yes, thanks Ed. What I would say on the managed service business another good news point is we saw the very satisfied blue chip customer base and when we highlight some of these performance issues, I again underscore that they’re inconsistent. So there is I think some pockets where we haven’t performed as well as we should have. But for the most part I think our customer satisfaction level is still high it’s evidenced by the 90% retention rate that we mentioned.

And we continue to expand with existing customers on both the renew side and the managed services side. So when we really look at this and I think this is what you’re driving at the decrease in the top-line is really dominated by the go-to-market and that’s why it’s our number one priority to redesign.

So when we look at this pipeline there is still a lot of interest, I netted out, I’ll net it out this way when I look at a sales rep, a sales rep today service source has to go out, they have to be conversing in on managed service offering, which is a complex to global solution, they have to be conversive and Renew OnDemand and how that’s differentiated is in emerging growth or new market entry. If I ask they also have to be able talk about Scout Analytics and then they have to talk about on-boarding for managed service or professional services for the SaaS applications. That is a lot for anyone rep to be able to message, they also have quotas that are some of these parts if you will and so what I think and that’s why this is our number one priority is that a sales rep is challenged to really have the right selling motion, the speed of execution and to be able to design a solution in a very distinct way with what the customer needs are and this is something we’ve been talking about in the past, but as I said the situation point was in Q1 where we said we really can’t afford to wait week until the end of the year to redesign this let’s bring it forward, let’s take a sense of urgency and let’s get both businesses to great.

Ed Maguire - CLSA

Just to follow-up on that, I mean, you guys did a fairly significant rebranding last year. Now a quarter in you have a planning process and implementation process. I realize it is preliminary because you have a lot of work ahead of you, but do you have at least a time horizon about where you are hoping to get all these changes planned and implemented?

Mike Smerklo

Absolutely. We’re not in the, we’re not going to take our time here. I mean we’re going to be thoughtful and robust in our examination. But our commitment to investors is that 90 days we will come back with specific plans, specific timelines and how we’re measuring our success against them. So I think we’ve put a lot of, we’ve done a lot of great things we’ve also done a lot of things to make it complex. And at the core this is really to think about what are we going to do about managed services and how does that business get back to grade.

I mentioned declining data, I mentioned go-to-market and then the cost structure we really need to benchmark these businesses, they have been commingled for last three years, look at the benchmarks by each business assess what our peers are doing, in the respective peer groups, and then develop a plan to get to top-line and bottom-line levels that are at or above our peer groups. So very specific scope here, very specific timeline, we know it’s a bit frustrating, because we don’t have all the answers. But we do think that we do know that 90 days will come forward with a very specific plan as how we go forward from here.

Ed Maguire - CLSA

Okay, thanks very much, appreciate it.


Thank you. Our next question is from Patrick Walravens of JMP Securities. You may begin.

Peter Lowry - JMP Securities

Hi, actually it's Peter Lowry in for Pat. Just a quick question. It sounds like you're reevaluating your go-to-market with your un-bundled offering. And I was wondering are the challenges that you're addressing, are they more related to the Q1 go-to-market changes or do the challenges pre-date that? It might be hard to delineate, understood.

Mike Smerklo

No, its actually, it’s a really good question, it’s pretty easy to delineate for us. As I mentioned on the call, we just started the unbundling last year, I think we saw some positive results in the early part of last year, but as we highlighted to investors, it was a pretty small sample size and we knew it have continued learning. I think we started to see, I know we start to see deterioration of this which we have highlighted in past calls, so this is not new news, but it just going to bring it all together.

We saw deterioration in our close rates in Q3 that trend is continued in Q4 and then came together in Q1 and I’d also add that what it’s been really great about adding Scout to our team and among other reasons is we had a sample set if you will of a standalone SaaS how they think about it, and how they run their business and all the key metrics and selling motions and that helped us get a better handle on the fact that we are trying to bring together as I just went through it add two very different selling motions.

And so when we look at it, we said this is why we have to move a little bit faster. So, I think it's been 15 months in the making if you will and learning that, they're just very different businesses and I think the good news is customers want to buy both. They are very good businesses, but to market them, to operate them is challenging in a commingled fashion. So, we're really talking about is moving to more differentiated business unit type approach for running our overall operations.

Peter Lowry - JMP Securities

Okay. Thanks Mike.

Mike Smerklo

Thank you.


Thank you. (Operator Instructions). Our next question comes from Raghavan Sarathy of Dougherty & Company. You may begin.

Raghavan Sarathy - Dougherty & Company

Hi, good afternoon and thanks for taking my questions. So Mike, a couple of times you mentioned the close sale as being lower than what you had expected. Can you talk about, from a bookings perspective for the current quarter for the managed services, how does that trended relative to your expectations?

Mike Smerklo

If I understand, when you talk about bookings, you mean in terms of our actual execution of renewals on behalf of our customers?

Raghavan Sarathy - Dougherty & Company

I think on ACV.

Mike Smerklo

ACV. No, I would say, as we highlighted in the script. The ACV, we had some nice expansions as I highlighted in the call, but on an overall basis, it's still came in below what we were expecting. So, I would say with both on the SaaS and the managed service side, where the net new signings, whether, it'd be in ACV or ARR. We had a good quarter, but it didn't hit our plan.

Raghavan Sarathy - Dougherty & Company

Okay. And then in terms of Scout Analytics, how did that business formulate to your expectations?

Mike Smerklo

Yes, I think it was as expected. It's always hard when you, we purchase this company in January. Right when we're getting ready to without the sales team they’re going through their own planning so taking that into account and really having it only be about 70 days as part of our solution. I highlighted some of the things before I think it contributed as expected, the big push for us now as I mentioned before is really to turbo charge our sales efforts. There is a lot more awareness in that space, I mentioned earlier the market need but also some aggressive start-ups out there trying to just stake their claim in the marketplace, there is a lot more awareness we just got to get the sales and marketing engine really going here.

Raghavan Sarathy - Dougherty & Company

Thank you.


Thank you. I am showing no further questions at this time. This concludes the Q&A portion of today’s call. Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day.

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