Greenidge Generation Holdings Inc. 8.50% Senior Notes due 2026 (GREEL) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Support.com Fourth Quarter and Year End 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce our host for today, Mr. Greg Wrenn, General Counsel for Support.com.

Thank you, operator. Good afternoon, everyone. Joining me here today are Josh Pickus, our Chief Executive Officer; and Shelly Schaffer, our Chief Financial 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 web page. The statements we'll make in this conference call are based on information we know as of today, and we assume no obligation to update any of these statements. With that, I'll turn it over to our CFO, Shelly Schaffer.

Thank you, Greg. Total revenue for Q4 was $18.9 million compared to $15 million in Q4 of 2011, and $18.2 million in Q3 of 2012. Q4 revenue was up 26% year-over-year and 4% sequentially. Services revenue for the quarter continue to grow, and we had a modest uptick in software revenue as well. The Q4 revenue mix was 81% services and 19% software, compared to 74%, 26% in Q4 of 2011, and 81%, 19% mix in Q3 of 2012. Total revenue for the full year was $72 million, an increase of 30% -- 34% over Q4 -- over 2011. In Q4, 2 customers contributed 10% or more of total revenue. For the full year, 4 customers contributed 10% or more of total revenue. In Q4, non-GAAP service gross margin was 44%, our highest services gross margin to date, compared to 23% in Q4 of 2011 and 41% in Q3 of 2012. Non-GAAP software gross margin was 92%, relatively consistent with 89% in the year ago quarter and 91% in Q3 of 2012. Overall non-GAAP gross margin for the fourth quarter was 53% compared to 40% in Q4 of 2011 and 50% in Q3 of 2012. The majority of the improvement in overall gross margin was driven by increased service delivery efficiency. For the full year, overall non-GAAP gross margin increased to 47% versus 42% in the prior year. Total non-GAAP operating expenses for Q4 came in at $7.1 million, a decrease from $8.9 million in Q4 of 2011 and $7.3 million in Q3 of 2012. The decline in operating expenses was driven primarily by lower third party selling expenses. For the full year, total non-GAAP operating expenses were $32.7 million, down 8% from 2011 levels, driven primarily by the reduction of our contact center sales agent workforce, partially offset by increased spending related to online marketing for end user software offerings. On a non-GAAP basis, income from continuing operations for the fourth quarter of 2012 was $2.9 million or $0.06 a share, compared to a loss of $2.8 million or $0.06 a share in the fourth quarter of 2011, and income from continuing operations of $1.8 million or $0.04 a share in the third quarter of 2012. For the full year, non-GAAP income from continuing operations were $935,000 or $0.02 per share, compared to a loss of $12.5 million or $0.26 a share for the full year 2011. The company has approximately $117 million and $81 million in gross federal and state losses, respectively. As a result, we do not anticipate paying meaningful income taxes for the foreseeable future. Turning now to the balance sheet. Total cash, cash equivalents and investments were $56.3 million at December 31 of this year compared to $51.6 million at the end of Q3, reflecting a net cash increase of $4.8 million in the fourth quarter. We ended the year with a total -- with an increase in total cash, cash equivalents and investments of $3.3 million as compared to year end 2011. DSOs for the quarter were 47 days as compared to 50 days in Q3. At December 31, less than 1% of our outstanding receivables were greater than 90 days old. Deferred revenue was $6.7 million at December 31 compared to $6.1 million at September 30. Please note that our deferred revenue does not reflect amounts related to a majority of our subscription revenue as our partners carry this deferred revenue on their balance sheet. Total headcount at December 31 was 877, consisting of 159 corporate employees and 718 work-from-home agents. This compares to a September 30 headcount of 905, consisting of 163 corporate employees and 742 work-from-home agents. In addition to our work-from-home agents, we also use contract labor in our operations. I'd now like to provide some color on Q1. We expect that Q1 2013 revenue mix and overall non-GAAP gross margin to be relatively consistent with Q4. As always, non-GAAP gross margin will be determined primarily where we fall within our revenue range, the services software mix, and service delivery efficiency. We expect total operating expenses for Q1 to increase by 10% to 15%, driven primarily by increased advertising rates related to our end user software offerings, initial investments in sales and marketing to support our Software-as-a-Service initiative and employee-related payroll taxes associated with the beginning of the year. With that, I'd like to turn the call over to Josh.

Thanks, Shelly. Q4 represented a strong finish to a strong year. From a financial perspective for the quarter, we grew revenue 26% year-over-year and 4% sequentially, with approximately 60% of total revenue coming from subscriptions. We achieved an overall gross margin of 53% and a services gross margin of 44%, both all-time highs for the business. We increased operating margin to a record 16% and we grew our cash balance by almost $5 million sequentially. For the year, we increased revenue 34%; achieved profitability for the full year, moving from a loss of $0.26 in 2011 to a profit of $0.02 in 2012, finishing with 2 consecutive profitable quarters; and we grew our cash balance by over $3 million. From an operational perspective, we had a successful fourth quarter and full year. Recent highlights include progress in our Software-as-a-Service, or SaaS business, enhancement of our small business solution through strategic relationships and evolution of our service offerings to reflect the changing technology landscape. Let me give you a little color on each of these items. In our SaaS business, we completed the first stand-alone agreement for our Nexus service delivery platform in October. I'm now pleased to announce that US Tech Support, our initial customer in this business, is live in production. US Tech Support has its own labor force and is using our platform to improve service delivery efficiency and customer experience while reducing costs. As part of the implementation, they are replacing 4 separate systems with our integrated solution. We have run the Nexus platform ourselves for many years, but deploying it rapidly and successfully for a third party represented a milestone in our emerging SaaS business. In the small business arena, we have expended our solution through strategic relationships with other solution providers. Many of our partners are launching business app stores to provide their small business solutions online. To allow our services to be obtained seamlessly from our partners' online stores, we integrated our Nexus service delivery platform with AppDirect, a leading cloud services marketplace provider. We have also extended our strategic relationship with OnForce, a leading platform for on-site technology services. As a result of this relationship, our partners can offer subscriptions and incidents combining our remote services and OnForce's on-site services at attractive price points. We are committed to providing a rich set of offerings for the small business market and expect to add new cloud-based solutions in the future. In terms of service evolution, we announced in Q3 that the portion of our subscription services focused on the home network rather than the PC had grown substantially. Q4 offered further evidence of the way in which our business is evolving in the post-PC world. Our retail partners are now selling an increasing number of tablets, and they want to offer services tailored to these devices. To meet this need, we introduced an innovative tablet SKU with 3 components: a system optimization app that extends battery life and improves security and privacy, access to a library of training videos and support for common tablet issues, such as Wi-Fi setup, e-mail setup and app store access. The SKU performed well during the Black Friday period and we've since arranged to introduce it into other programs. We believe wireless networks, tablets and other mobile devices will play an increasing role in our portfolio in the future. Looking forward, our 2013 focus will be on extending our market leadership, building out the new initiatives we've launched and maintaining and enhancing operating performance. Let me first update you on how we see the market evolving. In today's world, customer experience has become paramount to every business' success. According to recent studies, attracting a new customer costs significantly more than keeping an existing one. Retaining and growing share of wallet increasingly depends on the quality of the customer experience. Most customers surveyed have seized doing business with the firm because of a bad customer experience, and customer experience is highly correlated to customer loyalty. As a result of this growing body of evidence, customer experience management has established itself as a distinct discipline within the overall CRM field. What's now becoming clear is that a customer's experience with technology often determines the quality of the overall experience. This is true, not just for technology products but for many other products and services that depend on technologies to deliver the desired customer experience. Consider just 2 examples. A bank is not in the technology business in a traditional sense, but the quality of online banking, which is heavily technology-dependent, is increasingly important. A media company is in the content business, not the technology business. The quality of the streaming experience is increasingly relevant to customer satisfaction. Because technology increasingly affects the overall customer experience, companies are placing new emphasis on technology support. In a new market, which we call Technology Customer Experience Management, or TCEM, is emerging. Within this market, some firms are interested simply in providing better tech support in a cost-effective manner. Others are viewing this as an opportunity to build the new business, supporting not just their products and services, but the entire technology ecosystem their customers rely upon. We believe we're well positioned to succeed in this market because of our ability to support the whole ecosystem, our proven turnkey and SaaS solutions, our financial strength, our customer base and our market insight. To extend our market leadership in 2013, we're building out initiatives we launched last year. Expanding our Software-as-a-Service business is a key focus for us because some companies wish to utilize their own labor to provide support and need only a technology platform to achieve their TCEM goals. Right now, we are pursuing a number of sales cycles with large companies for our SaaS solution, while at the same time, defining our middle market offerings, our go-to-market strategies and our product pipeline. When we have demonstrated repeatable success in this area, we expect to expand our SaaS sales force. In the services arena, growing our customer base and increasing revenues from small business programs are key initiatives. We have small business programs in the market for a number of communications providers, and expect to launch programs for a number of retailers and others this year. Based on our experience with these programs to date, market demand is clear and subscriber satisfaction is high, but a lot of work remains to realize the potential of these programs. In addition to these new initiatives, we remain focused on maintaining and enhancing existing programs, acquiring and launching new programs and refining our service delivery operations. Let me provide some color on each of these areas. In our communications programs, Comcast grew substantially in 2012, and we expect continued growth in 2013. The current focus of the Comcast residential program is optimizing SKU solution, defining bundle opportunities and enhancing the customer experience. In the Comcast small business program, as well as the small business program for Time Warner Cable, the focus is on creating a scalable and successful sales process. In addition to Comcast and Time Warner, we expect to bring the market a small business program for Rogers, the Canadian communications provider we mentioned last quarter. There are several new opportunities in the communications arena that we hope to close and bring to market this year. In our retail programs, we are moving forward on the 2 contracts that come up for renewal in the first half of the year. At OfficeMax, where revenues have grown substantially over the last year, we're making progress on a contract renewal on terms attractive to both OfficeMax and ourselves. At Staples, we expect the contract to be extended, but the nature of the relationship to change. Unlike our other retail partners, Staples maintains a large staff of technicians and is seeking to increase utilization of those employees. As a result, Staples plans to migrate Virus Removal, the principal service we provide for them in-house. The migration begin this month and is expected to be rolled out by the end of the quarter. We have currently planned that the migration will reduce our Staples revenue by approximately $250,000 in Q1, which is fully reflected in our guidance today, and an additional $700,000 in Q2, though the manner in which the migration is implemented may reduce these financial impacts. Our relationship with Staples remain strong, and we expect to handle a level of Virus Removal, small business services, tablet SKUs and other services going forward. In addition, we have several new retail opportunities moving to the pipeline that we expect to contribute to revenue in 2013. In terms of new programs generally, our pipeline has grown substantially over the last quarter. Part of this is due to the SaaS business, but a substantial part relates to our traditional services solutions. What we do for partners is often something they are doing for the first time, so sale cycles remain lengthy but activity levels have noticeable increased. Finally, we made substantial progress over the last year in refining our service delivery operations, raising services gross margins from the mid-20s to the mid-40s while receiving outstanding net promoter scores. To maintain performance in 2013, we plan to enhance our technology platform, refine delivery processes and explore new labor models, while continuing to deliver a best-in-class customer experience. Taking all of this together, we're excited about the opportunities that 2013 presents. In terms of guidance for the first quarter, in addition to the color Shelly provided, we expect revenue of $19.4 million to $20.4 million, and non-GAAP earnings per share of $0.04 to $0.06. With that, I'll open it up for questions. Operator?

[Operator Instructions] Our first question comes from the line of Carter Malloy from Stephens.

So first is on the gross margin improvement you got yet again this quarter in the services business. Is that something that's sustainable, or should we expect to see that pulled back in the other directions going forward?

We think that services gross margin is around or about where we are sustainable. We get a lot of work that we're continuing to do, and we think that within a couple of points, it's possible to maintain them in the place they are. And of course, beyond that, we're always working to try to go further. But at this point, we'd say maintaining services gross margins is what our plan is.

Okay. And then in terms of the slide in Staples rev in 1Q and 2Q, what's filling that backup in 1Q to maintain your revenues and 2Q as well just something that you expect to ramp to fill that hole?

What I'd say about that is, we've got growth in the other services programs, we have the introduction of the SaaS revenue, there was a very tiny piece of that in Q4 but will actually be relevant and interesting starting in Q1, so that's a new revenue stream. And then moving later in the year, as I said in prepared remarks, there's a lot of really interesting opportunities in the pipeline. And while we've got to close them and launch them and make them successful, that makes us feel like there's good opportunities to replace that revenue.

Okay. And then at risk of potentially causing a riot in the room you're in there. You got a lot of cash on hand, you're now making money in the bottom line. Any change in your thoughts what to do with that cash?

No, not really. I think that the board is always considering what to do with the cash. They consider all the things that you would expect, M&A, buyback, et cetera, and that's really all I have to say at this time.

And our next question comes from the line of Chad Bennett from Craig-Hallum.

So Josh or Shelly, for that matter, I thought you had 3 retailer renewals coming up here, and you mentioned a couple of them. Did the third one, was that renewed in the fourth quarter and -- or not renewed for that matter? And what were the financial implications?

What's happened with the third one is that it was extended into the back half of the year. And so there will be a renewal this year, but it won't happen in the first half. So we just haven't talked about it because there's not much to say. Business is continuing as usual. And the other 2 were occurring in the first half, and that's what we've talked about.

Okay, good. And then can you speak to kind of the Comcast -- the level of sequential growth from Comcast this quarter? I know obviously, it'll be in the Q. But can you talk about if that was in line with expectations and maybe if that level changed from the prior quarter?

Comcast's sequential growth in the last quarter was excellent. It was in the double digits and it was a very good result. We continue to believe that that program has a lot of room for future growth.

Okay, that's great. And then on the Comcast call this morning or earlier, they were very bullish about their business services segment. I think it grew another 30% in the quarter. And they talked about -- they rattled about 4 or 5 things, CapEx things that were high priorities this year, and that was one of them. I guess, they seem pretty bullish and aggressive in SMB. The other metric they gave is 85% of their SMB customers were companies with less than 20 employees, which seems to be your sweet spot also or at least what you're targeting. When do we see anything material from them with that program for you guys?

Well, first of all, I'd say that what they said on the call was very consistent with what they've communicated to us privately, which is that business services is a huge growth opportunity for them. And I think across the cable industry, looking at Time Warner or Cox or the other players, they're all indicating that that's an area that they plan to expand in, and at which they're having real success. So that's very much the same conversations we're having. Where we are right now in Comcast, what we call business class, is that we are rolled out across their regions, and we're really working on perfecting the sales process. And we are going to see growth, and I'd like to see that program become material for us this year, but it really depends on making sure that both with the internal sales and with the third party sales that we really perfected that. And so we and Comcast, and everyone else involved the program is working very hard to get there because it's really clear to us that there's a lot of opportunity. These small businesses in the sub-20% range really do need IT support. They all live in a digital world. And it really doesn't matter what business they're in, they're using technology much more than they used to and its integral to their business, and they really don't have good solutions. And we are finding that when we get it pitched right, there's a lot of appeal. And we're offering the services at what I believe relative to the regional and local service providers at very compelling price points. So it's really a matter of perfecting the sales process to get this to really amp up, then my hope is that we'll start seeing that this year.

Okay. And one other thing on the Comcast call. They talked about rolling out, again, one of their big CapEx items this year was rolling out a wireless gateway product across their subscriber base. And I know you mentioned on the script that you're trying to figure out kind of the bundling option with Comcast and how to kind of put it together. Will that wireless gateway product be an opportunity for you guys on the bundling side?

Yes, it would be. As I indicated in the script, there's a lot of active discussions going on. And I think the way it's likely to proceed is that there are trials of a bundle, and then we see where that goes. But clearly, their strategy is to proliferate the gateway and really, as you've seen on those TV commercials, be able to deliver you all the content they've got regardless of device, regardless of where you are, and obviously, the wireless network matters to that. And so there's a lot of opportunity here, and it continues to be a topic of active discussion.

Right. Okay, one last one for me. On the Nexus opportunity and the SaaS licensing opportunity, Josh, obviously you're saying pipeline is pretty active and growing pretty rapidly for this business. How should we think about, not necessarily from a revenue standpoint for this year but maybe from a SaaS booking standpoint this year kind of your expectations? Is mid-single digit millions in bookings kind of what you're thinking, or any type of color there would be helpful?

Let me stay away from numbers because it's just still too early to say, but I think I can give you some nonquantitative color that will be useful. Here's the way I think this is going to roll out. The initial opportunities that we are seeing are large. There were big company's for large seat numbers, and they are with companies that really want the full breadth of the functionality that we are providing. It's pretty clear to me that 4 people with those needs, we really have a terrific solution. The thing that we're equally interested in now is figuring out how to pursue the path that the established SaaS companies, whether it's Salesforce or RightNow or Taleo or any of those companies pursued, which is you do have a number of the large transactions, but you also develop a broad mid-market capability where the fact that you don't have painful implementations and huge amounts of customization, et cetera, required, that needs to be a key part of the business. And what we're doing right now is we're focusing on advancing the big deals because those will be wonderful deals to have, but we're also focused on defining the mid-market and the low end, establishing the price tiers in the functionality that will leave within each of those and beginning, and I really say beginning, to expand the sales capability in this area. So that gives you hopefully some sense of how we're imagining this business will roll out over the course of the year. And when we've got more evidence, we'll talk more about what it means financially. But I think at this point, that qualitative guidance is what I'm comfortable sharing.

Yes -- no, that's great.

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

Just on the gross margin, you've got it to a very healthy level. I guess, one of your big customers really moves forward with a major project, whether it's bundling or small business, how do you envision that influencing the gross margin? Is it -- are you big enough now where you can kind of work in extra cost over time? Or do you still have the dynamic of big upfront expense? I guess, every situation is a little different, but how do you think about generally if you have a big project that really kicks in?

Here's how we think about it, we've gotten a lot better in launching programs and working with partners to develop forecast and being realistic about how volume's going to scale. So I think we're going to do better than we've done in the past at not impacting margin. That doesn't mean that there might not be some effects, but I'm talking about a few points, not a dramatic shift. The real question is less about how you launch these thing. We're not going to have cast of thousands available when there's nothing yet to do. We're going to ramp them gradually. But the real issue has more to do with what is the nature of the program? And to the extent that our revenue mix is moving toward subscriptions, it's important to note that the way our subscriptions work, is you have heavier usage in month 1 than you do in later months. And so when you're launching a program, and effectively, everybody is a month 1 user, you are going to have heavier usage and therefore, your profitability in that program is going to be a little bit lower to begin with. So that's probably a more important dynamic at this moment than is any kind of giant scale up before a program. So our goal is to moderate the effect that launching new things and big exciting things has on the gross margin, but I don't think we'd ever say that it won't have some effect.

Sure. Got it. And then on -- I guess on Office Depot, what was the motivation that -- behind -- just pushing out of few quarters as opposed to renewing it kind of per the normal expiration date?

Just relationships going well. They've got other things to do. This isn't the top priority. They feel good about the relationship. Nothing more than that.

Got it. Okay. And then at Comcast, I think there was in the third quarter, some call center where you are potentially during the quarter, anything else that maybe changes this year in terms of how they deal with selling your service through their internal sales force or third party? Is there any sort of comp changes that might occur? Anything they would -- that they're doing internally that might affect how they promote their product or services?

No, I'm not aware of any other internal reorg stuff, but that doesn't mean that it isn't happening. I do not have perfect knowledge and it's a very large organization. What I would say is that the biggest potential changes that I can see going forward are: a, if we do get to a point where we are doing something from a bundle standpoint, even on a test basis, that would be on a larger scale than we've done before, that would matter, and we'll see when and if that happens. The other thing is that we're doing a lot of experimentation, as I indicated earlier, on exactly how do we get the small business sales activity right. Clearly, the Comcast agents selling the high-speed data services to business-class customers are a critical element of this equation. Equally true, people who are receiving transfers from the Comcast tier support and doing that selling are important. So I expect that to evolve quite a bit over the course of the year as we really work to perfect it and realized the opportunity that, that market presents.

Got it. And I know you don't want to talk too much about revenues on small business or your Software-as-a-Service, but do you think by year end, each of those categories could be adding maybe $1 million a quarter? Is that in the ballpark or...

Well, let me say that I have grand aspirations, and the aspirations are, in fact, greater than those numbers, but I don't want to confuse aspirations with a green eyeshade financial plan that is a very disciplined thing based on known activities. I mean, we think there's real opportunity in both of those markets and we hope to make it real this year, but we're pretty disciplined in our financial planning about what goes in there based on the actual hard data we have today.

[Operator Instructions] Your next question comes from the line of Kevin Liu from B. Riley. Kevin Liu - B. Riley & Co., LLC, Research Division: Josh, you mentioned earlier that there are a number of opportunities on the small business side that are ramping. Just wondering as it relates to kind of the gross margin line, do you feel like you're effectively prepared for kind of the initial ramps to those programs already where -- which plant which you'll need to kind of add more resources?

Really what we're focused on right now is accelerating the sales part of it. We're in a good position from a staffing and coverage standpoint, and further staffing increases will be tied to cranking that sales engine faster and harder. Things will happen gradually. We don't think that this is kind of a cliff situation where, one day, it changes dramatically. We think that we do this right, it'll grow steadily, and that will cause increases in staffing. But you shouldn't think of this as a discontinuous change, at least the way we see the numbers today. Kevin Liu - B. Riley & Co., LLC, Research Division: Got it. And also another question on the margin. You guys talk about the impact of Staples in Q1 and Q2 here from a revenue standpoint. I would imagine they were kind of lower margin than what you guys show on the services line, but curious to see if you can add any color on how the changes to that relationship impact the gross margin line?

Well, we try to stay away from commenting about profitability of any particular program for obvious reasons. That was a profitable program; less revenue is not a good thing. But beyond that, I don't want to say anything specific in part just because I want to respect my partner's confidentiality. Kevin Liu - B. Riley & Co., LLC, Research Division: Fair enough. And looking at kind of the SaaS opportunity in front of you guys, I know there's some sales and marketing spend in front of that this year. But just wondering if you could talk about any sort of pipeline metrics, whether it's number of customers you're going after, or things of that nature?

Well, here's how I talk about it. We're really at the stage of trying to understand exactly where the market opportunity is greatest, and I'll give you a little color into our thinking about that. If you imagine a target that you would shoot an arrow at, we think that the bull's eye on the target is this first opportunities that we started. People who are doing large, premium technical support programs. And the great news about that is we're an absolutely perfect fit for that business, and I'm not sure there's anyone who can really compete with us. The challenge is, there aren't an infinite number of those programs. So the next circle out from that is where you're doing externally-facing technical support, and that's a much, much larger category of people. Any company that's got some type of technology solution or, as I indicated in the prepared remarks, technology is critical to the customer experience, all of those people have needs, and that's the next place that we're going. So people who are delivering external technical support to their customers, it matters to them, but they're not presently trying to make a separate revenue stream out of it. And what we're trying to explore is how good a fit is our SaaS offering for that market because that's going to drive what kind of customer account we're talking about here and that, in turn, is going to drive what kind of sales force we need for it. We're in that period of the evolution where the deal is now are business development deals. Everyone's a little bit different. But again, if you want sales force in the other companies that have really succeeded in this market, a lot of their genius has been around standardizing a sales process and replicating it over and over. And that's something that we need to get a lot closer to, we're going to build this into something substantial. When we're in that stage, I'll be much more comfortable talking about cut pipeline, sales coverage, et cetera, type of metrics. I think that's premature right now. Kevin Liu - B. Riley & Co., LLC, Research Division: Okay. And just a couple here. Shelly, apologies, but I missed kind of the breakout of the 905 headcount between corporate and work-from-home agents.

It's 159 corporate and 718 work-from-home agents, and that compares to 163 in Q3 and 742 work-from-home agents in Q3. Kevin Liu - B. Riley & Co., LLC, Research Division: And I know this is available when the K gets published, but was just curious if you had the percentage of revenues accounted for by the 10% customers in the year?

We don't normally give them. We will give it when our K comes out shortly. But for the year, it's 4%, we said there was 4% for the whole year.

And our next question comes from the line of Jim Bao from Yiheng Capital.

I was just wondering in your 1Q guidance, does that reflect the full revenue potential or the majority of revenue potential from your first SaaS customer?

The way the SaaS revenue is being recognized is that we've taken all of the software revenue and the services revenue and we put it in one box, and that is being recognized ratably over the course of the 2-year term. It began being recognized in February. So we will take a ratable portion of that this quarter and then each month for the remainder of the term.

I see. And then anything you can talk about on subscriber retention metric and/or the ARPU trends, I guess?

Not a lot of interesting new color. Subscriber retention, there's a lot of focus on, but we don't have news about it moving up or down. In terms of ARPU, there's been a fair amount of work going into the overall SKU selection. And if I had one comment to make about that it's that were trying to drive towards fewer rather than more SKUs. What we've learned consistently across programs is that the customer base, whether it is consumer or small business, doesn't yet have enough familiarity with this to really be able to choose among a menu that's got a lot of options. So we want to make it as simple as possible, and that's one of the ideas behind in the small business area offering this middle tier SKU that offers a combined remote plus on-site solution. A lot of small businesses want that deals with their concerned about could they really get somebody there if they needed to, and so that is an important innovation that we've introduced, being able to get that for one low monthly price rather than having to pony out for it separately. So I'd say that in terms of ARPU, it's a little bit less around driving more ARPU and a little bit more around driving overall demand by simplifying the overall SKU selection.

And this concludes our question-and-answer session for today. I'd like to turn the conference back to Josh Pickus, CEO, for any concluding remarks.

Okay. Thanks, everybody. We appreciate your time on the call today, and we look forward to talking with you soon. Bye-bye.

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