ServiceSource Reports Third Quarter 2012 Financial Results

(November 05, 2012)

SAN FRANCISCO, CA -- (Marketwire) -- 11/05/12 -- ServiceSource® (NASDAQ: SREV)

Reports revenue of $59.1 million, up 18% year-over-year
Achieves Adjusted EBITDA of $4.8 million, up 60% year-over-year and non-GAAP EPS of $0.02 per diluted share
Releases Renew OnDemand, the world's only cloud service application suite specially built to maximize recurring revenue

ServiceSource® (NASDAQ: SREV), the global leader in recurring revenue management, today announced financial results for the quarter ended September 30, 2012.

"During our third quarter, in the face of some challenging headwinds, we hit several key milestones, including strong new additions to ACV and expansions in our customer base, revenue at the high end of the range and outperformance on EBITDA. In addition, we released Renew OnDemand™, the industry's only purpose-built cloud application for maximizing recurring revenue," stated Mike Smerklo, Chairman and CEO of ServiceSource.

Revenue for the third quarter of fiscal 2012 was $59.1 million, an increase of 18% compared with $50.1 million in the third quarter last year.

Adjusted EBITDA for the quarter, which excludes stock-based compensation, was $4.8 million, compared with $3.0 million for the third quarter of 2011.

GAAP net loss for the third quarter of 2012 was $3.6 million or $0.05 per share, compared with a net loss of $2.8 million, or $0.04 per share, in the same period last year.

Non-GAAP net income for the third quarter of 2012, which excludes stock-based compensation and the amortization of internally-developed software, was $1.9 million, or $0.02 per diluted share. This represented an increase over the third quarter of 2011 non-GAAP net income of $1.1 million, or $0.01 per diluted share.

David Oppenheimer, CFO, added, "While we continue to be encouraged by our execution around our core growth strategies, our positive long-term outlook is balanced in the near-term by challenges in converting ACV to revenue for a handful of new engagements, the timing of signing new ACV in the year and weakening economic conditions, which are adversely impacting certain customers in our portfolio. As a result, we are revising our guidance with respect to revenue growth for the fourth quarter and fiscal 2012."

Recent Business Highlights

ServiceSource released Renew OnDemand, the world's only cloud application suite built specifically to maximize recurring revenue.
The company signed new customers, Qualcomm and CCH, a Wolters Kluwer business, as well as expansion agreements with BMC, Google and Microsoft, among others.
The Company was named among the Top 500 Software Companies by Software Magazine, and Montclair Advisors listed ServiceSource as one of the 2012 Top 250 SaaS companies in the world.

Business Outlook

The Company provided the following commentary on its expected business outlook:

Fourth quarter 2012: The Company expects revenue for the fourth quarter of 2012 to be in the range of $62.0 to $64.0 million, adjusted EBITDA of approximately $3.0 to $4.0 million, GAAP net loss of $5.8 to $6.8 million and non-GAAP net loss per share to be between breakeven a penny and two cents.

Adjusted EBITDA and non-GAAP net income exclude stock-based compensation and amortization of internally-developed software. Non-GAAP earnings per share assume a tax rate of 40% and 80 million fully diluted shares outstanding.

Full year 2012: Based on fourth quarter outlook, the Company is revising its revenue guidance for 2012 to be $238.0 to $240.0 million. Revised 2012 adjusted EBITDA guidance is estimated to be $15.5 to $16.5 million, GAAP net loss of $47.5 to $48.5 million and non-GAAP net income per diluted share in the range of six to eight cents. The Company's guidance for GAAP net loss reflects the $33.1 million one-time, non-cash tax charge recorded in the second quarter of 2012.

Adjusted EBITDA and non-GAAP net income exclude stock-based compensation, the one-time tax charge and amortization of internally-developed software. Non-GAAP earnings per share assume a tax rate of 40% and 79 million shares outstanding.

Quarterly Conference Call

ServiceSource will discuss its quarterly results today via teleconference at 1:30 p.m. Pacific Time. To access the call within the U.S., please dial (877) 293-5486, or outside the U.S. (914) 495-8592, at least five minutes prior to the start time. A live webcast of the call will also be available at http://ir.servicesource.com/events.cfm under the Events & Presentations menu. A replay of the webcast will also be available on the Company's website at http://ir.servicesource.com.

About ServiceSource International, Inc.

ServiceSource is the global leader in recurring revenue management. The world's most successful companies rely on us to maximize subscription, maintenance and support revenue; improve customer retention; and increase business predictability and insight. ServiceSource delivers results with Renew OnDemand™, the world's only cloud application built specifically to manage and grow recurring revenue, which can be combined with our industry-leading services and unique pay-for-performance model.

With over a decade of experience focused exclusively in growing recurring revenue, our services and applications are based on proven best practices and global benchmarks. The Company is headquartered in San Francisco, and has over $7 billion under management for customers in more than 150 countries and 40 languages.

ServiceSource, and any ServiceSource product or service names or logos mentioned above, are trademarks of ServiceSource International, Inc. All other trademarks used herein belong to their respective owners.

For more information on ServiceSource, visit http://www.servicesource.com. To connect with ServiceSource, visit us on Twitter, Facebook, LinkedIn and YouTube.

Forward-Looking Statements

This press release contains forward-looking statements, including statements regarding ServiceSource's future expected financial results, including its positive long-term outlook, the timing and our ability to convert ACV into revenue, our ability to improve the renewal rates of our customers, economic conditions and their impact on our customers, and the availability of our Renew OnDemand platform and its expected economic impact. These forward-looking statements are based on our current assumptions and beliefs, and involve risks and uncertainties that could cause our results to differ materially from those expressed or implied in our forward-looking statements. Those risks and uncertainties include, without limitation, changes in market conditions that impact our ability to generate service revenue on our customers' behalf; errors in estimates as to the service revenue we can generate for our customers; risks associated with material defects or errors in our software or the effect of data security breaches; our ability to effectively sell and implement our Renew OnDemand platform without significant disruptions to our customer base; our ability to adapt our solution to changes in the market or new competition; our ability to protect our intellectual property rights; general political, economic and market conditions and events; and other risks and uncertainties described more fully in our periodic reports and registration statements filed with the Securities and Exchange Commission, and can be obtained online at the Commission's website at http://www.sec.gov. All forward-looking statements in this press release are based on information currently available to us, and we assume no obligation to update these forward-looking statements.

The following tables reconcile (i) the business outlook net income (loss) to adjusted EBITDA; (ii) the business outlook net income (loss) to non-GAAP net income; and (iii) the business outlook net income (loss) per share to non-GAAP diluted earnings per share for the fourth quarter and full fiscal year.

ServiceSource International, Inc. Business Outlook Reconciliation of Net Income (Loss) to Adjusted EBITDA ($ in thousands, except per share amounts) Three Months Ended Twelve Months Ended December 31, 2012 December 31, 2012 ----------------------- ----------------------- GAAP Net income (loss) range $ (6,800) -- $ (5,800) $ (48,500) -- $ (47,500) Income tax (benefit) / expense 250 31,800 Interest & other expense, net 50 350 Depreciation & Amortization 3,500 10,600 --------- -- --------- --------- -- --------- EBITDA range $ (3,000) -- $ (2,000) $ (5,750) -- $ (4,750) Stock-based compensation 6,000 21,250 --------- -- --------- --------- -- --------- Adjusted EBITDA Range $ 3,000 -- $ 4,000 $ 15,500 -- $ 16,500 ========= == ========= ========= == ========= GAAP to Non-GAAP Reconciliation GAAP net income (loss) range $ (6,800) -- $ (5,800) $ (48,500) -- $ (47,500) Non-GAAP adjustments: Stock-based compensation 6,000 21,250 Amortization of internally-developed software 1,450 3,500 Income tax effect on non- GAAP adjustments and impact of normalizing the effective income tax rate 290 (110) 28,980 28,580 --------- -- --------- --------- -- --------- Non-GAAP net income $ 940 -- $ 1,540 $ 5,230 -- $ 5,830 ========= == ========= ========= == ========= GAAP diluted net income (loss) per share $ (0.09) -- $ (0.07) $ (0.61) -- $ (0.60) Non-GAAP adjustments: Stock-based compensation 0.08 0.27 Amortization of internally-developed software 0.02 0.04 Income tax effect on non- GAAP adjustments and impact of normalizing the effective income tax rate 0.00 0.36 --------- -- --------- --------- -- --------- Non-GAAP diluted net income per share $ 0.01 -- $ 0.02 $ 0.06 -- $ 0.08 ========= == ========= ========= == ========= Shares used in calculating diluted net income pershare on a non-GAAP basis 80,000 79,000 ========= ========= ServiceSource International, Inc. Condensed Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2012 2011 2012 2011 --------- --------- --------- --------- Net revenue $ 59,090 $ 50,088 $ 176,358 $ 144,722 Cost of revenue (1) 34,544 28,034 101,002 82,399 --------- --------- --------- --------- Gross profit 24,546 22,054 75,356 62,323 --------- --------- --------- --------- Operating expenses Sales and marketing (1) 13,512 12,144 41,158 34,664 Research and development (1) 4,416 3,547 13,295 9,650 General and administrative (1) 10,000 8,969 30,639 24,692 --------- --------- --------- --------- Total operating expenses 27,928 24,660 85,092 69,006 --------- --------- --------- --------- Loss from operations (3,382) (2,606) (9,736) (6,683) Interest expense (70) (27) (180) (349) Other income (expense), net 190 309 (124) (662) --------- --------- --------- --------- Loss before income taxes (3,262) (2,324) (10,040) (7,694) Income tax provision (benefit) 322 501 31,589 (21,152) --------- --------- --------- --------- Net income (loss) $ (3,584) $ (2,825) $ (41,629) $ 13,458 ========= ========= ========= ========= Net income (loss) per common share: Basic $ (0.05) $ (0.04) $ (0.56) $ 0.21 ========= ========= ========= ========= Diluted $ (0.05) $ (0.04) $ (0.56) $ 0.19 ========= ========= ========= ========= Weighted-average shares used in computing net income (loss) per common share: Basic 74,667 69,464 73,994 69,989 ========= ========= ========= ========= Diluted 74,667 69,464 73,994 72,208 ========= ========= ========= ========= (1) Includes stock-based compensation expense as follows: Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2012 2011 2012 2011 --------- --------- --------- --------- Cost of revenue $ 763 $ 470 $ 2,050 $ 1,286 Sales and marketing 2,180 1,111 5,836 2,981 Research and development 562 327 1,455 864 General and administrative 2,148 1,060 5,919 2,973 --------- --------- --------- --------- Total stock-based compensation $ 5,653 $ 2,968 $ 15,260 $ 8,104 ========= ========= ========= ========= ServiceSource International, Inc. Condensed Consolidated Balance Sheets (In thousands) (Unaudited) September 30, December 31, 2012 2011 ------------- ------------- Assets Current assets: Cash and cash equivalents $ 110,277 $ 65,983 Short-term investments - 42,882 Accounts receivable, net 58,506 54,095 Current portion of deferred income taxes 363 3,526 Prepaid expenses and other 6,965 7,945 ------------- ------------- Total current assets 176,111 174,431 Property and equipment, net 35,332 26,840 Deferred income taxes, net of current portion 1,496 30,238 Other assets, net 1,193 1,118 Goodwill 6,334 6,334 ------------- ------------- Total assets $ 220,466 $ 238,961 ============= ============= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 5,577 $ 8,617 Accrued taxes 1,026 924 Accrued compensation and benefits 16,775 21,749 Other accrued liabilities (including deferred revenue of $2,815 and $593 at September 30, 2012 and December 31, 2011, respectively) 9,237 7,639 Current portion of capital lease obligations 733 706 ------------- ------------- Total current liabilities 33,348 39,635 Long-term obligations 6,060 2,310 ------------- ------------- Total liabilities 39,408 41,945 ------------- ------------- Stockholders' equity: Common stock 8 7 Treasury stock (441) (441) Additional paid-in capital 203,667 177,796 Retained earnings (accumulated deficit) (22,213) 19,416 Accumulated other comprehensive income 37 238 ------------- ------------- Total stockholders' equity 181,058 197,016 ------------- ------------- Total liabilities and stockholders' equity $ 220,466 $ 238,961 ============= ============= ServiceSource International, Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Nine Months Ended September 30, ----------------------------- 2012 2011 ------------- ------------- Cash flows from operating activities Net income (loss) $ (41,629) $ 13,458 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 7,092 7,109 Loss on disposal of fixed assets - 46 Amortization of deferred financing costs 135 325 Accretion on premium on short-term investments 577 87 Deferred income taxes 32,534 (22,229) Stock-based compensation 15,260 8,104 Tax benefit from stock-based compensation (266) (2,382) Changes in operating assets and liabilities: Accounts receivable (4,237) 6,433 Prepaid expenses and other 734 (2,169) Accounts payable (1,087) 73 Accrued taxes 85 3,201 Accrued compensation and benefits (5,094) 3,410 Accrued payables to customers - (30,640) * Other accrued liabilities 5,050 789 ------------- ------------- Net cash provided by (used in) operating activities 9,154 (14,385) ------------- ------------- Cash flows from investing activities Acquisition of property and equipment (17,049) (8,784) Purchases of short-term investments, net (31,100) (47,854) Sales of marketable securities 52,050 961 Maturities of marketable securities 21,415 1,000 ------------- ------------- Net cash provided by (used in) investing activities 25,316 (54,677) ------------- ------------- Cash flows from financing activities Net proceeds from issuance of common stock in initial public offering and follow-on offering - 111,105 Proceeds from revolving credit facility - 23,424 Repayment of revolving credit facility - (23,424) Repayments of long-term debt and capital leases (234) (15,747) Payments of deferred debt issuance costs - (200) Proceeds from common stock issuances 10,279 7,198 Tax benefit from stock-based compensation 266 2,382 ------------- ------------- Net cash provided by financing activities 10,311 104,738 ------------- ------------- Net increase (decrease) in cash and cash equivalents 44,781 35,676 Effect of exchange rate changes on cash and cash equivalents (487) (35) Cash and cash equivalents at beginning of period 65,983 22,652 ------------- ------------- Cash and cash equivalents at end of period $ 110,277 $ 58,293 ============= ============= * Activity in 2011 resulted from $18.1 million in payments to Oracle/Sun and the related settlement of accrued payables owed to Oracle/Sun and amounts owed to the Company by Oracle/Sun.

Use of Non-GAAP Financial Measures

To supplement its financial statements presented in accordance with generally accepted accounting principles, or GAAP, ServiceSource also provides investors with non-GAAP gross profit, net income, net income per share and Adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the closest GAAP financial measure is presented in the financial tables below under the heading, "GAAP to Non-GAAP Reconciliation."

ServiceSource believes that the non-GAAP financial information provided in this release can assist investors in understanding and assessing its on-going core operations and prospects for the future and provides an additional tool for investors to use in comparing ServiceSource's financial results with other companies in the industry, many of which present similar non-GAAP financial measures to investors.

Non-GAAP gross profit consists of gross profit plus stock based compensation and amortization of internally-developed software.

Non-GAAP net income consists of net income (loss) plus stock-based compensation, amortization of internally-developed software and applying an income tax rate of 40% reflecting our estimated tax expense on our core operations. Accordingly, our non-GAAP calculation of net income has excluded a one-time, non-cash income tax charge of $33.1 million recorded during the period ended June 30, 2012 related to a valuation allowance for a substantial portion of the company's deferred tax assets. Results for the nine months ended September 30, 2011 reflect a one-time tax benefit related to the conversion of ServiceSource from a limited liability corporation to a Delaware corporation, which has also been excluded from the calculation of non-GAAP net income. Stock-based compensation expenses are expected to vary depending on the number of new grants issued, changes in the company's stock price, stock market volatility, expected option lives and risk-free rates of return, all of which are difficult to estimate.

EBITDA consists of net income (loss) plus depreciation and amortization, interest expense, other expenses, net, and income tax expense and a deduction for income tax benefit. Adjusted EBITDA consists of EBITDA plus non-cash, stock-based compensation expense. ServiceSource uses Adjusted EBITDA as a measure of operating performance because it assists the company in comparing performance on a consistent basis, as it removes from the operating results the impact of the company's capital structure.

These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles in the United States.

ServiceSource International, Inc. Reconciliation of Net Income (Loss) to Adjusted EBITDA (In thousands) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 2012 2011 2012 2011 ----------- ----------- ----------- ----------- Net income (loss) $ (3,584) $ (2,825) $ (41,629) $ 13,458 Income tax provision (benefit) 322 501 31,589 (21,152) Interest expense 70 27 180 349 Other income (expense), net (190) (309) 124 662 Depreciation 2,504 2,621 7,092 7,109 ----------- ----------- ----------- ----------- EBITDA (878) 15 (2,644) 426 Stock-based compensation 5,653 2,968 15,260 8,104 ----------- ----------- ----------- ----------- Adjusted EBITDA $ 4,775 $ 2,983 $ 12,616 $ 8,530 =========== =========== =========== =========== ServiceSource International, Inc. GAAP To Non-GAAP Reconciliation (Dollars in thousands, except per share amounts) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ----------------------- 2012 2011 2012 2011 ---------- --------- ---------- ---------- Gross Profit GAAP gross profit $ 24,546 $ 22,054 $ 75,356 $ 62,323 Non-GAAP adjustments: Stock-based compensation ( A ) 763 470 2,050 1,286 Amortization of internally- developed software ( B ) 432 389 890 1,196 ---------- --------- ---------- ---------- Non-GAAP gross profit $ 25,741 $ 22,913 $ 78,296 $ 64,805 ========== ========= ========== ========== Gross Profit % GAAP gross profit 42% 44% 43% 43% Non-GAAP adjustments: Stock-based compensation ( A ) 1% 1% 1% 1% Amortization of internally- developed software ( B ) 1% 1% 1% 1% ---------- --------- ---------- ---------- Non-GAAP gross profit 44% 46% 44% 45% ========== ========= ========== ========== Certain totals do not add due to rounding Operating Expenses GAAP operating expenses $ 27,928 $ 24,660 $ 85,092 $ 69,006 Stock-based compensation ( A ) (4,890) (2,498) (13,210) (6,818) Amortization of internally-developed software ( B ) (355) (789) (1,167) (1,922) ---------- --------- ---------- ---------- Non-GAAP operating expenses $ 22,683 $ 21,373 $ 70,715 $ 60,266 ========== ========= ========== ========== Net Income (Loss) GAAP net income (loss) $ (3,584) $ (2,825) $ (41,629) $ 13,458 Non-GAAP adjustments: Stock-based compensation ( A ) 5,653 2,968 15,260 8,104 Amortization of internally- developed software ( B ) 787 1,178 2,057 3,118 One-time tax items( C ) - - 33,072 (21,417) Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate ( D ) (949) (228) (4,394) (1,147) ---------- --------- ---------- ---------- Non-GAAP net income $ 1,907 $ 1,093 $ 4,366 $ 2,116 ========== ========= ========== ========== Diluted Net Income (Loss) Per Share GAAP diluted net income (loss) per share $ (0.05) $ (0.04) $ (0.56) $ 0.19 Non-GAAP adjustments: Stock-based compensation ( A ) 0.07 0.04 0.20 0.11 Amortization of internally- developed software ( B ) 0.01 0.01 0.03 0.04 One-time tax items( C ) - - 0.42 (0.30) Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate ( D ) (0.01) 0.00 (0.06) (0.01) ---------- --------- ---------- ---------- Non-GAAP diluted net income per share $ 0.02 $ 0.01 $ 0.03 $ 0.03 ========== ========= ========== ========== Shares used in calculating diluted net income per share on a non-GAAP basis 79,859 77,093 78,220 72,208 ========== ========= ========== ========== Footnotes to GAAP to Non-GAAP Reconciliation ---------------------------------------------------------------------------- ( A ) 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. ( B ) Amortization of internally-developed software. Included in our GAAP presentation of cost of revenue and operating expenses, amortization of internally-developed software reflects non-cash expense for certain software purchases and software developed or obtained for internal use. We exclude these expenses from our non-GAAP measures because we believe they are not indicative of our core operating performance. ( C ) One-time tax items. We elected to be treated as a corporation under Subchapter C of Chapter 1 of the United States Internal Revenue Code, effective March 1, 2011, and therefore became subject to federal and state tax expense beginning March 1, 2011. As a result of this tax election, we recorded a net deferred tax asset and a one-time non- cash tax benefit of $21.4 million in the first quarter of 2011. During the second quarter of 2012, we recorded a $33.1 million non- cash charge against a substantial portion of our deferred tax assets, much of which was recorded in connection with electing to be treated as a corporation, because the recoverability of these items for financial reporting purposes is uncertain. We have excluded these items from our non-GAAP measures because they are non-recurring and unique, they are non-cash in nature and are not indicative of our core operating performance. ( D ) 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, B and C noted above on our non-GAAP net income and adjusts the income tax rate to a normalized effective tax rate of 40%. ServiceSource International, Inc. Revenue by Segment (In thousands) (unaudited) Three Months Ended September 30, ----------------------------------------- 2012 2011 ------------------- ------------------- % of % of $ Revenue $ Revenue --------- -------- --------- -------- NALA $ 37,647 64% $ 31,952 64% EMEA 14,159 24% 12,365 25% APJ 7,284 12% 5,771 11% --------- -------- --------- -------- $ 59,090 100% $ 50,088 100% ========= ======== ========= ======== Nine Months Ended September 30, 2012 2011 ------------------- ------------------- % of % of $ Revenue $ Revenue --------- -------- --------- -------- NALA $ 110,720 63% $ 88,383 61% EMEA 45,425 26% 41,612 29% APJ 20,213 11% 14,727 10% --------- -------- --------- -------- $ 176,358 100% $ 144,722 100% ========= ======== ========= ========

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