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…

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…

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.