Feb 12, 2014
Executives
Gregory J. Wrenn - SVP of Business Affairs, General Counsel, Corporate Secretary Roop K.
Lakkaraju - EVP Chief Financial Officer and Chief Operating Officer Josh Pickus - President and CEO
Analysts
Chad Bennett – Craig-Hallum Capital Kevin Liu – B. Riley & Co.
Ryan MacDonald – Northland Securities John Campbell – Stephens Inc.
Operator
Good day, ladies and gentlemen, and welcome to the Support.com Q4 2013 Earnings Conference Call. [Operator’s Instructions] I would now like to introduce your host for today’s conference Greg Wrenn, General Counsel of Support.com.
You may begin.
Gregory J. Wrenn
Thank you, operator. Good afternoon, everyone.
Joining me here today is Josh Pickus, our 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 file with the SEC.
All of which can be found through our investor relations page of our website 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 webpage.
The statements we will make in 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 will turn it over to our CFO and COO, Roop Lakkaraju.
Roop K. Lakkaraju
Thank you, Greg. Total non-GAAP revenue for Q4 was 24.9 million compared to 18.9 million in Q4 of 2012 and 23.7 million in Q3 of 2013.
Q4 non-GAAP revenue was up 32% year-over-year and 5% sequentially. In Q4 2013 we incurred account for revenue charge of 394,000 related to the issuance of a warrant to Comcast upon their achievement of certain performance milestones.
Adjusting for this charge total GAAP revenue for Q4 of 2013 was 24.5 million. Non-GAAP services revenue for the quarter grew to 22.4 million compared to 15.3 million in Q4 of 2012 and 19.7 million in Q3 of 2013.
Services revenue in Q4 2013 increased primarily due to the continuous successful ramp of Comcast owned networking support bundle. Software revenue declined year-over-year and sequentially to 2.5 million in Q4 2013 from 3.5 million in Q4 2012 and 4.1 million in Q3 2013.
Due to our previously discussed decision to end unprofitable advertising arrangements for our end user software products. Our SaaS revenue continue to grow in Q4 2013.
The Q4 revenue mix was 90% services and 10% software compared to 81% and 19% in Q4 2012 and 83% and 17% in Q3 of 2013. Total non-GAAP revenue for the full year was 88.9 million, an increase of 24% over 2012.
In Q4 and for the full year 2013, Comcast and the combined Office Depot and OfficeMax organization both contributed more than 10% of total revenue. Office Depot and OfficeMax completed their merger in Q4 2013 upon receiving SEC clearance.
We continue to work closely with the merged organization to create a smooth integration for their customers and associates. Overall non-GAAP gross margin for the fourth quarter was 44% compared to 53% in Q3 of 2013.
In Q4 non-GAAP service gross margin was 39% compared to 44% in Q3 of 2013. The non-GAAP service gross margin decline is due to the growth as a percent of total revenue of the lower margin home networking support bundle.
Non-GAAP software gross margin was 88% down slightly from 93% in Q3 of 2013 due to SaaS revenue growth as a percent of revenue. Total non-GAAP operating expenses for Q4 came in at 5.7 million, a decrease from 7.9 million in Q3 of 2013.
The decline in non-GAAP operating expenses was primarily driven by the decision to end unprofitable advertising arrangements for our end user software products. On a non-GAAP basis, income from continuing operations for the fourth quarter of 2013 was 5.3 million or $0.10 a share.
This was higher than our October 2013 guidance range of $0.06 a share to $0.08 a share due to better than expected performance in revenue and margins for the XFINITY Signature Support Program and lower advertising spend for end user software products. For the full year non-GAAP income from continuing operations was 16.8 million or $0.31 per share compared to income of 0.9 million or $0.02 a share for 2012.
We do not anticipate incurring meaningful federal or state income taxes for the foreseeable future as a result of our net operating loss carry forward, 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 72.4 million at December 31st, 2013 compared to 68.5 million at the end of Q3 reflecting a net cash increase of 3.9 million in the fourth quarter.
We ended the year with an increase in total cash, cash equivalents and investment of 16 million as compared to year-end 2012. DSOs for the quarter were 52 days as compared to 53 days in Q3.
At December 31, 2013 less than 1% of our outstanding receivables were greater than 90-days old. Differed revenue was 3.4 million at December 31, 2013 compared to 4.4 million at September 30; a decrease of 1 million mainly due to the termination of XFINITY Signature Support Program during the quarter.
Total headcount at December 31, 2013 was 1,344 consisting of 165 corporate employees and 1,179 work-from-home technicians this compares to a September 30, 2013 headcount of 1,551 consisting of 175 corporate employees and 1,376 work-from-home technicians. The headcount declined as a result of the reduction in force that we completed at the end of 2013; the reduced work-from-home technicians by 210 employees and corporate workforce by 15 employees.
The effective employees were terminated as of December 30, 2013 with certain corporate employees remaining with the Company for a limited time thereafter. We incurred total severance cost for this reduction of 431,000 in the fourth quarter of 2013 and expect to pay the cash during the first quarter of 2014.
In addition to our work-from-home technicians we used contract labor in our operations. Turning to guidance, based on positive developments since our January 7th call we are updating our non-GAAP revenue range to 16.7 million to 18.2 million with a revenue mix similar to Q4 2013 of 90% services and 10% software.
We expect overall non-GAAP gross margin to be in the low 20s and OpEx to be approximately 10% lower than in Q4 2013. Based on the foregoing, our updated outlook for Q1 non-GAAP results from continuing operations is a loss of $0.04 per share to a loss of $0.01 per share.
With that, I would like to turn the call over to Josh.
Josh Pickus
Thanks, Roop. Since our call on January 7th there have been a number of important developments in our business.
At Comcast we moved forward in two areas; staffing for the home networking support bundle is growing. By the end of Q1 we expect the headcount to be approximately 20% higher than it was at the end of Q4.
Contact volumes remain high and gateway distribution continues, so there may be further staffing increases. We’ve also been selected to provide remote support for XFINITY Home: Comcast next-generation home security and automation system.
XFINITY Home offers traditional home security features such as police and fire alarm protection as well as new capabilities such as the ability to adjust digital thermostats, turn lights on and off and watch streaming video from wireless cameras while away from home. In Q2 we expect to launch next-generation support offering designed to ensure customers receive the full benefits of their XFINITY Home systems.
This support will be included in the XFINITY Home package and we expect this program to have a similar margin profile to the home networking support bundle. We’ve also advanced our DISH Network program.
As a reminder, we offer home networking subscriptions and virus removal services for DISH Network. DISH has indicated that they are pleased with the feedback from their sales agents, their end customers and with the overall sales numbers.
Based on the progress to-date DISH has expanded the sales channels offering these services. In addition to progress in existing accounts we’ve also added a number of new customers.
Sam’s Club, a division of Wal-Mart stores, operates membership warehouse clubs throughout the United States and internationally. It’s the nation’s eighth largest retailer with over 600 clubs.
We will provide the tech support component of an extended warranty bundle that Sam’s Club will offer to members following purchase of a computer. We expect the rollout of this offering to begin at the end of the first quarter and continue throughout the year.
SouthernLINC is a cable provider operating in the Southeast and South-Central United States. It offers video, voice, data and home security services and has approximately four million subscribers.
Beginning in March we will pilot a full premium technology support program with SouthernLINC’s small business customers. Carbonite is a leading provider of cloud backup solutions.
It offers personal, professional and server backup plans and has over a million subscribers. Starting in Q2 we will offer a referral program for Carbonite subscribers.
Under this program Carbonite support agents will offer customers who have issues beyond Carbonite’s support boundaries the opportunity to purchase services from Support.com. Finally, ContactWorks is an outsourced contact center provider serving the telecommunications industry among others.
ContactWorks has licensed our Nexus Service Platform to help with its expansion into premium technical support services. In addition to this new account we have two go lives with earlier SaaS customers.
We expect further growth in our SaaS customer base as a result of our stepped up sales and marketing efforts. From a technology perspective, at the end of the first quarter we are planning to release the next generation of the Nexus Service Platform which will enable us to extend our SaaS customer base beyond providers of premium support who charge separately for their support services to the larger set of companies that include support as part of their offerings.
In addition to broadening the addressable market for the platform this next-generation platform will significantly enhance the ability of all support organizations to resolve technology issues quickly, boost support productivity and improve customer experience. Beyond this first quarter release, the team has put in place innovative product plans for current and future markets.
In closing, I would like to address the other announcement we made today. I have decided to step down as an officer and director of the Company on April 1st for personal reasons.
I will continue to serve the Company as an advisor following my departure. The Board is conducting a search for my successor with the assistance of Egon Zehnder, a national search firm.
It has been a great privilege and honor to lead the Company for almost eight years. I’m very proud of what we have accomplished and I’m equally grateful for the support I have received from the Board and our employees, customers and shareholders.
The Company has a unique combination of technology, human capital and financial resources and is poised to play a major role in the development of the next-generation of support technology. My successor will be in a position to lead a new innovation cycle that addresses the expanding universe of opportunities in front of the Company.
I look forward to working closely with the Board during the transition process and afterwards as an advisor. With that, I will open it up for questions.
Operator?
Operator
Thank you. [Operator’s Instructions] And our first question comes from the line of Chad Bennett of Craig-Hallum.
Your line is now open.
Chad Bennett – Craig-Hallum Capital
Yeah, good afternoon.
Josh Pickus
Good afternoon.
Roop K. Lakkaraju
Good afternoon.
Chad Bennett – Craig-Hallum Capital
So, I guess – with considering the March quarter guidance and now that the legacy Comcast program is behind us, can you give us kind of an indication of that revenue range that you’re thinking – you know, how much is going to be Comcast roughly as we enter the new year here?
Roop K. Lakkaraju
I think, Chad, you’re looking right now at 50% to 60% in terms of where Comcast would come out. There is obviously a lot of variables there, both, in the sense that we continue to discover new opportunities at Comcast.
Frankly, some even this morning, as I was chatting with them. But also, that we’re seeing other opportunities with other customers and we’re growing programs that we have today, like, DISH and we’re investing in amp-ing up sales and marketing to drive SaaS to be a much larger percentage of revenue.
So, those are all the caveats that say if you play out a different ways but right now if you look in the 50% to 60% range, that’s kind of how it seems to us.
Chad Bennett – Craig-Hallum Capital
Yeah. And not that you guys talk about anything more than the next quarter but considering that the new programs that you announced today and obviously it sounds like a lot of that stuff is getting started in the June quarter and hopefully ramping SaaS business, I guess, is it logical to believe the March quarter is kind of the trough and we grow from there in terms of what you can see today?
Roop K. Lakkaraju
Yes. Our plan for the year on the top line has growth throughout the year starting from the base that we’re establishing in Q1, so that’s the correct assumption.
I think we’re all eager to drive that even faster but it’s safe to say that we do expect the trend to be up from Q1 throughout the year.
Chad Bennett – Craig-Hallum Capital
Okay. And a couple of more for me, the XFINITY Home opportunity, Josh, is – I guess, it sounds like it’s the same margin profile as the bundle program, are the economics behind it the same, is it based on the number of agents you hire and kind of productivity of those agents or is it sub-based or any kind of color there and then also what – is there any way to talk about how significant two quarters down the road it may be?
Josh Pickus
Okay. Let me try to tackle all of those.
The model looks very much like the home networking support bundle which is to say it’s a predictive hour model that could always evolve in the future but that’s what it is for today. In terms of growth, the way we look at it is we’re going to be doing this in a number of regions for probably six months to make sure that it’s working effectively and assuming it is then it would ramp beyond that.
I think based on the program we’re talking about today, in the specified regions that we’re talking about, we’re talking about low seven figure numbers for the year. I think if it grew to be a program that touched all of the regions and we were to do all of that you’d be looking at probably low eight figures is kind of the way I would think about it.
Chad Bennett – Craig-Hallum Capital
Okay. And I guess, last question, you know, first of all, good to be working with you for the number of years, we’ve been working together.
I guess, I wish you best of luck in the future but kind of any type of color of kind of why now and then secondarily, do you have – I assume you don’t – but do you have any type of – are in the involved in the new CEO process or not?
Josh Pickus
Yeah. So, in terms of the first question, why now, the real answer is just I’ve been doing this for eight years and it’s time for a change.
There’s really nothing more to it than that. From the Company’s perspective, we’re seeing a whole bunch of new and really exciting opportunities that fall generally under the heading “Internet of things” and that’s something that has been hyped for a long time but is getting very real now and the support challenges posed by all of that stuff are really fascinating, so it feels like the beginning of a new innovation cycle and it seems like a great time to bring in somebody to lead that entire cycle.
So that’s really the thinking around this from my perspective and as I thought about it with respect to the Company. In terms of the new CEO search, I’m absolutely going to have the opportunity to meet and contribute my feedback about the new CEO and that’s something I’ll do eagerly and passionately.
I think the Board wants to make really sure that we don’t have a situation like Microsoft just had where, you know, there’s a worry about somebody hanging around. This is really going to be the new person’s gig and I’m excited to contribute to making that person successful and getting him off the ground.
So I will be involved in that regard.
Chad Bennett – Craig-Hallum Capital
Okay. Great.
Thanks. Best of luck, Josh.
Josh Pickus
Thank you, Chad.
Operator
Thank you. Our next question comes from the line of Kevin Liu of B.
Riley & Co. Your line is now open.
Kevin Liu – B. Riley & Co.
Hi, good afternoon. First question, just in terms of referral type deals like the Carbonite one, just wondering how long a deal like that takes to come together and what are the logistics behind it?
I would imagine there isn’t kind of the same, you know, formal type of handover you would get with some of the Comcast referrals but maybe if you could help add some clarity around that?
Josh Pickus
Yeah, the Carbonite deal came together pretty quickly. Actually what happened was we got to know them working on one of our retail programs, they were pleased with what we were able to do their and our retail partner recommended us to them, so that deal came together fairly quickly, matter of limited numbers of months.
And then the second point about time to get started, that’s actually a very important point. I’m not ready to call it a trend yet but we are seeing more of these referral opportunities and they are interesting to us for the very reason you mention, which is that they’re easier to get going, there is less infrastructure.
You know, when they’re not light label it’s really a matter of the partner’s agents being trained to – when they have an out-of-scope call, send the call to us and when that happens we get rolling, there’s not a lot of complicated technology integration or other things and that means you can get to revenue faster. They also have a positive margin profile in the sense that because the partner isn’t investing in a lot of stuff itself their request for margin back are more limited than in a full white label program when they are doing a lot of investing.
So, we think it’s interesting that both Comcast and now Carbonite are going in that direction and maybe there’s more there and we’d certainly be interested in those kind of opportunities.
Kevin Liu – B. Riley & Co.
Got it. And as referrals do become a bigger part of the business would you guys anticipate ramping up marketing spends just to start to build out your own brand again?
Josh Pickus
No, I wouldn’t like those two. We continue to not believe that we should be in the direct-to-consumer support business because we’ve been there, we know what the magnitude of the subscriber acquisition cost are and frankly they don’t lead to an attractive model.
The referral deals are different because we’re not spending any of those dollars, what’s happening is that calls are coming into the partner for which the partner isn’t spending dollars and they need to be handled. And it’s a very good fit in the sense that they get a solution for their customer, we get a new opportunity without having to do that type of marketing spending.
So, I wouldn’t anticipate, even if referral deals become a larger percentage, that that would be going along with substantial increased marketing spend. To the extent we do more marketing spend or more marketing and sales spend, that’s much more likely to be in the SaaS arena than it is with these referral deals.
Kevin Liu – B. Riley & Co.
Understood. And then just two quick questions on updated guidance.
One, is it primarily the Comcast relationship that drove the uptick in the revenue range and then with regarding the EPS line, I notice that you guys just kind of narrowed the high end of that down a little bit and was curious if that was more so related to maybe one-time expenses around recruiting type of stuff or if there were other factors playing with that?
Josh Pickus
Yeah. In terms of top line there is of course the increase in the bundle headcounts that’s playing a substantial role there.
It’s also that some of these other programs may come online in a way in the first quarter and so there’s a little bit of revenue for them even though we anticipate that that won’t start really happening until Q2, so there are several contributors there. And then on EPS it’s a couple of things.
It is some incremental things like the recruiting dollars you’re talking about. It’s also the fact that we may end up in a situation here where to meet the increasing headcount requirements for the bundle we end up having to add agents that don’t get all the way through training and so we don’t go for them until the next quarter and that timing affect could end up hurting on EPS in Q1 though it would be a positive event for the rest of the year because it would mean more agents ramped for a longer period of time during the year.
Kevin Liu – B. Riley & Co.
Got it. Well, thanks for that.
And, Josh, just wanted to wish you good moving forward.
Josh Pickus
Thank you very much, Kevin.
Operator
Thank you. And our next question comes from the line of Mike Latimore of Northland Capital Markets.
Your line is now open.
Ryan MacDonald – Northland Securities
Hi, this is Ryan MacDonald on line for Mike Latimore. And first on Comcast, so you discussed a bit of where there might be some increases in staffing and gave some guidance around that for first quarter.
I’m kind of looking beyond that, I mean, has Comcast really finalized the number of agents that they think are going to be required maybe on a per wireless gateway basis or is that number going to continue to remain variable?
Josh Pickus
Well, I think what I can say, Ryan, is that we’re all revising upwards our view of what the call volume at Comcast is going to be because it’s quite substantial and even as our team is getting more efficient and moving handle times down, the call volume continues to ramp. So, I think it’s safe to say that we’re all agreeing that is going to go higher.
Exactly how high it’s going to go or exactly how it correlates per number of wireless gateways is still very much something that’s under study. I think that there’s a lot of continuing consultation and my suspicion is that the headcount increase that we’re talking about here will not be the last one but exactly what that model is will probably take several more quarters to play out until we can sort of get it to a science.
Ryan MacDonald – Northland Securities
Okay. And kind of tagging along with that with those call volumes, I mean, are there any changes that will be anticipated and needed service that you’re going to be providing with the bundle or on those customer calls?
Josh Pickus
No, it’s very consistent with what was originally designed. You know, to really try to make sure that Comcast subscribers with leased equipment are really getting great support for their home network so that their overall Comcast experience is a really good one.
So, no change in the scope, just turns out that there is a lot of call for this sort of thing and we’re running fast to try to make sure we meet those needs.
Ryan MacDonald – Northland Securities
Okay. So, switching gears a bit to OfficeMax people, I know you have provided in the comment a little bit of an update there, but I mean is there any update on whether there has been a new contract yet or new pricing or change in pricing in that relationship?
Josh Pickus
There’s nothing specific that’s happened on either of those things. We have contracts with both organizations that go on well beyond the date of their merger, so there are contracts in place.
They’ve been focused on sorting out exactly their management team and I would say they are about 80% of the way to finalizing that all the way down to the specific merchants and we’re trying to be as helpful as we can as they work through their processes and I anticipate that in the next few months we’ll sit down with them and we’ll sort out exactly what things are going to look like going forward. And we’ve made some assumptions in our own models about what that will be but we’re looking forward to operating with the combined entity because we think there’s an opportunity to reignite the growth there and to combine some of the best practices from each of the programs and deliver something even better.
So, nothing very tangible to report at this moment but moving along pretty much as they inform us it was likely to move along.
Ryan MacDonald – Northland Securities
And then just finally, do you think DISH could become as big of a customer as say one of your historic retail customers from the past?
Josh Pickus
It’s hard to say at this moment because we’re still in so early days. You know, what I would say is that we do think DISH can make a meaningful contribution to revenue.
We’ve said before that we’re impressed with the sales capabilities that they have and they also seem to feel that this is an important priority for them and they are putting us in new channels. So, all of those are encouraging facts.
And our plans does account for some very meaningful percentage growth for DISH. To say, will it get to be as big as one of our big retail programs, it possibly but it’s really too early to say until we see the performance of the offering in some of these new channels.
Ryan MacDonald – Northland Securities
Got you. Thank you very much, Josh, and best of luck going forward.
Josh Pickus
Thank you, Ryan.
Operator
Thank you. [Operator’s Instructions] And our next question comes from the line of John Campbell of Stephens Inc.
Your line is now open.
John Campbell – Stephens Inc.
Hey, guys, thanks for taking our questions.
Josh Pickus
Happy to do it.
John Campbell – Stephens Inc.
On the marketing spend, it sounds like you guys are clearly wanting to scale that back a bit going forward, you know, how should we think about that general run rate as we move into ’14. Is that more, I guess, a structured cost you guys have considered or built in to the ’14 budget or is it more of a variable type cost you guys would kind of rollout as conditions allow?
Josh Pickus
Well, here is the way I would look at it. There’s different pieces of our marketing spend.
For example in the premium tech support business we have market development funds that are paid to retailers based on sales and so that’s going to vary in a way that’s directly connected to the performance of the retail business. We have marketing spend that’s related to the end user software products and we’ve eliminated the programs that were not profitable and so what we’re left with is the remaining profitable programs and the marketing spend associated with them.
And, you know, in the absence of new information, I would take both the MDF and the end user software marketing and sort of assume it’s going to be pretty much what it was in Q4 maybe smaller a little bit but not dramatically different. The real question is what’s going to happen with the SaaS marketing expenditures and what I think there is, we don’t have an immediate plan to grow it substantially but we are very pleased with the level of activity that the investments that we’ve been making recently are showing and it’s possible as the year plays out that we will decide to increase that number to drive even further activity.
So, if you sort of look at the sales and marketing number in Q4 and you say it’s plus or minus 200,000 or 300,000 throughout the year until we tell you otherwise, that’s probably a fair way to think about it given what we know today.
John Campbell – Stephens Inc.
Got it. Thanks for that additional color.
So, on the capital allocation, I think you guys still have a share repo plan in place, if so could you guys just give us an update of where we stand on that and then maybe just if you guys could help us get an idea of where that ranks in your priorities in the ’14?
Josh Pickus
Sure. Yeah.
We actually discussed that at our most recent Board meeting and the Board’s view is that you always want to be thinking carefully about capital allocation. And for us there are really three buckets that it falls into.
It sits in the bank for future use and to provide stability and assurances to customers, it gets used for M&A or it gets used for some kind of share repurchase or dividend activity. And the Board looks at this regularly and doesn’t ever make a decision forever.
The most recent conversation is that the Company to create real sustainable growth and shareholder value from where we are today should probably focus its cash on internal investment and possibly, if the right target appears, M&A. So there aren’t imminent plans to use the money for a share repurchase but that’s not a closed door forever it’s kind of a current bird view of the universe that would be looked at regularly.
John Campbell – Stephens Inc.
Okay. Great.
And then last one for me is just CapEx in the quarter and then just plans for ’14.
Josh Pickus
Yeah, pretty much current levels. Don’t expect dramatic expansion.
The only place in which I can foresee you really have a meaningful uptick is as the SaaS business begins to really scale there will come a point where more infrastructure is required and some of that is capital, so if and when we get to that point we’ll alert you to it but we don’t foresee a difference from present trends right now.
John Campbell – Stephens Inc.
Okay. Great.
Thanks, Josh, and best of luck in your future endeavors.
Josh Pickus
Thank you very much.
Operator
Thank you. And I’m showing no further questions at this time.
I would like to hand the call back over to Josh Pickus, CEO. Your line is now open.
Josh Pickus
Okay. Thanks everybody.
Happy snowboarding and look forward to talking to you soon. Bye-Bye.
Operator
Ladies and gentlemen, I thank you for participating in today’s conference. This does conclude today’s program.
You may all disconnect. Have a great day, everyone.