Support.com's (SPRT) CEO Elizabeth Cholawsky on Q1 2016 Results - Earnings Call Transcript

| About: Support.com, Inc. (SPRT)

Support.com Incorporated (NASDAQ:SPRT)

Q1 2016 Earnings Conference Call

April 27, 2016 16:30 ET

Executives

Michelle Johnson - General Counsel

Elizabeth Cholawsky - President & CEO

Roop Lakkaraju - CFO & COO

Analysts

Joe Fadgen - Craig-Hallum

Operator

Good day, ladies and gentlemen and welcome to the Support.com First Quarter 2016 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 turn the conference over to Michelle Johnson, General Counsel, you may begin.

Michelle Johnson

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.

Elizabeth Cholawsky

Thanks Michelle, good afternoon everyone and welcome to our first quarter 2016 earnings conference call. In today's call we will discuss the continued execution of our business strategy, evolution of the market, progress in our SaaS offering and update on our services program. We will also highlight some key actions we have taken that will accelerate our path to non-GAAP profitability and help us become a financially stronger, leaner, and more agile company.

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 $16.6 million at the high-end of our guidance of $15.8 million to $16.6 million. Non-GAAP loss from continuing operations for the quarter came in at $0.07 per share better than our guidance of a loss of $0.8 to $0.10 per share. I would now like to discuss our SaaS offering which continues to grow and expand its capabilities in the market.

In addition to the continued traction of agent support and guided tab, self-support capabilities added late last year are becoming more and more important. Our vision of self-support and agent support is being recognized as differentiated in the market. It is also becoming important in identifying new types of services opportunities. We will talk more about those later in the call. But first, I would like to mention that Support.com cloud is the new name for what we have previously referred to as Nexus.

As our technology encompasses a wider range of capabilities we decided on a naming convention similar to that of other SaaS company. Additionally Support.com is a strong brand and as our SaaS offering gains momentum, we are leveraging that brand by using the name Support.com cloud. In terms of results we had a good first quarter under our SaaS sales leaders Dustin Oxborrow. Dustin has ramped up quickly and improved sales execution and pipeline development enabling us to further align and streamline our marketing and sales organization which contributed to cost savings.

In Q1 we added a number of new customers in growing our existing account. We continued to see a large percentage of customers add to their existing orders which reinforces our approach to the market with our land and expand model but more importantly shows that our customers are seeing value in Support.com cloud.

We have continued to make progress on Enterprise fields that we are already in play. Added new enterprise targets and new types of opportunities to the pipeline. Now the large majority of our pipeline is comprised of traditional product companies of hardware and software. All of this activity shows the broad applicability of our solutions and the continued traction we are seeing in the market. We seem increased interest in our offering and self-service category since it was released category since it was released last October. Customers have told us that our product self-support is one of the few solutions that seamlessly lends self-service with agent support and focuses on a great user experience.

Our self-support capabilities provide the same guided path towards problem resolution by the customer that are used by agents and ensure seamless and contextual escalations to an agent if the customer cannot resolve the issues themselves. For example one of our customers Rachio maker of the leading smart sprinkler controller s starting to use Support.com agent support and self-support to enable the delivery of connected support that accompanies Rachio customers all the way from device setup and hat configuration through usage and realization of full product value.

We continue to be recognized as an innovator in the customer support industry. We were recently named a 2016 CRM service rising star, an award given by the editors of CRM magazine, key innovators in the market. In their award the editors highlighted the guided PAM, remote video support, self-support and data analytics features of Support.com cloud as capabilities that advance a larger mission of revolutionizing customer support.

In both our services program and our cloud offering we are disrupting the traditional support experience, moving it from a simple break fix model to becoming a key element on how customers receive value from their value technology at every stage of their product lifecycle. Product usage continues to show that cloud is gaining traction. Peak usage has increased 96% since January and all other usage measures has also continued to grow.

Active agent users grew by a 118% quarter-over-quarter and the average number of customer sessions per week increased by more than a 160% from fourth quarter to the first quarter. Yet again, sessions of pro-active new agents which is a strong indicator that we deliver value and as you know, value drives customer retention. On our last earnings call we discussed our work with leading technology and IOT platform companies to establish long term partnerships. I am pleased to report two exciting developments related to these efforts.

One of our new key partner relationships is with NetSuite. A premium provider in the CRM industry. We launched our built for NetSuite Suite app that is available in the Suite cloud of the developer network. The Suite app integrates with the NetSuite CRM product providing NetSuite CRM customers the benefit of the Support.com cloud advanced customer support capabilities including guided path for remote issue resolution, remote control and configuration and remote video control.

All critical data from current sessions and previous sessions are stored within the NetSuite case so that the agents have a single place to view customer's activity. One of our joint customers PC Laptops, makers of custom configured computers and laptops covered by a lifetime service guarantee is already in the process of deploying our Suite app. The combined capabilities of NetSuite and Support.com allow customers including PC Laptops to deliver a superior support experience versus the traditional siloed approach.

Additional details on the partnership can be found on our dedicated NetSuite page in the product section of www.support.com and in the press release about next week we issued this morning.

I am also very excited to announce our partnership with Icontrol networks, the company behind one of the most widely distributed interactive security and home automation platforms. With customers like Comcast Infinity Home, Cast Home lights, ADT and Time Warner Cable. The partnership involved integrating our cloud capabilities directly into the Icontrol platform. This will allow any of the major cable operators on the Icontrol platform to embed our software right into their mobile app so that their subscribers get a broad section of advance customer service and support capabilities in the smart home space.

This streamlined intelligent support experience can not only resolve issues and even predict or revert them. It can also help ensure that smart home customers get maximum value out of the technology which is the critical element for wide spread adoption. We are very excited to be working with Icontrol to create a competitive advantage for service providers and home security companies.

We have already started work on the integration and will be showcasing it to the MSOs at Icontrol MSO steering council the week of May 2nd. Based on the progress we have made and the momentum exiting the first quarter, we remain confident in the goals of achieving $2 million in annual recurring revenue and 2600 to 3000 seats.

Let's now discuss our services program. In Q1 our services program continued to execute at a high level. During the quarter, we fully ramped the North American service providers who we discussed in earlier calls, maintained a high level of customer satisfaction and all of our programs and received a partner of the year award from one of our largest customers. This type of partner award represents our outstanding in meeting and exceeding expectations in customer satisfactions and overall performance matrix.

Turning now to Comcast, we believe the guidance we gave on our last call for Comcast quarterly revenue of between $8.5 million and $10 million is still appropriate. Though Q1 was in the higher end of this range we are currently expecting Q2 to Q4 to be at the lower end of the range as Comcast continues with their customer experience efforts. Our Staples program is expected to expand in Q2 to include support for an additional business area that will use support.com cloud including our self-service capabilities.

The new program and account is still small and it has executive level focus from both my team and Staples. We are gratified to see that our service delivery since restarting with Staples in 2015 is being rewarded with additional business. The nature of our services pipeline is changing in tandem with support market trends and consistent with vision and approach that underlies the support.com strategy. We are seeing and hearing more of our customers starting to recognize a market shift to the empowerment of the user and technology driving great customer support experiences.

All the same shifts we anticipated when we embarked on our transition to a product and services organization. It's becoming increasingly clear as new service opportunities move towards the sales cycle. Support.com cloud is starting to play a more strategic critical role in closing new business deals. As we mentioned the expansion of our existing Staples relationship was to a great degree based on the new value added capabilities of cloud self-support. We are in discussion with another large brand name online retailer that use guided path to assisted self-support as a way to potentially deflect product returns.

This brand retailer also views our cloud capability key support which is a real time photo, video, viewing capability that gives the support agent eyes on the problem. As a way to improve problem resolution one issue is escalated to an agent. Our target market is recognizing that seamless escalation from self-service to agent assistance support is critical. Guided path with contextual escalation has also become a significant competitive differentiator with several other active prospects in the pipeline.

Our strategy of aligning services programs opportunities with our support.com cloud technology gives us a compelling edge to win new services programs, expand further in existing accounts and add more value to each of our services partners. We believe we are coming to market with the right strategy, right product and a complimentary SaaS and services business model to achieve new customer growth. We see this as a key to mitigating the sometimes unpredictable lumpiness inherent in the traditional support services market.

As with any market undergoing shift timing and both upward and downward pressure upon resourcing and revenue growth can be difficult to predict. To that end we are currently experiencing downward pressure with some of our traditional services programs with Comcast being a good example of that.

Additionally PCA in certain retail markets are also seeing some seasonal and other sector specific softness. We are very pro-active and working with our key customers to get advanced insight into these demand driven revenue and resources fluctuations and continue to make dynamic adjustments managing both our fixed and variable cost. As you saw in our press release, along with the progress achieved commercializing support.com cloud, the addition of new talent in key sales roles and additional input from our new and existing board members, we announced a cost reduction plan which we are undertaking.

The actions in this plan will minimize our long term cash burn and accelerate our long term path to profitability. Our revised plan reduces both fixed and variable operating costs across the organization while still allowing us to achieve the goals of providing high quality technical support services for our partners and growing a cloud product that is increasingly synergistic with our labor based services programs.

With a leaner, more agile and higher skilled sales and marketing organization, a strong foundation of SaaS product capabilities and recognition in the market as an innovator, we are now streamlining our cloud initiative, we are increasing their alignment to their services program. We have also reduced the variable cost in our contacts and operations as well as some corporate support positions and have done commensurate with our revenue outlook.

The current realignment and expense changes results in a reduction in our corporate head count by approximately 20% at the end of Q1 2016. These actions will be taken primarily in Q2 and the full impact will be reflected in our Q4 2016 financial numbers. This cost reduction plan improves our previously communicated long term financial outlook. On our last call we mentioned we expect to end 2016 with a cash balance between $50 million and $52 million.

We are now able to improve on our prior expectations and believe exiting 2016 our ending cash balance will be between $52 million and $54 million and exiting 2017 our ending cash balance will be between $47 million and $50 million. We anticipate the cost reduction plan will allow us to expedite our previously communicated plan to become profitable on a non-GAAP basis with a full year 2018. This is an improved outlook compared to the view we gave at our September 2015 investor day where communicated becoming breakeven on a non-GAAP basis exiting 2018.

These actions always represent difficult decisions particularly if they impact our people. Nevertheless, I, my leadership team and the board are aligned that these are the right and necessary steps to take to drive us toward profitability sooner than we previously announced. With these changes we believe that we have the talent in the organization to continue to innovate on behalf of our customers, disrupt the traditional support market and create the value for our shareholders.

Before I close my remarks, I would like to highlight that over the last few weeks we have added significant new capabilities on our board. Our new three new members bring a breadth of technology, operation and financial expertise and they have already been a great asset. I would like to formally welcome Tim Stanley, Elizabeth Fetter and Low Robinson to the board. I would like to thank them for their quick ramp up, enthusiastic engagement and contributions thus far and I look forward to continuing work with each of them and the rest of the board in the future.

Support.com is at a pivotal moment with our cloud technology investments, fuelling our services opportunities and our deep experience with our world class service operations fuelling the refinement of our cloud offering. The trends upon which we build our strategy are coming to fruition. The evolution of the traditional support market is creating new growth opportunities particularly around self-service and customer support experiences enhanced by intelligent technology.

Support.com cloud continues to gain traction in these areas and we are performing at a high level in our services program. We have a dedicated team and the actions we outlined today will sharpen our focus, streamline our operations and accelerate our path to non-GAAP profitability. We will become more agile in supporting our customers and their requirements as well as deliver value to our shareholders.

We understand the work required to execute on our strategic plan and are confident on our team's ability to execute on that plan and grow support.com. I would now like to turn the call over to Roop. Roop?

Roop Lakkaraju

Thank you, Elizabeth. Total revenue for Q1 was $16.6 million compared to $23.2 million in Q1 2015 and $15.7 million in Q4 2015. Services revenue for the quarter was $15.3 million compared to $21.9 million in Q1 2015 and $14.4 million in Q4 2015. Sequentially services revenue increased as North American service provider was fully ramped by the end of Q1 as we had previously stated.

As well as strength from office depot in a quarter, the year-over-year decline was primarily due to Comcast customer experience improvements efforts. Software and other revenue was $1.3 million in Q1 2016 flat from Q1 2015 and from q4 2015. The Q1 2016 revenue mix was 92% services and 8% software compared to 94% and 6% in Q1 2015 and 92% and 80% in Q4 2015. In Q1 Comcast represented 60% of our total revenue and office depot represented 17%. Overall non-GAAP margin for Q1 2016 was 16% compared to 20% in Q1 2015 and 17% in Q4 2015.

In Q1 2016 non-GAAP services gross margin was 10% compared to 16% in Q1 2015 and 11% in Q4 2015. During Q1 2016 our services and overall gross margins were affected by higher than expected costs of our data center migration as the move is taking slightly longer than anticipated. To reduce our hosting cost, we are moving from a fully managed service model to one that is co-located and managed directly by us.

This move is in the final stages and associated migration costs is onetime expenses. We will see a portion of the migration costs continuing into Q2 2016 but beyond that it will not be incurred. The higher cost adversely affected our gross margins by 1.3%. We also incurred higher than expected claims for medical benefits. As a reminder last year, we moved to a self-insured model for medical benefits which reduced overall cost compared to using a managed model. Although there are caps on expenses with self-insured model, it is difficult to predict the timing and size of the claims.

The higher claims adversely affect our gross margins by approximately 1%. Non-GAAP software gross margin was 91% in Q1 2016, 89% in Q1 2015 and 90% in Q4 2015. Total non-GAAP operating expenses in Q1 2016 came in at $6.4 million an increase from $6.1 million in Q1 2015 and a decrease from $7 million in Q4 2015. The sequential decrease was a result of our proactive cost reduction efforts. On a non-GAAP basis loss from continuing operations for Q1 was $3.7 million with a loss of $0.07 per share.

We do not anticipate meaningful federal and 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 sheets, total cash, cash equivalents and investments were $61.3 million at March 31, 2016 compared to $65.7 million at December 31, 2015. The SOS for the quarter was 57 days as compared to 59 days of the prior quarter.

At March 31, 2016 less than 1% of our outstanding receivables were greater than 90 days old. Deferred revenue was $2.4 million at March 31, 2016 and $2.3 million at December 31, 2015. Total head count as of March 31, 2016 was 1604 consisting of 108 corporate employees and 1406 work from home technicians. This compares to a December 31, 2015 headcount of 1695 consisting of 202 corporate employees and 1493 work from home technicians. In addition to our work from home technicians we used contract laborer in our operations.

For the second quarter of 2016, we expect our revenue range to be between $14.2 million to $15 million. We expect a revenue mix of 91% services and 9% software. We expect the overall non-GAAP gross margin in the range of 17% to 19%. We expect our non-GAAP software margin to be between 90% to 92% and we expect non-GAAP operating expenses to increase sequentially by 12% to 15% as a result of additional expenses to support our proxy contest.

Based on the foregoing, our outlook on Q2 non-GAAP results from continuing operations at 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 and cash generation excluding capital expenditures.

During Q2 expecting fair or less than $50,000 of non-recurring capital expenditures associated to improvements for our IT infrastructure. We anticipate that the cost reduction efforts we announced today will result in an annual savings run-rate of approximately $3.5 million upon completion. We will incur a restructuring charge of approximately $625,000 in fiscal year 2016 as part of the cost reduction. As a result of the cost reduction plan and the recent business trends as discussed by Elizabeth in her prepared remarks we would like to update our financial targets for fiscal year 2016 and provide some additional financial targets beyond 2016.

For the full year 2016 we expect total revenue to be in the range of $60 million to $64 million. We expect non-GAAP results from continuing operations to between loss of $0.19 to a loss of $0.23 per share. Exim 2016 we still expect overall gross margin to be in the low to mid 20s. We now expect to finish with an ending cash balance between $52 million to $54 million which is an improvement which we have communicated in our previous call wherein we had expected to end 2016 with a cash balance between $50 million and $52 million.

For 2017 and beyond our cost reduction plan improves our previously communicated long term financial outlook. We believe exiting 2017 our ending cash balance will be between $47 million to $50 million. We anticipate the cost reduction plan to allow us to be profitable on a non-GAAP basis for the full year 2018. As part of the profitability we will add new services programs, see revenue from our product ramp to help support our gross margins increasing to the low 30% exiting 2018.

With that, we would like to open the call to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] First question is from Joe Fadgen of Craig-Hallum. Your line is open.

Joe Fadgen

Hey guys on here for Chad today, thanks for taking the question. I guess on the first one around the services business, is it fair to say that you still expect that business ex-Comcast sale to be a growth business in 2016 and beyond?

Elizabeth Cholawsky

Yes, hi Joe and thanks for taking the call. Yes, we absolutely do and I will put it this way as I said in the past. Non Comcast and OD are over 10% customers. If we look other than that we services to be a growth business.

Joe Fadgen

Okay. And I guess the follow up to that is are there any metrics or data points that you can talk to either in terms of like -- I don't know, maybe services, customer churn rate or customer turnover or maybe average revenue per services, customer that you can kind of point or at least give us trends on so that we can hang our heads and look at something and say like yes, that is really showing signs of growth business ex-Comcast, ex-ODP?

Elizabeth Cholawsky

Yes, what we are trying to do is highlight as we go along the kind of programs that are joining us and the kind of growth on the programs that we have got. For example I talked about Staples which we got back into the fold last year 2015 and expansion of their program which happens to include support.com cloud self-support capability so that's how we have been trying to give indications so that we can get a handle for what we are adding.

Roop Lakkaraju

Yes, Joe I think one of the things that I want to add to that is obviously both, Comcast and SIP [ph] are greater than 10% customers. We provide those percentages, we back those out quarter-to-quarter you can see in recent quarters, especially with Q4, Q3 to Q4, Q4 to Q1 you see that increase in the non-Comcast, non-Office Depot revenue balances and obviously announcing new services deals as we move forward you will start to see that will continue to expand.

Joe Fadgen

And then just one more quick one on the guess the Nexus support cloud. To get to that $2 million run-rate by the end of this year. can you get there based on the coverage you have right now whether that the sales coverage you have right now or the pipeline you have right now, how much visibility or coverage you have into that number exiting this year?

Elizabeth Cholawsky

Yes, let me first talk about our sales and marketing which are I mentioned in the prepared remarks, we brought in a new leader Dustin Oxborrow, he is really come up to speed very quickly and not missed a beat with the execution so he's upskilled the team in certain ways so and better aligned it with marketing. So, I do firmly believe that we got the right coverage on the sales & marketing side to get to the $2 million number.

And on the pipeline, again the pipeline is looking better than ever in terms of visibility and the future as well as different types of customers that are in the pipeline. We have now made the transition from the original niche that we had around premium tech support and I really are telling to a wide variety of different types of customer and that's where we wanted to be and we are there. So that again gives us great confidence that we can get to the $2 million number.

Roop Lakkaraju

And Joe, just to add one additional point, we have grown our pipeline in Q1 in the time Dustin has been here and we anticipate growing it further with the types of targets that Elizabeth indicated in our prepared remarks so there is a continued expansion in that pipeline that will help support that $2 million and from Q1 alone we have increased that pipeline with the types of opportunities we have.

Joe Fadgen

Okay. That will be all for me thank you.

Operator

Thank you, the next question is from Mike Latimore of Northland Capital. Your line is now open.

Unidentified Analyst

Hi there, this is Gerald [ph] for Mike Latimore. My first question here is on Office Depot, you guys mentioned that they were strong in this quarter. can you talk a little bit about what you expect from them this year and I also believe that contract renews this year and so what kind of preference we looking at this year and just some color on that.

Elizabeth Cholawsky

Yes, we continue to work closely with Office Depot on new initiatives there and really trying to continue the good success we have seen in Q4 and Q1 so far. So, the relationship is strong as ever, regarding the contract, it's up for renewal and we are in the process of working on that and we will keep you posted.

Roop Lakkaraju

Yes, one other thing to add. Office Depot has seasonality throughout the year and with some of the revenue guide that we gave being down, sequentially part of the revenue guide is the seasonality within the retail customers we have and Office Depot is obviously a key part of that so that's factored into kind of our view of the year as well.

Unidentified Analyst

Okay great and when you guys laid out your cash balance target for this year and next year, does that factor in any potential acquisitions or is that something we are not really considering as far as the cash targets?

Roop Lakkaraju

Yes, those cash balances do not include consideration for acquisitions. We have indicated that acquisitions are a part of our overall strategy. We continue to obviously evaluate the opportunities in the market place in an appropriate and bring this forward but it's all part of the same strategy that we played our previously but the balance is that we have articulated our operational nature and non-inclusive of acquisitions.

Unidentified Analyst

Okay. Perfect and then you mention the little bit of expansion at Staples. What do you think is the kind of potential there? Could that get back to a level where Office Depot's size or do we expect that to be more smaller account within the foreseeable future?

Elizabeth Cholawsky

Yes, as you heard things are going great with the new Staples initiative so right now they are small and continue the growth there but I don't think I can really comment on whether they will get to the greater than 10% customer. We will let you know if that happens.

Unidentified Analyst

Okay. Great thanks that's it for me.

Elizabeth Cholawsky

Okay.

Roop Lakkaraju

Thank you.

Operator

Thank you. And at this time I would like to turn the call back over to Elizabeth for closing remarks.

Elizabeth Cholawsky

So I am going to thank everyone for listening. Roop and I are around to answer any additional questions and we look forward to continuing this dialogue and hopefully meeting many of you in the next number of months. Good bye.

Operator

Ladies and gentlemen this concludes today's conference. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!