servicesource q4 fiscal year_2013_earnings_call_v_finalforwebsite

Q4 & Fiscal Year 2013 Earnings Call

February 6th 2014

ServiceSource Confidential Information 1 1

Important Information • This presentation contains forward-looking statements within the meaning of the U.S. federal securities laws that

involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove

incorrect, our results may differ materially from those expressed or implied by such forward-looking statements. All

statements other than statements of historical fact could be deemed forward-looking, including, without limitation,

statements regarding: predictions for future growth, our possible or assumed future results of operations;

estimates of service revenue opportunity under management and annual contract value; our ability to improve our

customers’ renewal rates, margins and profitability; our ability to increase our revenue and contribution margin

over time from new and existing customers; business strategies; technology and product development; competitive

position; the effects of competition; third party and company estimates of market sizes; our long term business

model; economic, industry and market trends; potential growth vectors and opportunities; comparative models;

and statements about partnerships or acquisitions.

• Typically, these statements contain words such as “if,” "believe,” “may,” “will,” “estimate,” “continue,” “anticipate,”

“intend,” “expect,” “opportunity” and similar expressions. .

• You are cautioned that the forward-looking statements in this presentation are based on estimates and information

available to us at the time of this presentation. These statements are subject to risks and uncertainties that could

cause actual results and events to differ materially and are not guarantees of future performance. We undertake no

obligation, and to not currently intend to update the forward-looking statements to reflect subsequent events or

circumstances. A detailed discussion of these and other risks and uncertainties that could cause actual results and

events to differ materially from such forward-looking statements is included in our periodic reports and registration

statements filed with the Securities and Exchange Commission, which can be accessed at http://www.sec.gov.

• This presentation refers to certain non-GAAP financial metrics. See the GAAP to non-GAAP reconciliation tables

contained herein and our earnings release posted on the Investor Relations portion of the ServiceSource website for

a reconciliation of the non-GAAP metrics to the closest GAAP financial measures.

ServiceSource Confidential Information

Mike Smerklo Chairman and CEO


2013 In Summary…

Q4 2013

• Revenue: $77.2M, +15% y/y

• Adj. EBITDA: $8.6M

• Non-GAAP EPS: $0.04

• Significant technology subscription expansion

• Expanded with three Fortune 50 Customers

• Successful presence at Dreamforce

• New alliances with Accenture and Aria

FY 2013

• Revenue: $272.5M, +12% y/y

• Adj. EBITDA: $17.7M

• Non-GAAP EPS: $0.06

• Free cash flow $11.0M

• $275.1M of cash on the balance sheet as of year end

• Unbundled our solution

• Brought 15 customers live on Renew OnDemand

• Launched new Sales Center in Japan


2013 was a Pivotal Year

Challenges Going Into the

Year

Revenue Growth Deceleration

Introduction of SaaS Offering as New Platform for

Growth

New Capabilities Required For

Success

Five Key Initiatives to Reposition Ourselves for

Reacceleration

Move to an “Unbundled Offering”

Improve Sales Execution

Product Scale & Standardization

Increase Capacity to Implement Renew OnDemand

Customer Retention


Rapidly Changing Market Environment Benefits ServiceSource

• Cloud • Internet of Things • Installed base selling for traditional

and subscription businesses • New recurring revenue

business models

Focus shifts from customer acquisition to maximizing customer lifetime value


Acquisition of Scout Analytics

• Provides usage-based, predictive analytics

• Adds more than $300B in TAM

• Extends our solutions for subscription customers

• Highly scalable solution

• $32.5M* transaction value

• $7M Subscription ARR (2013)

• $5.4M 2013 Revenue

• Anticipated EPS accretive in 6-8 quarters

Strategic Rationale Transaction Overview

$14.5B under management, 200 customer engagements, 400 million devices, 25 million subscription users, $600B+ TAM

* On a cash-free, debt-free basis

Combined Company

TM


Expanding TAM and Subscription Portfolio

Low

High

Subscription Traditional Business Model

Com

ple

xity


• High Churn • Low Adoption and Customer

Satisfaction • Limited Visibility into

Application Usage

• Low Renewal Rates • Limited Visibility • Inefficient Renewals and

Channel Management • Multiple Data Sources

We Can Uniquely Solve Our Customer’s Biggest Business Challenges

Traditional Subscription

• Increased Complexity From Mixed Models • No Complete View of Customer • Higher Cost of Sale and Difficulty Cross Selling

Combined


Industry’s Only Combined Offering with Managed Services and SaaS Applications

Renewal Sales

Renewal management and analytics

Predictive analytics for subscription businesses

Customer Success

Enablement

Implementation Training Data

Services

Applications

Professional Services

Managed Services

Put

Partners & Ecosystem


2014: Our Growth Pillars

Strengthen the Power of Our People

Extend Go To

Market Reach & Partner

Ecosystem

Help Customers

Unlock Data as a

Strategic Asset

Sell into Base

& Expand Market

With Cloud Applications

Reinforce Managed Services

Leadership Position


Subscriptions Become Larger Part of ACV

178

281

31

2011 2014

21% Total ACV Growth CAGR

BOP Managed Services ACV

BOP Subscription ARR

$312M

$178M

10%


Ashley Johnson CFO


2013 Revenue Summary

• Q4 2013 Revenue grew 15% year-over-year

• FY 2013 Revenue grew 12% year-over-year reaching $272.5M

• Cloud & Data Services represented ~6% of revenue

$67.3

$77.2

$243.7

$272.5

Q4 13 Q4 12 FY 13 FY 12

+15%

+12% $ millions


Non-GAAP Operating Expenses*

• Continued investment in the business to drive growth and market adoption for Renew OnDemand

14

* All metrics exclude stock-based compensation and amortization of internally developed software. Net income excludes non-cash interest expense and assumes a 40% tax rate.

Q4 2012 Q4 2013 FY2012 FY 2013 % growth

Non-GAAP Operating Expenses

Cost of Revenue 34,020 44,050 132,082 156,170 18%

Sales and Marketing 13,328 12,448 48,229 48,519 1%

Research and Development 5,436 4,629 17,030 21,129 24%

General and Administration 8,154 9,532 32,374 36,206 12%

Total operating expenses 60,938 70,659 229,715 262,024 14%

Adjusted EBITDA 8,339$ 8,578$ 20,933$ 17,711$

% of Revenue 12% 11% 9% 6%

Non-GAAP Net Income 3,563$ 3,236$ 7,928$ 5,252$

Non-GAAP EPS 0.05$ 0.04$ 0.10$ 0.06$

Diluted shares on a non-GAAP basis 77,831 84,615 79,093 82,268


Key Balance Sheet and Cash Flow Metrics

15

• Improved cash flow metrics and raised convertible debt, significantly strengthening our balance sheet in 2013

12/31/2012 12/31/2013

Balance Sheet Metrics

Cash & Cash Equivalents 109.4 275.1

DSOs 87 85

Deferred Revenues 3.2 6.3

Cash Flow Metrics

Cash Flow from Operations 10.5 15.7

Capital Expenditures 20.3 5.2

Free Cash Flow (10.0) 11.0


Managed Services Key Drivers and Guidance

KEY DRIVERS

• Modest growth in new Managed Services ACV as business focus shifts to SaaS, weighted to H2

• 2 – 3 quarters to ramp new ACV, compressing gross margins

• Quarterly seasonality – Lighter Q1 and Q3 (particularly international business), stronger Q4

• Target ACV retention historical average of 90% (or better)

GUIDANCE TABLES

Q1 2014 Q1 Low Q1 High

Managed Services

Revenue Range 59.0 61.0 y/y growth 1% 5%

Estimated Gross Margin* 34% 36%

FY 2014 FY Low FY High

Managed Services

Revenue Range 270.0 274.0 y/y growth 5% 7%


• Strong customer base and leadership position in recurring revenue management provides leverage to emerging subscription business

* Non-GAAP metrics exclude stock-based compensation and amortization of internally developed software.


• Continued investment in fast-growing subscription business

Cloud & Data Services Key Drivers and Guidance

KEY DRIVERS

• ARR of $31M at the beginning of 2014, including Scout acquisition

• New subscription ACV weighted to H2 as sales teams integrate and go to market with full suite of apps

• Revenue recognized ratably starting month post signing

• Subscription gross margins expand as business scales

• Professional Services a loss-leader to drive Renew success

GUIDANCE TABLES

Q1 2014 Q1 Low Q1 High

SubscriptionRevenue Range 7.0 8.0 y/y growth 204% 248%


Professional ServicesRevenue Range ~1.0 ~1.0

Estimated Gross Margin* -250% -250%

FY 2014 FY Low FY High

SubscriptionRevenue Range 35.0 38.0 y/y growth 178% 202%


Professional ServicesRevenue Range ~3.0 ~4.0

Estimated Gross Margin* -200% -200%

* Non-GAAP metrics exclude stock-based compensation and amortization of internally developed software. Revenues do not reflect the write-down of acquired deferred revenue.


Consolidated SREV Guidance

• Investing in leadership and growth of SaaS business through R&D, implementation & adoption and sales & marketing investments

* Non-GAAP metrics exclude stock-based compensation and amortization of internally developed software. Revenues do not reflect the write-down of acquired deferred revenue.

$ millions

Q1 Low Q1 High FY Low FY High

Total ServiceSourceRevenue Range 67.0 70.0 308.0 316.0

y/y growth 10% 15% 13% 16%

Non-GAAP Gross Margin 33% 35% 38% 40%

Non-GAAP Operating Expenses

Sales & Marketing 20% 19% 19% 20%

Research & Development 9% 9% 9% 9%

General & Administrative 15% 14% 14% 13%

Depreciation 2.0 2.0 9.0 9.0

Adjusted EBITDA (6.0) (3.0) (4.0) 4.0

Non-GAAP Net Income (4.8) (3.0) (7.8) (3.0)

Non-GAAP E.P.S. (0.06) (0.04) (0.09) (0.04)

Free Cash Flow - 3.0 (15.0) (7.0)


For Your Reference….

• An archive of today’s call will be posted on the IR portion of our website, under “Events & Presentations”

• If you’d like more information on the Scout acquisition, we will be hosting a webinar on Thursday, February 13th @ 8am PT.

– Registration information will be available on our IR site.


Non-GAAP to GAAP Reconciliation Tables

Q1 and Full Year Guidance Reconciliation

Three Months

Ended

Twelve Months

Ended

March 31, December 31,

2014 2014

$20,700 - $23,000 $111,500 - $121,000

Stock-based compensation ( A ) 900 3,500

Amortization of internally-developed software ( B ) 500 2,000

Non-GAAP gross margin $22,100 - $24,500 $117,000 - $126,400

31% - 33% 36% - 38%

Stock-based compensation ( A ) 1% 1%

Amortization of internally-developed software ( B ) 1% 1%

Non-GAAP gross margin % 33% - 35% 38% - 40%

Certain totals do not add due to rounding

ServiceSource International, Inc.

GROSS MARGIN - GAAP TO NON-GAAP RECONCILIATION

(In thousands)

(Unaudited)

GAAP gross margin

Non-GAAP adjustments:

Gross Margin

GAAP gross margin


Gross Profit %


Three Months

Ended

Twelve Months

Ended


2014 2014

GAAP net loss $(17,000) - $(14,000) $(50,000) - $(42,000)

Stock-based compensation ( A ) 6,500 26,000

Amortization of internally-developed software ( B ) 600 2,400

Non-cash interest expense ( C ) 1,700 7,500

( D ) $2,200 - $3,400 $3,000 - $6,200

Non-GAAP net income $(4,800) - $(3,000) $(7,800) - $(3,000)

GAAP diluted net loss per share $(0.21) - $(0.17) $(0.60) - $(0.50)

Stock-based compensation ( A ) 0.08 0.31

Amortization of internally-developed software ( B ) 0.01 0.03

Non-cash interest expense ( C ) 0.02 0.09

( D ) 0.03 - 0.04 0.04 - 0.07

Non-GAAP diluted net income per share ( E ) $(0.06) - $(0.04) $(0.09) - $(0.04)

Certain totals do not add due to rounding

82,500 84,500

(In thousands, except per share data)

(Unaudited)

GAAP to Non-GAAP Reconciliation

Net Income (Loss) Per Share

Net Income (Loss)


Income tax effect on non-GAAP adjustments and

impact of normalizing the effective income tax rate


Income tax effect on non-GAAP adjustments and

impact of normalizing the effective income tax rate

Shares used in calculating diluted net income per

share on a non-GAAP basis


Business Outlook

Reconciliation of Net Loss to Adjusted EBITDA

(In thousands)

(Unaudited)

Three Months

Ended

Twelve Months

Ended


2014 2014

Net loss range………………………………….. $(17,000) - $(14,000) $(50,000) - $(42,000)

Income tax (benefit) provision…………………………… 200 1,000

Interest & other expense, net……………………………. 1,700 7,500

Depreciation & Amortization……………………...……. 2,600 11,500

EBITDA range……………………………………………. $(12,500) - $(9,500) $(30,000)- $(22,000)

Stock-based compensation……………………………… 6,500 26,000

Adjusted EBITDA range………………………………… $(6,000) - $(3,000) $(4,000) - $4,000


Three Months

Ended

Twelve Months

Ended


2014 2014

$2,000 - $4,000 $(5,000) - $1,000

Less:

1,000 - 2,000 8,000 - 10,000

- -

$0 - $3,000 $(15,000) - $(7,000)

Free cash flow

ServiceSource International, Inc.

Supplemental Cash Flow Information

Free cash flow analysis, a non-GAAP measure

(in thousands)

Operating cash flow

GAAP net cash provided by operating activities

Capital expenditures

FX adjustment


Footnotes to GAAP to Non-GAAP Reconciliation

( A )

( B )

( C )

( D )

( E ) For this per share reconciliation, basic shares were used for the above calaculation.

Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate.

This adjusts the provision for income taxes to reflect the effect of the non-GAAP items (A) - (C) on non-

GAAP net income and adjusts the income tax rate to a normalized effective tax rate of 40%.

Stock-based compensation. Included in our GAAP presentation of cost of revenue and operating

expenses, stock-based compensation consists of expenses for stock options and awards and purchase

rights under our stock purchase plan. We exclude stock-based compensation expense from our non-

GAAP measures because some investors may view it as not reflective of our core operating performance

as it is a non-cash expense.

Amortization of internally-developed software . Included in our GAAP presentation of cost of revenue

and operating expenses, amortization of internally-developed software reflects amortization of expense

for certain software purchases and software developed or obtained for internal use and are non-cash in

nature. We exclude these expenses from our non-GAAP measures because we believe they are not

indicative of our core operating performance.

Non-cash interest expense . Under GAAP, we are required to separately account for liability (debt) and

equity (conversion option) components of the $150 million convertible senior notes that were issued in

August 2013. Accordingly, for GAAP purposes we are required to recognize effective interest expense

on our convertible senior notes which includes interest cost related to the amortization of debt issuance

costs and the contractual 1.5% interest rate of the note. The difference between the effective interest

expense and the contractual interest expense is excluded from our assessment of our operating

performance because we believe that this non-cash expense is not indicative of ongoing operating

performance. We believe that the exclusion of the non-cash interest expense provides investors a view

of our core operating performance.

servicesource q4 fiscal year_2013_earnings_call_v_finalforwebsite

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