Greenidge Generation Holdings Inc. (GREE) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Support.com Second Quarter Earnings 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, this conference is being recorded. I would like to introduce your host for today's conference Michelle Johnson, General Counsel, Ma'am, you may begin.

Thank you. 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 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 on 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 Michelle. Good afternoon, everyone and welcome to our second quarter 2016 earnings conference call. In today's call we will discuss a number of accomplishments that continue to show progress in growing our cloud offering and diversifying our services programs. Let me start with a quick overview of the financials for the quarter and then Roop will discuss further details later in the call. We met the revenue and EPS guidance that we provided. Revenue came in at $14.9 million at the high end of our revenue guidance of $14.2 million to $15 million. Non-GAAP loss from continuing operations for the quarter came in at $0.09 per share within our guidance of a loss of $0.08 to $0.10 per share. [At the order] where we implemented a cost reduction plan in April where we reduced our corporate headcount by approximately 20%. We have completed the actions as planned and we'll see the expected savings in Q3 and the full impact in Q4 and beyond. Turning first to our SaaS online Support.com cloud, I am pleased to say that the second quarter saw a number of key accomplishments. We won our first enterprise customer, expanded sales to additional vertical market segments and continued growing customer usage. These accomplishments propel the second quarter's new bookings to be the highest number in a quarter that we had to date. These events further validate our cloud offering's compelling product market fit and the capabilities of our streamlined sales and marketing organizations. This allows us to reaffirm our 2016 goals of achieving $2 million in annual recurring revenue and 2,600 to 3,000 seats. In the second quarter, we closed our first enterprise deal with a large company that is in eCommerce marketplace connecting consumers to local businesses. Enterprise customers are important to growing our cloud offering as they have brand names and multiple hundreds to thousands of seats in their services organizations. The values that our new customer sees in our cloud offering centers on the dynamic intelligence that can be embedded and guided test and our ability to integrate with the larger contact center ecosystem, specifically in this case with Zendesk. As the customer roles out the product during Q3, we will be enabling their agents to provide a better and more targeted experience to their customers. Our first enterprise win was a competitive situation and in a market segment outside of our traditional premium technical support vertical. It is yet another validation point for our differentiated cloud offering. Going forward, we have a pipeline of enterprise prospects and expect enterprise and marquee accounts to be a driver of the continued progress with Support.com cloud. The second quarter saw an expansion in our Support.com cloud customer base and pipeline in a range of vertical market segments standing hardware and software companies, education, Internet-of-things and service providers. During the quarter, over 80% of new bookings came from businesses in these targeted vertical market segments. More specifically an important example of a win in these verticals in the quarter was an education client, who will be providing technical services to university students as they return to school this fall. This is a repeatable used case across universities and for the education segment in general. On last quarter's call, we discussed a number of key new partner relationships including NetSuite and our launch of Support.com Cloud in the Suite Cloud developer network. During Q2, we closed our first cloud customer that was brought to us as part of our referral agreement with NetSuite. The quickness of this win and the value customers are seeing in the integration, underscores the clear fit between the NetSuite CRM product and our cloud offering. It also indicates the beginnings of a promising partnership. Part of our strategy has always been to partner and integrate with important players in the services ecosystem. One such company is Zendesk who provides a leading customer service platform with over 75,000 customers. We have completed the Support.com cloud integration with Zendesk. The integrated application has been approved and it’s now in the Zendesk marketplace making it available to all customers on the Zendesk platform. This application will immediately be in use at our new enterprise customer, mentioned earlier in my remarks, who has standardized on the Zendesk platform. This solution makes it easy to combine guided paths and the associated dynamic decision points with Zendesk functionality, improving agent performance from a single desktop resulting in an enhanced customer experience. Our product usage also continues to grow. The average number of customer sessions per week increased by 40% from the first quarter to the second quarter and yet again sessions outgrew active agents showing the value of the product once it is deployed. Total sessions grew by 47% quarter-over-quarter and maximum sessions per day also showed 39% growth. The double-digit growth patterns show continued positive adoption of our cloud product. They are exiting Q2 with important partnerships and expanding pipeline and growing product usage. We're looking forward to building on this progress in the second half of the year. Now let’s turn to our services programs. The quarter was kicked-off to a positive start when we were awarded in 2016, Top 15 Contact Center Outsourcing Award from Customer Magazine. We were specifically recognized as one of the top 15 domestic inbound contact center agencies. To be eligible for this award, candidates must be at a certain large-scale for billable minutes. This award is the first for Support.com and Customer Magazine’s recognition helps to validate our presence in this market as a premium provider of services. We're continuing to see a shift in the type of new service programs that are coming our way. We're working with prospects as they redesign their services programs to combine labor with self-service capabilities. We call this full spectrum support, which is enabled by Support.com cloud. As Forrester reported in a May 2016 report web and mobile self-service have unseeded the phone for customer service preference. For Forrester customers are migrating to online self-service channels as these channels provide an easy and effective way to resolve issues. Consistent with its market shift, every active prospect in our third quarter pipeline relies on our ability to use cloud to create an integrated support program. Our strategy of aligning services program opportunities with our Support.com cloud technology gives us a compelling edge to win new services programs, expand further in existing accounts as we’ve seen with Staples last quarter and add more value to each of our services partners. We are continuing to see success with new service programs in the retail segment and we’ve recently been awarded a program with a major national retailer. We were selected for our deep expertise and knowledge of the retail industry but it was our technology capabilities that pushed us over the top in this competitive situation. For this client, we will be taking over an existing program and we are working to finalize the agreement with expected full program launch in Q4 of this year. We also closed another brand name retailer, Sears. This is a bundled offering along with the Sears extended warranty provider to offer whole home hardware and tech support coverage. We are expecting an August launch of a pilot and expansion into next year. Since this program is one that will be building a new subscriber base, it will start small with subscriptions growing over time. Sears is a desirable grand logo to add to our portfolio. The win shows how our deep retail expertise and our knowledge of the warranty business gives us a competitive advantage, helping retailers levers to the success that we’ve seen with bundling strategies. Service execution for all of our existing customers continues at a high level. The Comcast wireless gateway and Xfinity home programs are operating as planned. Second quarter revenue for Comcast was in the guided range of between $8.5 million and $10 million. We believe that guidance for quarterly revenue to be in the range of $8.5 million to $10 million is appropriate for the remainder of the year and we should see a slight uptick sequentially in Q3. With Office Depot, prior to our previous contract expiring, we signed a bridge agreement allowing us to execute on our current programs. We've been working with them as they redesign their premium tech support programs exploring initiatives on growth, technology, innovation and service delivery. As these initiatives are formalized, we will work towards incorporating any changes in a definitive agreement with our second largest customer. At this time, I would like to take a moment to welcome our new board members, Rick Bloom, Brian Kelly, Brad Radoff, Josh Schechter and Eric Singer. Since joining the Board at the end of June, our new Directors have been fully engaged and we have been having productive discussions. The new team brings new perspectives and experiences to the Board and I look forward to working with them all in the future. During the second quarter, we saw the continued market evolution as end users demanded more effective self services, services customers and prospects demanded integrated technology in their services programs and the emerging need of timely contextual knowledge, which is provided by Support.com cloud. Our strategy and offerings have been built to address the opportunities presented by these market changes and this market evolution has fueled our second quarter accomplishments in both cloud and services programs. With the momentum we have exiting the second quarter, we look forward to continued progress in the back half of 2016 and beyond. Now I would like to turn the call over to Roop, who will review our financial details. Roop?

Thank you, Elizabeth. Total revenue for Q2 was $14.9 million compared to $20.6 million in Q2 2015 and $16.6 million in Q1 2016. Services revenue for the quarter was $13.6 million compared to $19.3 million in Q2 of 2015 and $15.3 million in Q1 2016. Sequentially, services revenue decreased as Comcast was at the lower end of the previously provided guidance range of $8.5 million to $10 million and in line with what we communicated on our Q1 call. Office Depot was lower due to traditional seasonality. The year-over-year decline is primarily due to Comcast customer experience improvement efforts. Software and other revenue was $1.3 million in Q2 2016, flat from Q2 2015 and from Q1 2016. The Q2 2016 revenue mix was 91% services and 9% software compared to 94% and 6% in Q2 2015 and 92% and 8% in Q1 2016. In Q2, Comcast represented 58% of our total revenue and Office Depot represented 17%. During Q2 2016, our services our services and overall gross margins were negatively impacted by continued higher than expected large medical claims as a result of us being self insured. Overall, non-GAAP gross margin for Q2 2016 was 14%, compared to 23% in Q2 2015 and 16% in Q1 2016. In Q2 2016, non-GAAP services gross margin was 7% compared to 18% in Q2 2015 and 10% in Q1 2016. The impact of these large medical claims decreased our overall gross margins by approximately 300 basis points. Excluding the impact of these medical claims, overall gross margins would have been 17% within the guidance range we have provided on our Q1 earnings call. As a reminder, last year we moved to a self-insured model for our medical benefits, the change to a self-insured model resulted in a cost savings in fiscal year 2015. However, in fiscal year 2016, we've seen large medical claims more than double on an annualized basis as compared to fiscal year 2015, even though demographically there has been no change in our employee base. As we look towards 2017, we're evaluating various ideas that would allow us to redesign our medical programs to better help us manage claims, while still providing competitive medical benefits for our employees. Non-GAAP software gross margin was 90% in Q2 of 2016, 90% in Q2 2015 and 91% in Q1 2016. Total non-GAAP operating expenses in Q2 2016 came in $7.1 million, an increase from $6.4 million in Q2 2015 and $6.4 million in Q1 2016. The sequential increase was a result of proxy contest related costs. In Q2 2016 we incurred approximately $1.5 million of proxy contest related cost. On a non-GAAP basis, loss from continuing operations for Q2 was $4.9 million or a loss of $0.09 per share. We do 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 sheets, total cash, cash equivalents and investments were $58 million at June 30, 2016, compared to $61.3 million at March 31, 2016. DSOs for the quarter were 58 days same as the prior quarter. At June 30, 2016, less than 1% of our outstanding receivables were greater than 90 days old, deferred revenue was $2.5 million at June 30, 2016 and $2.4 million at March 31, 2016. Total headcount as of June 30, 2016, was 1,433 consisting of 169 corporate employees and 1,264 work-from-home technicians. This compares to a March 31, 2016, headcount of 1,604 consisting of 198 corporate employees and 1,406 work-from-home technicians. In addition to our work-from-home technicians, we use contract labor in our operations. For the third quarter of 2016, we expect our revenue range to be between $14.6 million to $15.4 million. We expect a revenue mix of 91% services, 9% software. We expect the overall non-GAAP gross margin to be in the range of 13% to 15% as we have assumed that the high level of medical claims expenses will continue into the second half of 2016. We expect our non-GAAP software gross margin to be between 89% to 91% and we expect non-GAAP operating expenses to decrease sequentially by approximately 25% as a result of our cost reduction plan as announced in April 2016 and the absence of any proxy contest cost. Based on the foregoing, our outlook for Q3 non-GAAP results from continuing operations is a loss of $0.05 to a loss of $0.07 per share. As we have previously discussed, our quarterly non-GAAP results are generally indicative of our cash usage or cash generation excluding capital expenditures. During Q3 we expect to incur less than $50,000 of non-recurring cap full expenditures associated with improvements to our IT infrastructure. For the full year 2016, we expect total revenue to be in the range of $60 million to $64 million as a result of our higher medical claims expenses incurred through Q2 and anticipated level of medical expenses through the remainder of 2016, we expect non-GAAP results from continuing operations to be between a loss of $0.23 to a loss of $0.27 per share. We estimate that higher medical claims for fiscal year 2016 will negatively impact our results by approximately $0.04 per share. Exiting 2016 we expect overall gross margins to be in low 20s as a result of our continued operational execution and focused cost management even with the assumed higher medical expenses. We still expect to finish with an ending cash balance between $52 million to $54 million. With that, we’d like to open the call to questions.

[Operator Instructions] Our first question comes from the line of Joe Fadgen with Craig-Hallum. Your line is now open.

Yeah, thanks. I am here for Chad, thanks for taken the question. First one, little housekeeping question, looks like the G&A expense in the quarter was pretty significantly, is that due to the proxy contest and some of the other things you talked about and how much and then where should we expect that line to go next quarter and the rest of the year?

Hey, Joe its Roop. Good evening. Yes the uptick in the operating expenses and specifically the G&A is associated with the proxy contest related cost because that’s where they would be mapped and as we think about looking forward, you can assume that that 1.5 comes out of that area of G&A and that kind of run rate is what you should expect. So, if you think about the 25% reduction that we talked about overall for operating expenses from the 7.1% it takes you down to around 5.3% or so that should be our go forward run rate on operating expenses for Q3, Q4 and beyond.

Okay. And then I guess on this Sears agreement, can you may be give a little bit of detail, I think if I remember right, I think you said that was a competitive win. Can you talk a little bit about in a little more detail about what you’re going to be doing for them? What services you're providing them and if you can give any indication of how large a customer you think they could end up being, this is something that could end up being like say 10% customer over time.

Yeah, so well obviously really we're pretty pleased to have Sears in the portfolio. The program itself is connected home program. So we'll be working with some of the larger brands that Sears has that are now all connected to the internet. It’s part of the whole IOT evolution and we'll be providing support on them. As I mentioned in the prepared remarks, it is a new program for them along with their warranty provider. So it's a bundled offering, but they have to build, we have to build with them a subscriber base from scratch and those programs take time. They're starting with pilots and then the full ramp will be into the next year. So this will be a small program to start with and it will evolve over time. On that one program could be a 10% customer that's a long way to speculate on that, but a company like Sears with what they're doing and their forward-looking in the market interested to see how all their plans and programs evolve.

Okay. And then last one, I’ll ask and I guess answer as much as you can in light of the new Board of Directors as there -- are there any changes in your overall strategy or level of maybe a level of investment in the software business or services business that we should start thinking about that we can expect to see?

So the end of June we welcomed five new Board Members to the Support.com Board and they've been very engaged in discussions with us. Their main focus has been really to really understand the business end to end now that they have access to all the details that they need to really do the evaluation. So we're looking and evaluating everything that we're doing as we always do. We don't have anything to say externally now. But as the new Board comes together and starts looking at things, we'll let you know if anything changes.

Okay. Fair enough. That will be all for me thank you.

Thanks Joe.

Thanks Joe.

[Operator Instructions]

Okay. Maybe operator, if there is no other questions, we’ll close the calls.

Yeah. Thanks everyone on the call for joining and spending your time today and have a good day.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.