Support.com Incorporated (NASDAQ:SPRT)
Q4 2015 Earnings Conference Call
February 17, 2016 04:30 PM ET
Michelle Johnson - General Counsel
Elizabeth Cholawsky - President and CEO
Roop Lakkaraju - CFO and COO
Joe Fadgen - Craig-Hallum
Jim Fitzgerald - Northland Capital Markets
Good day, ladies and gentlemen and welcome to the Fourth Quarter 2015 Support.com Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s program maybe recorded.
I would now like to introduce your host for today’s program Michelle Johnson, General Counsel of Support.com. Please go ahead.
Thank you. Good afternoon, everyone. Joining me here today is Elizabeth Cholawsky, our President and Chief Executive Officer and Roop Lakkaraju, our Chief Financial Officer and Chief Operating Officer.
Before we begin, I would like to remind everyone that our remarks today will include forward-looking statements about our future financial results and other matters. There are a number of risks and uncertainties that could cause our actual results to differ materially from expectations. These risks are detailed in today’s press release and the reports we filed with the SEC, all of which can be found through the Investor Relations page of our Web site at www.support.com.
I would also like to point out that we will present certain non-GAAP information on this call. All numbers presented today are non-GAAP unless otherwise stated. The reconciliation of GAAP to non-GAAP financial measures is included with today’s press release and also on our Investor Relations Web page. The statements we’ll make on this conference call are based on information we know of as of today. And we assume no obligation to update any of these statements.
With that, I’ll turn it over to our President and CEO, Elizabeth Cholawsky.
Thanks, Mitchell. Good afternoon everyone and welcome to our fourth quarter and year-end 2015 earnings conference call. In today’s call, we will discuss progress in both services and our SaaS offering Nexus along with an overview of the opportunity in front of us. We are driving towards the long-term goals we presented at our 2015 Investor Day. Our 2016 plan reflects a focused strategy and in our conversation today, we would like to provide you more details about our business than we had done previously.
Let me start with a quick overview of the quarter and then Roop will discuss further details later in the call. We met or exceeded the revenue and EPS guidance that we provided. Revenue came in at 15.7 million at the high-end of our revenue guidance of 14.8 million to 16 million. Non-GAAP loss from continuing operations for the quarter came in at $0.08 per share better than our guidance of a loss of $0.10 to $0.12 per share. For the full year, revenue was 77.3 million and non-GAAP loss from continuing operations with 10 million or a loss of $0.18 per share.
With regards to Nexus, the rate of customer additions in 2015 did not meet our expectations and as a result, we fell short of our 1 million annual recurring revenue and 1,300 to 1,600 seat goal. We ended the year at 488,000 in annual recurring revenue and year-end total seats at 727. While we entered the fourth quarter with a strong pipeline, we experienced weaker than expected sales as a result of increased product performance enhancements required by our customers, and our need for deeper enterprise sales acumen.
Our Q4 pipeline includes new prospect and customers looking to license additional Nexus seats. Both have maintained interest and are continuing with their Nexus testing. We expect many of these opportunities to close over the next several quarters. I have brought in an experienced SaaS sales leader, Dustin Oxborrow to help drive a higher level of performance. Dustin has 15 years of successful SaaS leadership, at companies including WebEx, Mindjet and BrightEdge Technologies. In the short time Dustin has been here he has initiated a transformation of our sales organizations and has added new enterprise opportunities to the pipeline. In addition to the progress Dustin has already made in this short time, there are several indicators that show Nexus is gaining traction.
We continued adding customers in the fourth quarter. Peak usage has more than doubled since October and all other usage measures have also continued to grow. Active agent users grew by 40% quarter-on-quarter and the average number of customer sessions per week increased by more than 75% from third quarter to the fourth quarter. As session usage outpaced active users, we can conclude that our customers are receiving increased value from the Nexus product. That value is reflected in our average seat price, which has continued to hold at levels between $50 to $60 per seat.
In addition to increasing usage in the fourth quarter, we saw that our customers expanded their used cases for the product. For example, several customers are now actively using guided path technology for improving sales to their subscribers in addition to service delivery. Customers have reported meaningful sales conversion uplift of over 15% when agents use Nexus compared to existing processes and tools. Besides the obvious customer benefit of increased revenue, the expanded type of use validates our belief that Nexus can extend well beyond technical troubleshooting.
In Q4, we focused on product performance improvements and we also made enhancements in the areas of guided path and agent support. Guided path now has decision points which allow for branching in the logic of problem resolution. This allows guided path to meet the needs of our customers who have processes that cannot be codified in our linear approach. We have seen a quick adoption of guided paths with decision points in our customer base and with prospects.
Q4 also saw the first release of our self support capabilities which are critical to our overall vision of connected support. Forrester reported that last year self service overtook the phone as the preferred support channel. Our self support capabilities provide the same guided paths towards problem resolutions for the customer that are used by agents. Self support also ensures seamless and contextual escalation to the agent if the consumer cannot resolve the issue themselves. We have received positive feedback on our self support capabilities and have already signed new customers.
Strategic partnerships and the Internet of Things or IoT continue to be critical to the growth of Nexus. We are working diligently with leading technology and IoT platform companies. We have a number of memorandums of understanding with these companies, and our next step is to convert them to long-term partners. We are integrating Nexus with their technology to improve customer experience, and deliver on the promise of connected support. We look forward to telling you more about this area in the future.
Based on the increased functionality and momentum with existing customers, prospects and partners, we expect in 2016 to have 2,600 to 3,000 total seat licenses from customers using agent support and additional purchases from customers using self support. This will allow us to achieve an annual recurring revenue of at least $2 million exiting 2016.
Let me now turn to fourth quarter progress with our services partners. A strategic priority for Supporrt.com is to grow and diversify our services programs. We advanced that goal when we won a large North American service provider in the third quarter of 2015. Because of our partners confidentiality requirements we aren’t able to name them but they are one of the largest cable providers in the United States. The program launched in Q4 when virtually overnight we began supporting tens of thousands of their customers. This type of service has long been a core competency of Support.com and the program will reach an on schedule full ramp by the end of this quarter. As previously announced we expect the newly revenue contribution from this program to be between 4 million and 5 million. We are excited about the future potential with our new partner.
Our largest partner Comcast renewed their contract at the end of 2015 as expected. During the second half of 2015 Comcast continued their focus on improving the customer experience of their subscribers. We have worked closely with them to achieve this goal while continuing to provide best in class voice of customer metrics and continuing to maintain positive margins. We have also been working more closely with Comcast to achieve longer term visibility. Consequently during the course of the last four months as Comcast has completed their planning cycle, we have gained more confidence in our view of 2016 Comcast potential revenue. Whereas we previously indicated that Comcast would contribute 6 million to 7 million per quarter based on our knowledge today, we believe total Comcast will be between 8.5 million and 10 million in revenue per quarter.
Xfinity Home is our other major program with Comcast. Within this program there is an initiative called work with Xfinity Home. This initiative will introduce in-phases third party IoT devices attached to their Xfinity Home hub. We started support of this initiative in Q3 2015 and expect to work to continue into 2016. This type of program furthers our leadership in support for the connected home environment and underscores the emerging demand for support for IoT. In addition our Xfinity Home program is not limited to troubleshooting, but also includes enablement and on boarding activities.
Because of the type of work we do and how we use support and the customer experience Comcast has seen firsthand the benefit of nurturing their customer from product awareness through full use. The progress we have made with the wireless gateways and Xfinity Home programs further strengthens our relationship with Comcast and provides potential new commercial opportunities for Tier 2 technical support with them.
In both services and our cloud-based offerings we are committed to transforming the traditional world of technical support to address shifting industry demand trends. The traditional world of support is stuck in an old way of thinking. Products in software brake, the user calls an agent, the agent fixes the problem and hangs up the phone. The traditional world of support worries about taking the least amount of time they possibly can with a customer. The evolved view of support what we call connected support looks to resolve the customers’ problems no matter where they are in a mobile app, on a Web site, in a chat session or over the phone. And connected support strive to operate seamlessly between all communication channels with a laser focus on resolving the user’s issue whether that issue is a how to question or an it doesn’t work problem. This is the evolution from troubleshooting only to supporting the entire customer experience.
Our connected support approach is reliant on combining our services knowhow with our technical innovations and it is having an impact. As an example we supported an IoT pilot powered by our cloud technology for a major service provider customer. In this program, using our set product metrics agent training time was 50% less than a traditional approach. Also we’re using Nexus in our large North American service provider program and it was an integral part of the successful ramp up.
With Support.com with support cam we are already seeing tangible ROI in one of our early products. The benefits of solving more problems over the phone with support cam is reducing the need to send a service track to the customer and resulting in substantial savings. And all of these institutes are SaaS technology gives an edge in our services programs and the marketability of Nexus benefits from our services expertise.
I have a high level of confidence in the talented team that have come together at Support.com. 2016 will require us continue to refine our focus and execute in every key area that we have discussed, but I’m confident in our future success. Speed of work diligently both internally and with our partners, so that we have better visibility into the long-term finances of Support.com than ever before. While there is still variability in our business, we feel we can provide a broader view of 2016 at this time including information around revenues, gross margins, EPS and cash usage and Roop will give you further details during this call. As we have done in 2015, we will continue to run the business in the most cost protective way possible, while still accomplishing the goal of a transition to a more balanced company. I and my team look forward to continuing dialogue with all of our investors as we execute on our 2016 plan.
I’d now like to turn the call over to Roop, Roop?
Thank you, Elizabeth. Total revenue for Q4 was 15.7 million compared to 22 million in Q4 2014 and 17.9 million in Q3 2015. Services revenue for the quarter was 14.4 million compared to 20.6 million in Q4 of 2014, and 16.6 million in Q3 of 2015. As expected, services revenue decreased sequentially as Comcast continued with their efforts to improve the Wireless Gateway customer experience which resulted in lower call volume, offsetting the sequential decline in Comcast revenue, which revenue from other programs including our large North American service provider.
Software and other revenue was 1.3 million in Q4 2015 flat from Q4 2014 and from Q3 2015. The Q4 2015 revenue mix was 92% services and 8% software, compared to 94% and 6% respectively in Q4 2014 and 93% and 7% respectively in Q3 2015. Total revenue for the full year was 77.3 million, compared to 83 million in 2014. In Q1 and for the full year 2015 both Comcast and Office Depot contributed more than 10% of total revenue. Comcast and Office Depot represented 66% and 15% of Q142015 total revenue respectively. For the full year 2015, Comcast represented 68% of our total revenue and Office Depot represented 15%.
Overall, non-GAAP gross margin for Q4 was 17% compared to 22% in Q4 2014 and 19% in Q3 2015. This is higher than the Q4 guidance of 12% to 13% we issued, because of improved productivity in our Comcast programs and an efficient launch how large North American service provider program. In Q4, non-GAAP services gross margin was 11% compared to 17% in Q4 2014 and 14% in Q3 2015. As expected, Q4 services gross margin was infected by three revenue investments such as the hiring of work from home technicians and supervisor staff associated with our new large North American service provider program. This is typical of new large subscription based tech support programs.
As I previously mentioned, we expect this program to be at full revenue run rate by the end of Q1 2016 and we still anticipate achieving gross margins on the program above our corporate average starting in Q2 2016. Non-GAAP software gross margin was 19% in Q4 2015, 87% in Q4 2014 and 90% in Q3 2015. Total non-GAAP operating expenses in Q4 2015 came in at 7 million an increase from 5.8 million in Q4 2014 and an increase from 6.4 million in Q3 2015. The sequential and year-over-year increase is a result of our previously stated plans to make incremental investments in Nexus development and go-to-market capabilities.
On a non-GAAP basis, loss from continuing operations for Q4 was 4.2 million or a loss of $0.08 per share. For the full year non-GAAP loss from continuing operations was 10 million or a loss of $0.18 per share. We do not anticipate incurring meaningful federal or state income taxes for the foreseeable future as a result of our net operating loss carry-forwards. However, to the extent that we have future taxable income, the company will be subject to alternative minimum taxes in certain tax paying jurisdictions.
Turning now to the balance sheet, total cash, cash equivalents and investments were 65.7 million at December 31, 2015 compared to 68.4 million at September 30, 2015. DSOs for the quarter were 59 days as compared to 58 days in the prior quarter. Year-over-year as of December 31, 2015 net cash, cash equivalents and investments decreased by 8.1 million. At December 31, 2015, less than 1% of our outstanding receivables were greater than 90 days old, deferred revenue was 2.3 million at December 31, 2015 and 2.1 million at September 30, 2015.
Total headcount as of December 31, 2015 was 1,695 consisting of 202 corporate employees and 1,493 work component technicians. This compares to our September 30, 2015 headcount of 1,625 consisting of 209 corporate employees and 1,416 work from home technicians. In addition to our work from home technicians we use contract labor in our operations. For the first quarter of 2016 we expect our revenue to be in the range of 15.8 million to 16.6 million. We expect the revenue mix similar to Q4 2015 of 92% services and 8% software. We expect the overall non-GAAP gross margin to be in the range of 17% to 19%, we expect our non-GAAP software gross margin to be between 90% to 92%, and we expect non-GAAP operating expenses to increase sequentially by approximately 15% as we continue to invest in Nexus development and go to market capabilities.
Based on the foregoing, our outlook for Q1 non-GAAP results from continuing operations to a loss of $0.08 to a loss of $0.10 per share. As we have previously discussed our quarterly non-GAAP results are generally indicative of our cash usage or cash generation excluding capital expenditures. During Q1 we expect to incur approximately $500,000 of non-recurring capital expenditures associated with IT infrastructure.
To sum up, the connected support paradigm shift is driving the need for an innovative approach. We remain focused on resolving and helping our partners, meet the challenges of this new connected world. We are doing this through our best in class technical support programs for brands like Comcast, Office Depot, and others, as well as scaling and refining our cloud software Nexus.
We will continue to focus on diversifying our revenue base and mix and increasing our gross margins. We will do this through improved operational performance, by adding higher gross margin services revenue programs and through the growth in our Nexus revenues. We will continue to focus on expense management and prudently manage our use of capital.
During our September 2015 Investor Day, we provided a three year financial framework and outlook, we remain on track to achieve these goals including breaking even on a non-GAAP basis exiting 2018. At this time, I’d like to provide some additional information regarding our broader financial targets for full year 2016. For the full year of 2016 we expect total revenue to be in the range of 63 million to 70 million. We expect non-GAAP results from continuing operations to be between a loss of $0.20 to a loss of $0.24 per share. Exiting 2016, we expect overall gross margins to be in the low to mid-20s. We expect to finish with an ending cash balance between 50 million to 52 million.
With that we would like to open the call to questions, operator?
Certainly. [Operator Instructions] Our first question comes from the line of Joe Fadgen from Craig-Hallum, your question please.
Yes hi guys I am here for Chad, so thanks for taking the questions. I appreciate all the extra color this call, one for you on the Nexus product. So, if we’re looking into 2016 I guess first one actually first one I think that you said your target was 2,600 to 3,000 seat licenses. I guess can you talk about like how many seats you’ve got kind of in the pipeline and what you assume or what kind of close rate you would assume for those?
We’ve got a strong pipeline as I alluded to going into the year. I don’t want to comment specifically on the number of seats and also I just want to remind everybody that this year’s Nexus ARR is going to be seats which come from the agent support product as well as from our self support capabilities which is the part of the product facing to consumers and gets charged on a usage basis. But I think we’ve got the ability to closing in the range that we’ve got and announced for 2016 and we feel pretty good about that.
Yes and Joe if I can just add additional couple of comments. One of the things we’ve noticed with our pipeline for Nexus is its continue to grow and part of what’s included in that pipeline is service organizations, product companies as well as IoT focus such companies and part of what’s developed over the course of near-term as more enterprise type deals which tend to have longer sales cycles times when we come to realize that. And so overall we’ve entered 2016 with a healthy pipeline with the type of prospects that Nexus is geared for.
Okay. And then another one on Nexus I mean you talked about in respect to OpEx to grow sequentially with some investment in Nexus I guess whether it's for the March quarter or even the like fiscal ’16 if you can say that would be great. I guess how much investment do you expect to go into Nexus or like if I am thinking about like to OpEx for the full year how much of that is going to be Nexus related just trying to get an idea of how much you put into product development there.
Yes. As we've indicated and we invest both in our services area as well as into the Nexus area from an OpEx standpoint it's primarily Nexus and I don’t think at this point in time we are really prepared to give you a sense of specific operating expense numbers associated with them. But as you can see we’re looking at margins exiting the year in the low to mid 20s we’re expecting Q1 to be 17% to 19% overall company margin so you can see kind of the projected revenue improvements there. And then from an operating expense standpoint netting that down we expect EPS to be somewhere between $0.20 to $0.24 so you kind of seeing that the middle part and the majority of that operating expense would be Nexus oriented both with product development and go to market capabilities.
Okay. And then last one sounds like the Comcast business is going to be a little bit better maybe then expected in 2016 is that the higher revenue run rate that you are talking about this just seems kind of the gross margin profile of the Comcast relationship? Is that different than normal or different than may be expected before?
No, it doesn’t change the margin profile as we indicated in our prepared remarks they renewed their contracts for another year as we had expected. There is no pricing changes or anything of that sort as a result of the renewal and really it's the higher revenue and then with our operational effectiveness delivering the kind of gross margins that we've been delivering recently and Comcast as well as all of our other services programs are all positive gross margins and obviously drive towards being able to invest back into the rest of that company.
Thank you. Our next question comes from the line of Mike Latimore from Northland Capital Markets, your question please?
Hi. This is Jim Fitzgerald came in for Mike Latimore. My first question here on Comcast. Can you just talk a little bit about why you decided to increase guidance there maybe what kind of things they’re telling you? And then secondly I know historically Comcast has given you a forecast of only a few months and it sounds like that might be changing a little bit, can you talk about that if there is time to give you all of those longer term forecast?
Yes, maybe let me start with the longer term forecast. They are not giving us necessarily a longer term committed forecast. The contract is still subject to kind of that those 45 day periods of locked forecast, so that hasn’t change. What we were able to do with them though is work with them on understanding kind of what their overall call volume is based on the improvement efforts that they have been driving and as part of their 2016 planning cycle we were able to understand what that means from an overall call volume and what that might result in for us as a vendor for them in this wireless gateway area, and so really it's with that additional confidence that we then felt it was important to update the investment community around what we've previously indicated of a $6 million or $7 million per quarter revenue run rate and give you an updated view towards that obviously it's to the best of our knowledge at this point in time, but we feel very comfortable with where they are at and what they are doing and where we are supporting them and the level that we’re executing at with them.
Great, and then turning to acquisitions so I mean you guys talked at the Analyst Day about your acquisition strategy and I think you had said that you would look at acquisitions that further your Nexus platform. Can you talk a little about your strategy there right now and if that's still the case we talked about the Analyst Day and if there is anything in the pipeline or if that's an active priority for you guys?
Yes. As we did talk about Investor Day we would consider acquisitions to accelerate the growth of our cloud-based programs. So, we are still actively on that in terms of that being part of the strategy the profile of acquisitions that we've discussed is around supplementing technology that we get Nexus more applicable to a broader set of customers, there are other market segments as well as come with some amount of revenue that we could start working with right away we just set a parameter on the acquisitions of sending accretive and within a few quarters certainly within the first year. So we've got a profile of acquisition we are actively and have been looking at the possibilities there and we will keep you posted as things come up.
Okay. And then lastly, can you just talk about the Office Depot relationship a little bit what you guys expect from them this year?
Yes, yes. So the Office Depot relationship is still very strong we are working with them on new programs, we’ve got some new technology initiatives that we’re working with them to support their services programs. So it’s all still as strong as we’ve talked about in the past, things are going on as usual the contract will renew mid-year sometime and we’re working towards that now. But we see that all very positively at this point in time.
Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Elizabeth Cholawsky.
Okay. Thank you all for your time today. And we’re looking forward to continuing dialogue with our investors and keeping you updated on our progress throughout the year. Thanks. Have a good day.
Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
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