Greenidge Generation Holdings Inc. (GREE) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Support.com First Quarter 2015 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 follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to introduce your host for this conference call, Mr. Greg Wrenn, General Counsel of Support.com. You may begin, sir.

Thank you, operator. 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 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 web page. 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 President and CEO, Elizabeth Cholawsky.

Thanks, Greg. Good afternoon, everyone and welcome. I’ll start with some key financial results, and then talk in more detail about our operations this quarter. I’m pleased to report that revenue for the first quarter of 2015 was $23.2 million, which was above our guidance of $22 million to $23 million. Non-GAAP loss from continuing operations came in at $0.03 a share, which was within our guidance of a $0.01 to $0.04 loss per share. Our focus during Q1 was on building our sales capabilities for both services and our SaaS product, Nexus. We’re following a standard SaaS go-to-market model for Nexus, which is a metric-driven methodology to develop leads, nurture them with marketing campaigns and sales development reps and close the deals with inside or field sales people. We entered Q1 recruiting for each type of sales function in the model, and I’m pleased to report that during the quarter, we added professionals in all areas. This included bringing on-board our first field SaaS sales person and a new VP of SaaS sales. These new hires are season pros with deep experience in subscription software sales and contact center technology. We’ll continue to build-out our sales capabilities and plan to add to our team in the coming months. With the team that has been built in Q1, we had a proven go-to-market process that is working well for Nexus. The Nexus value proposition is continuing to resonate with our target customers, including premium tech support providers, product companies, warranty providers, and Internet of Things environments. Additionally, we’ve made progress building our partnership program which was launched at the end of Q4 2014. We believe that partnerships are an important sales channel for Nexus and that Nexus is attractive to potential partners. The first results from our new partner program are proving that our beliefs are well founded and that the unique capabilities of Nexus can fill a support gap in the contact center ecosystem. This is shown by one of our new partners BeQuick, a global enabler of mobile virtual network operators. Nexus is particularly suited to support these operators because of the connectivity that we can provide to a wide variety of devices that operators are required to support, and the streamlining of their complex troubleshooting that Nexus Guided Paths can provide. Through our partnership with BeQuick, we now have reached into the rapidly growing market of mobile virtual network operators, comprised of around a 175 million subscribers who have needs, we can easily address. As a result of our go-to-market progress in Q1, our opportunities are increasing quarter-over-quarter and we are bringing new Nexus customers onboard. During Q1, the number of sessions and the number of users both grew by more than 50% over the prior quarter. As important as growing the number of users is how much they use the product that is shown by the number of sessions. When new sessions grow faster than new users as they once again depressed this quarter, it’s a clear sign that the customers are receiving more value from Nexus. Usage also indicates that Nexus is becoming a key part of enhancing service delivery for our customers, including companies like iOPEX, a tech support provider for premium brand Product Company. iOPEX shared in a recent webinar, which you can find on our website. The Nexus decreased the cost of a service interaction by 18%, an increased expert level productivity from 75% to 88%. We are aware of proof points like this; continue to build the reputation of Nexus in the market. Based on our progress in our recent build out of our broader SaaS sales team in Q1 2015, which provided our first full quarter of operating data. We now feel confident that we can exit this year with annual recurring Nexus revenue of at least $1 million and between 1,300 and 1,700 agent licenses. Well it’s still early in driving Nexus to market. We felt that it was important to offer investors specific quantitative targets for this calendar year. During the quarter, we continued to add capabilities to Nexus, making it more useful and attractive to our target market. As you may have seen in yesterday’s press release, one example of our new capabilities is the Nexus SupportCam. SupportCam allows a consumer to receive help by using the camera on their smartphone to show a technician in the contact center exactly what the consumer is looking at. There are plenty of SupportCam use cases and an obvious one is when wiring is involved. Helping end-users hook up TVs and entertainment systems is a traditional hornet’s nest in the support role, and letting your remote agent actually look at the back panel of a device, can drastically reduce the time it takes to resolve the problem. The Nexus SupportCam is differentiated by its integration with Guided Path, the heart of our Nexus product. Support.com is also differentiated by the Nexus ability to provide analytic insight into each part of a service interaction, allowing for continual optimization of processes. We are also building out Nexus capabilities to address issues in the Internet of Things. IoT is one of the hottest topics in technology. But even though it’s at the top of the Gartner hype cycle it’s not just a fad, it’s real. There are going to be somewhere between 33 billion to 50 billion devices hooked up to the Internet, five years from now. But its only lately the people have started to talk about how it’s all going to be supported. Based on some research we’ve recently conducted and the Norway support problems, our efforts exposed, IoT will need a new support paradigm. We are creating that paradigm in a significant and specific way. While most focus has been on the devices themselves, it seems like LIFO, thermostats, motion sensors, lease detectors and dozens more, it turns out that the tricky part is getting them all connected to do what they’re supposed to do. And when something doesn’t work in the IoT world, it can be extremely difficult to figure out exactly what caused the problem. Let me give you an example from research we did. One of our test scenarios involved buying basic home automation packages from a variety of vendors and then self installing. In one instance of this test, we couldn’t get the Internet connected to home security camera to work we call the support line. The agent first had to verify that the hub was connected to the network. The agent had no remote access and this took about 25 minutes. The security camera still didn’t work, so the agent spent over an hour working our tester through half a dozen attempts to do the pairing of the camera with the hub, which included asking our tester to go into their Windows command line and examine IP addresses and proxies. This is not something you want to do to your average consumer. The agent eventually gave up, assumed the camera was bad and suggested that we return the whole kit back to the store. Well, we didn’t return it. We persevered independently and found out that the camera’s IP address was being reported incorrectly by the installation software. Much of is the port headache, including the excessive agent time, consumer frustration, as well as a potential product return could have been avoided by using Nexus. We’ve integrated Nexus at the platform level, which gives Nexus and the agents’ using the product visibility into system and device level information such as the incorrect IP address from our test scenario. Given the criticality of platforms in the new world of IoT, today we’re excited to announce our first major platform partners ThingWorx. ThingWorx is one of the first platform offerings for the connected world and now our Nexus software is embedded directly into their technology. This means that any solution provider for IoT devices using the ThingWorx platform can put a Nexus button right in their app, allowing the end-user to contact support with a single click, and allowing support agents to control and receive information from ThingWorx connected devices. These capabilities give IoT device manufacturers a way to avoid the support pitfalls that we exposed in our research. Turning now to services. This quarter, our revenue upside was primarily driven by Comcast. We received to request to supply additional hours, beyond what we had visibility into at the start of the quarter. Once again, we were able to respond to Comcast increased needs, driving our over performance in Q1 revenue. We do know that Comcast is working hard to reduce the volume of calls from their wireless gateway customers. Looking forward to Q2, we will see the impact of the Comcast call reduction efforts, as it is reflected in the forecast that Comcast has provided to us. We continue to perform well for Comcast and are meeting or exceeding their operational metrics, such as line adherence and voice of the customer, which is the customer satisfaction measure. This type of performance furthers our strong relationship with our biggest partner. We continue to focus on new customer acquisition for services and we’re adding new names. The quantity and quality of prospects we are talking with are increasing and the pipeline is more robust now than it was even 90 days ago. In addition to new service customer adds, we’re in negotiations with a number of IoT prospects and others. Many of our existing services customers grew in Q1 and we are in the early stages of revenue generation from new programs. These new programs take time to ramp up, but the revenue streams will build over time. My goal in joining Support.com was to transition the company to a balance between a cloud-based support technology offering and our technical services programs. Execution of this strategy is going well. With the exception of Nexus, which is in its nascency, all other revenue generating areas namely services and end-user software do operate at positive gross profit dollars. This supports our ability to invest back into the business and further our strategic goals. Before I close, I’d like to mention that we will be hosting an Investor Day in Redwood City, California on Thursday, September 10. We’ll be updating you with specific details in the near future, but I wanted to get the date on your calendars. At our Investor Day, we will give you a detailed view of Nexus including a demonstration and discussion with customers. You’ll be able to meet the executive team and have a chance to get to know Support.com better. I look forward to seeing many of you in person out here on the West Coast. We also will be webcasting the event for those of you who can’t participate in person. Let me wrap up my remarks on Q1 by saying that we made progress on both services and Nexus, with both are existing and new customers. I’m seeing more interest in the company now than at any other time during my tenure. Our teams are getting stronger and driving harder and harder towards our goals. It’s been a good start to 2015 and I’m looking forward to reporting more progress on our strategy throughout the rest of the year. With that, let me turn the call over to Roop to discuss our financials. Roop?

Thank you, Elizabeth. Total revenue for Q1 was $23.2 million compared to $18.6 million in Q1 2014, and $22 million in Q4 2014 or year-over-year growth of 24%. Services revenue for the quarter was $21.9 million compared to $17.1 million in Q1 of 2014, and $20.6 million in Q4 of 2014. Services revenue increased year-over-year and sequentially due to higher revenue across various partners. As Elizabeth mentioned, Q1 services revenue also benefited from additional service hours requested by Comcast beyond their committed forecast and the expansion of Comcast, Xfinity Home. Software and other revenue declined year-over-year to $1.3 million in Q1 2015, from $1.6 million in Q1 2014, the most comparable to $1.3 million in Q4 2014. The Q1 2015 and Q4 2014 revenue mix was 94% services and 6% software compared to 92% services and 8% software in Q1 2014. In Q1, both Comcast and Office Depot contributed more than 10% of total revenue. Overall, non-GAAP gross margin for Q1 was 20% compared to 30% in Q1 2014, and 22% in Q4 2014. In Q1, non-GAAP services gross margin was 16% compared to 24% in Q1 2014, and 17% in Q4 2014. During Q1 2015, gross margins were affected by the mix of revenue from our partners. Non-GAAP software gross margin was 89% in Q1 of 2015, 85% in Q1 2014, and 87% in Q4 2014. Total non-GAAP operating expenses in Q1 2015 came in at $6.1 million, an increase from $5 million in Q1 2014, and $5.8 million in Q4 2014. The year-over-year and sequential increase as a result of our previously stated plans to make incremental investments in Nexus development and go-to-market capabilities. On a non-GAAP basis, loss from continuing operations for Q1 was $1.4 million or $0.03 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 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 sheet. Total cash, cash equivalents and investments were $73 million at March 31, 2015 compared to $73.8 million at December 31, 2014. DSOs for the quarter were 60 days as compared to 61 days in the prior quarter. At March 31, less than 1% of our outstanding receivables were greater than 90 days old. Deferred revenue was $2.6 million at March 31, compared to $2.7 million at December 31. Total head count at March 31, 2015 was 2,317 consisting of 212 corporate employees and 2,105 work from home technicians. This compares to a December 31 head count of 2,023 consisting of 179 corporate employees and 1,844 works 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 2015, we expect our revenue range to be between $20 million to $21 million. Our guidance reflect seasonality with our retail partners and as Elizabeth mentioned, Comcast focus on reducing overall calls per customer for their wireless gateways. For Q2, we expect the revenue mix similar to Q1 2015, 94% services and 6% software. We expect the overall non-GAAP gross margin and non-GAAP software gross margin to be similar to Q1 2015. Non-GAAP operating expenses are expected to increase sequentially by approximately 15% to 20%, as we continue to invest in Nexus development and go-to-market capabilities. Based on the foregoing, our outlook for Q2 non-GAAP results from continuing operations is a loss of $0.05 to $0.08 per share. As we previously discussed, our quarterly non-GAAP results are generally indicative of our cash usage or cash generation excluding CapEx investments. It’s important to note that other than Nexus, our services and end-user software areas provide positive gross profit dollars. These positive gross profit dollars are being invested into our product and go-to-market initiatives. With that, I would like to turn the call back to Elizabeth.

Thanks, Roop. Now I will turn the call over to the operator for your questions. Operator?

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

Yes. Thanks for taking my questions.

Yeah.

So, I guess a couple of questions were on the service business, specifically, the gross margin this quarter and what it looks like to be next quarter. I guess anymore color you can provide into the kind of mix that impacting service gross margins and it’s – this kind of a run rate on a percentage basis for service gross margins going forward even as we add potentially new partners there and new customers there?

Yeah Chad, this is Roop. So, the gross margins in Q1 as we had indicated were affected by the mix of revenue and the strength with Comcast especially. And as we look at Q2, as we’ve indicated the gross margins will be similar to Q1. In terms of additional color I would say, we’ve got within our services pipeline, sales pipeline, programs that are at or above our corporate gross margin averages. They are going to be smaller in nature and will take time as we’ll execute on our sales strategy there. And as Nexus continues to gain traction longer term, we’ll see that contribute to a higher gross margin level, but that’s from a longer term perspective.

Okay. And then the color – additional color you gave on Nexus is it’s great and I think it’s what people were looking for. I guess Elizabeth, how should we think about kind of sales head count. I know you gave kind of an existing run rate from a recurring revenue standpoint. And then I think kind of a seat or agent standpoint. So how should we think about the sales ramp around Nexus from here to year end?

Yeah. Well, what I said before, and I think it still applies is that we will build up the go-to-market capabilities commensurate with the traction that we are seeing with Nexus in the marketplace. So, therefore, we are seeing some higher growth than we anticipate with current staff. We got the flexibility to add there. But right now, we are still in a position where we are adding the heads. We don’t break out the sales head count separately from everything else, but you can see given the numbers that we’re continuing to investment in Nexus, and we’ll do so as long as we see the growth.

So, I guess another way of asking it is. I guess, so the $1 million exit run rate that you’re talking about, do you expect to get there from the partnerships and the sales head count that you have. I am just thinking about sales cycle ramp – sales people ramp time and product, time to productivity, is that $1 million exit rate with what you have today from a partnership in sales head count standpoint or does that do you have to get couple more partners that actually do something and fix more salespeople that are actually productive by year end to get there?

Yeah. I got your question now. Yeah. We will be continuing to add and will be necessary to do that to get to the run rates that we want to see with Nexus exiting the year. But, that’s all been planned in to how we’re ramping up the products and it certainly not undoable. So, we’ll be adding to both direct sales and partners.

Got it. And then the last for me. Shifting back to the service business, I know, you guys don’t like to guide more than a quarter off, but I mean, how should we think about the service business looking out the next couple of years from a strategy standpoint. I know, you’re actively looking at adding new partners and so forth, but should we think about that business as being a growth business looking out a couple of years to the service fees?

Yeah. I do believe that the services programs will continue to be growth for Support.com. The nature is changing somewhat, and the types of customers that we’re seeing is changing. As I said before that you don’t see necessarily these mega programs from these huge companies, you see innovators and smaller programs making their way in the complex technical support. But the other area that’s really interesting and gives me confidence that we will see growth in the whole IoT space. So, the pipeline of services opportunities is really being influenced by that and we’re hoping very soon to be able to talk in more detail about some of those prospects.

Got it. Thank you.

You’re welcome. Thanks, Chad.

Thanks, Chad.

Our next question comes from Stan Berenshteyn with Sidoti and Company.

Hi.

Hi, Stan.

Hi. Thank you for taking my questions.

Sure, Stan.

Yeah. I just wanted to get a bit more color on what you said regarding Comcast looking to decrease the amount of calls, do you have any indication of how they plan on doing that considering calls tend to come from the end user?

Yeah. Comcast has some initiatives around as we’ve indicated call volume reductions and they are looking at doing it from our understanding and what’s been shared with us in a few different ways, one is they continue to work with their OEMS on improving their hardware, also they are improving their guided paths if you will that agents are supposed to use and maybe most importantly they are improving the tier 1 compliance and delivery – service delivery and just as a reminder, we are at a tier two level and so the calls that we get are not direct from the end consumer, they go through a tier 1 level and so as the call compliance improves at that tier 1 level, that would reduce our call volume. So those are a few different ways that they’ve mentioned to us.

Okay. So in light of that is the agent head counts are growing primarily due to Comcast though, or this other businesses driving growth in agents?

Yeah. In Q1, we had growth as we’d indicated from various partners as well as Comcast which including the wireless gateway and XFINITY home side, so that growth I think you can attribute to various programs, we don’t guide head count from a future looking standpoint and obviously as we’ve suggested our guidance for revenue is $20 million to $21 million for Q2 and we do have a variable cost structure within our services area and so as need be we would adjust our cost structure appropriately.

Okay. And what kind of color can you provide regarding the mix and expenses that we can expect from your operating costs going up kind of maybe a split between R&D, sales and marketing, where can we see the impact?

Yeah, I mean we don’t split out operating expenses in that granular detail. But as you would imagine, Stan, the continued investment will be in the product and you can see from the announcement of SupportCam and other capabilities that we’ve added within Nexus. That’s a key area for us in focus in the go-to-market areas that Elizabeth mentioned that will drive our ability to hit the annual recurring revenue number that we’ve stipulated.

Great. And the last question, you spoke about the MVNO market being a source of opportunity. Can you maybe expand that a little bit?

Yeah. So, there’re two things about it that are interesting to us through our partner BeQuick, one, is that that’s a growth market. So, there are more, more MVNOs that are coming on now and BeQuick has access to them. But even more importantly, that the use case of Support with MVNOs is really well suited to Nexus. There’s two things about it, there’s lots of different device types. They just don’t have a homogenous device that they’re selling to their subscribers. There is android, there’s smartphones, there is tablets, and everything in between and Nexus is great with that, because we have had full connectivity and as I mentioned in the prepared remarks, now extending into IoT devices. Also the kinds of problems that those operators experience, usually end up to be on the complex end of things. And again, that’s where Nexus is particularly well suited with guided path to simplify those complex technical problems and make them easy to resolve and efficient for the operators. So, we think the market is really a good one to be involved with.

Okay. Thank you.

Sure. Thanks, Stan.

Thanks, Stan.

Ladies and gentlemen, we only have time for one more question. And our last question comes from Mike Latimore with Northland Capital.

Hey, thanks. Just on the ThingWorx announcement, is this something that would generate revenue on new deals for them, or is it something that could push out to current customers?

It’s really the latter and it’s really the Nexus would be used by those service providers that have their devices, their IOT things that work on the ThingWorx platform.

Okay, guys. And then just – you talked about the $1 million run rate goal and the certain number of agents there related to that. Does that kind of come out in ARPU, kind of monthly ARPU is sort of $50 or so per user, that what you’re looking at right now with Nexus?

Yeah, I mean if you’re doing the math, you can get in that range and as I said before, we’re still seeing and still really kneeling down what the long-term agent seat prices going to be, but it’s still in the $50 to $100 range, and it’s still really dependent on the size of the customer and really what their individual use cases. So, there’s still some discovery to be done around what that’ll end up to be, but right now, the way that with today that we have and the way that we’re looking at forecast that’s the number you get to.

Yeah. And on the services business, I mean you mentioned it’s a growth business long term, is that largely tied to kind of new customers coming on or kind of after Comcast say right sizes here, do you see them growing as well in the mix?

Yeah. I think, our view point that it’s a growth business it’s based on the new prospects and our existing customer still growing, specifically the Comcast. I don’t know that I can really comment on what they’re going to do long-term, but putting them aside from what we know with our services programs, we believe it’s a growth business.

Okay. Great.

Thanks Mike.

Thanks Mike.

I would now like to turn the call back over to Elizabeth for closing remarks.

Thanks everyone for your time today and I look forward to seeing you as many of you can make it at the Investor Day. Thanks now.