Greenidge Generation Holdings Inc. (GREE) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Support.com First Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference, Greg Wrenn, General Counsel to Support.com. You may begin.

Thank you, operator. Good afternoon, everyone. Joining me here today is Jim Stephens, our Board Chairman and Interim 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 the 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'll 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'll turn it over to our Board Chairman and Interim CEO, Jim Stephens.

Hi, everyone. As a reminder, I joined the Support.com board in 2006 and was named Chair in 2010. I'm really glad to be here today. As you know, Josh Pickus left Support.com on April 1. I began working full time at our headquarters starting on March 25. Josh and I overlapped for a week, and I've been working daily with the company's leadership team since that time. I'm enjoying working with the team. Today, I'm pleased to report that our financial results for the first quarter of 2014 exceeded our expectations. Total revenue for Q1 was $18.6 million and exceeded our outlook of $16.7 million to $18.2 million. Non-GAAP income from continuing operations for the quarter came in at $0.01 per share, also ahead of our prior outlook of a loss of $0.01 to $0.04 per share. Roop will take you through the numbers in a few minutes, but I'd like to highlight a few things. First, an update on our CEO search. I, along with the nominating and governance committee, are leading the search for a new CEO. The search process is going well, and we have narrowed the field to a short list of candidates who are in final consideration. These final candidates are all impressive and experienced. And based on where we are today, I'm confident that we will have a new CEO named during the second quarter. Each of our top candidates brings a strong product-oriented background, along with deep operating experience. They have all seen success in their prior career paths, growing high-performing organizations, qualities that we feel are important for the company's future. Let me next provide you with a business update. Within services, we continued to perform well for our customers. The Comcast Home Networking bundle program continued to grow during the first quarter, and we managed the associated increase in volume and exceeded our operating targets. We expect the Home Networking bundle program to grow in the second quarter and to maintain that level for the remainder of the year. As we discussed on our last conference call, our relationship with Comcast has expanded and diversified. The referral program at Comcast for premium technical support provided a full quarter of revenue. We're happy with this program's results and expect it to grow in Q2. Last quarter, we indicated that Comcast had selected Support.com to provide remote support for Xfinity Home, Comcast's 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. We are on track to support this home security service later this summer. Our support will be included in the Xfinity Home offering, and we expect this program to have a similar margin profile to the Home Networking support bundle. The home security and automation market is just one example of the growing opportunities within the Internet of Things. Research and Markets, a third-party analyst firm, forecast the global home automation system market to grow at a compound annual growth rate of 55% from 2013 to 2018. We continue to evaluate this emerging opportunity, and we plan to be a leader in providing services for this market. We are working closely with the new Office Depot on their integration process, and our service program with them performed well sequentially. Our program with DISH continued to show growth as it rolls out within their service territories. DISH has expansion plans for the program in their channels, including marketing our services in conjunction with customer call support and in-home support. We continue to see very high customer satisfaction with our services. We are pleased with the results in the first quarter and the trends within this program. Turning to software. During the quarter, we achieved our goals with our end-user software product line. The end result is that we have found the right combination of marketing spend to generate profitable revenue, albeit at a lower level of revenue than in prior years. Within our cloud software area, revenue continued to grow in the first quarter. During the quarter, Inbound Call Experts deployed our SaaS platform, and we're pleased with the growth of this program so far. Inbound Call Experts currently has hundreds of agents using our platform, and they've experienced productivity increases as a result. We are currently working on a next generation of our Nexus Service Platform. This new cloud-based software product is actively being tested by some of our customers in a controlled beta environment. While I can't go into the specifics now, this next-generation platform will leverage our deep technology expertise and our experience in delivering 20 million services to expand our opportunities within the Internet of Things. We are encouraged by early customer feedback and look forward to telling the marketplace more about our product and plans later this quarter. Now I'll turn the call over to Roop to take you through the financials.

Thank you, Jim. Total non-GAAP revenue for Q1 was $18.6 million compared to $20.2 million in Q1 of 2013 and $24.9 million in Q4 of 2013. In Q1 2014, revenue was down 8% year-over-year and 25% sequentially. Services revenue for the quarter came in at $16.7 million compared to $16.4 million in Q1 of 2013 and $22.4 million in Q4 of 2013. Services revenue in Q1 2014 declined sequentially, as expected, primarily due to the termination of the Comcast Xfinity Signature Support program at the end of Q4 2013, as we've discussed on prior calls, offset by growth from the Comcast Home Networking support bundle. Software revenue declined year-over-year and sequentially to $1.9 million in Q1 2014 from $3.8 million in Q1 2013 and $2.5 million in Q4 2013, due to our previously discussed decision to end unprofitable advertising arrangements for our end-user software products. The Q1 2014 revenue mix was approximately 90% services and 10% software compared to 81% and 19% in Q1 of 2013 and approximately 90% and 10% in Q4 of 2013. In Q1 2014, both Comcast and the new Office Depot contributed more than 10% of total revenue. Overall, non-GAAP gross margin for Q1 2014 was 30% compared to 53% in Q1 2013 and 44% in Q4 of 2013. In Q1, non-GAAP service gross margin was approximately 23% compared to 44% in Q1 2013 and 39% in Q4 of 2013. Q1 service gross margin benefited from the release of the final Xfinity Signature Support deferred revenue balance, which carried no associated cost of revenue. The non-GAAP service gross margin decline year-over-year and sequentially is due to the impact of a higher mix of the lower-margin Comcast Home Networking support bundle in Q1. Non-GAAP software gross margin was 87% in Q1 2014, down slightly from 92% in Q1 2013 and 88% in Q4 2013. Total non-GAAP operating expenses in Q1 2014 came in at $5 million, a decrease from $7.6 million in Q1 2013 and from $5.7 million in Q4 2013. On a non-GAAP basis, income from continuing operations for Q1 2014 was $490,000 or $0.01 a share. This was higher than our first quarter outlook range, which was a loss of between $0.01 and $0.04 per share. We do not anticipate incurring meaningful federal or state income taxes for the foreseeable future as a result of our net operating loss carryforwards. However, to the extent that we have future taxable income, the company will be subject to alternative minimum taxes in certain taxpaying jurisdictions. Turning now to the balance sheet. Total cash, cash equivalents and investments were $75.5 million at March 31, 2014, compared to $72.4 million at the end of Q4 2013, reflecting a net cash increase of $3.1 million during Q1 2014. DSOs for the quarter were 58 days as compared to 52 days in Q4. At March 31, 2014, less than 2% of our outstanding receivables were greater than 90 days old. Deferred revenue was $3 million at March 31, 2014, compared to $3.4 million at December 31, 2013, a decrease of $324,000 due to the termination of Comcast's Xfinity Signature Support program in Q4 2013. Total headcount at March 31, 2014, was 1,489, consisting of 155 corporate employees and 1,334 work-from-home technicians. This compares to a December 31, 2013, headcount of 1,344, consisting of 165 corporate employees and 1,179 work-from-home technicians. In addition to our work-from-home technicians, we use contract labor in our operations. Turning to guidance. For the second quarter of 2014, we expect our revenue range to be between $18.8 million to $20.3 million, with the revenue mix similar to Q1 2014 of 90% services and 10% software. We expect overall non-GAAP gross margin to be approximately 20%. We expect our non-GAAP software gross margin to decline to approximately 82% to 84%, and non-GAAP operating expenses to increase sequentially by approximately 10% to 15% as we invest in our Nexus Service Platform initiative. Based on the foregoing, our outlook for Q2 non-GAAP results from continuing operations is a loss of between $0.02 and $0.04 per share. With that, I'd like to turn the call back to Jim.

Thanks, Roop. We're pleased with our first quarter's performance. I'm excited about what I've seen in the offices here and the opportunities ahead for Support.com. Now I'll turn the call over for your questions. Operator?

[Operator Instructions] Our first question comes from the line of Chad Bennett with Craig-Hallum.

I guess just a couple of questions. So how much of an impact did the Xfinity Home relationship have on revenue in the quarter, if any? And can you provide any more color on potentially what that means, looking out a year?

So Xfinity Home didn't have any impact in Q1. It is launching in the summer of -- in Q2. And in terms of outlook for it, as we don't give specific information around that, but we do anticipate that, that program will launch here. And it is also a productive-hour basis model, so the profile of that will be -- margin profile will be similar to the Home Networking bundle program.

Okay. And then what should we expect -- the 20% gross margin guidance that you gave for the June quarter, is that kind of a baseline we should think about going forward? Assuming kind of the mix stays the same? Or what are the puts and takes to that going forward?

Yes. Chad, as you know, we don't give specific guidance beyond the current quarter that's in front of us. However, that's not an unreasonable view in terms of -- depending upon mix, as you've indicated, to have that sort of margin profile.

Okay. And then it sounds like the existing Comcast bundle program will ramp again, obviously, in the June quarter. But I think you indicated that it will level off from there. I guess, is that -- assuming, obviously, they have all the regions rolled out. And is that assuming kind of their hardware gateway penetration is kind of mature at that point? Kind of why would it level out then?

So I can't -- we can't speak to the Comcast deployment of their wireless gateways. We don't get visibility to that. But we have experienced sequential growth from Q4 when the program really launched to Q1, and we anticipate further growth from Q1 to Q2. We are managed in that program by Comcast's forecast. And to date, we have met those expectations within that forecast. And as we move forward, if those forecasts have future growth, we feel very confident in our ability to support further growth. But at this time, what we have is reflected in our comments so far, and within our guidance.

Our next question comes from the line of John Campbell with Stephens.

So I guess, first off, I mean, it looks like you guys have done a great job just kind of tapering that sales and marketing spend over the last 2 quarters. But with that marketing spend being, as a percent of rev, 8% or 9% range, is that a pretty normal run rate we should consider going forward?

At the -- as we look at things right now, we think that is a reasonable run rate. We do -- as indicated in the guidance comments I've provided, we do anticipate 10% to 15% uptick from the Q1 operating expense line. We do anticipate some further investments in R&D and sales and marketing. So if you contemplate within the guidance comments that we provided, we think you're in good shape.

Okay, great. And then I might have missed this, but any share repurchase in the quarter and then maybe just expectations for the remainder of the year?

We did not have any share repurchase in the quarter. And currently, as the board and management evaluates such things, we think our uses of cash has opportunity for investment back into the business at this time, and we continue to invest into the business.

Our next question comes from the line of Mike Latimore with Northland Capital.

You mentioned the final Xfinity Signature Support balance helped gross margin. I guess, can you just quantify that a little bit? Or was your revenue affected?

Yes. That deferred balance was, as we'd indicated and as you can see in the deferred balance change, around $300,000, a little bit more than that. And there was no cost of revenue associated with that. So it drops straight to the bottom line, and it's the remaining balance that was left over from the Xfinity Signature Support.

Okay. And then as it relates to the home security opportunity, do you have a sense of how many agents are going to be needed per 1,000 homes? For example, like, what would be the ratio there versus what you have with the bundle that you currently are operating with?

Yes. They are distinct programs, Mike. And at the end of the day, Comcast, again, manages us with forecast. So the approach to the management of the program is through the Comcast forecast, and they don't correlate it to any other metric that they may look at internally. We don't have visibility to that. We manage through the forecast, and we anticipate that we're going to be able to support that ramp that they have.

Okay. And I think, on the last call, you talked about a general run rate this year for Office Depot, or at least the changes here relative to last year. Has that outlook changed at all in the last -- since the last quarter?

The Office Depot relationship is very strong. We do have some seasonality within the Q2 time frame. That is reflected within our guidance. And as we look at -- further out into the year, as they've announced some closure possibilities, we think that there may be an effect. However, we feel confident that they will continue to be a greater than 10% customer for us.

[Operator Instructions] Our next question comes from the line of Matthew Paul with Sidoti & Company. Matthew Paul - Sidoti & Company, LLC: I just wanted to follow up with the Office Depot question to see if you guys could further clarify for us the runoff from year-to-year in revenue due to store closures and whatnot.

Yes. Matthew, first of all, glad to have you on the call here for the first time. And in terms of giving that level of specificity, we don't typically provide that level of detail within our programs. As we've indicated and as Office Depot has indicated recently or within the past 90 days, they do anticipate store closures. And as we work with them, because of our strong relationship, we will have that reflected in future periods. And again, I think we can -- we feel confident in their ability to continue with us and be a greater than 10% customer. Matthew Paul - Sidoti & Company, LLC: Okay. And moving forward, the decrease in software gross margin, is that more or less the effect of growing your SaaS platform out? I think you said you expect further penetration in Q2 moving forward throughout the year.

Yes. As Jim noted, we've got a beta currently with our Nexus Service Platform. There's investments that we've contemplated in our plan for this year around our SaaS platform, and that is having an effect on those gross margins.

I'm not showing any further questions at this time. I would like to turn the call back over to Jim Stephens, Chairman and Interim CEO, for closing remarks.

Great. Thank you, everyone. We appreciate you joining the call, and we look forward to speaking with you again. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a good day.