Greenidge Generation Holdings Inc. 8.50% Senior Notes due 2026 (GREEL) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Support.com Fourth Quarter 2014 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 call is being recorded. I would like to introduce your host for today’s conference, Mr. Greg Wrenn, General Counsel. Sir, you may begin.

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 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 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 to our fourth quarter and fiscal year-end 2014 earnings conference call. Today, I’m pleased to report our financial results for the fourth quarter of 2014, with revenue coming in at $22 million, which was within our revenue guidance of $21 million to $22.5 million. Non-GAAP loss from continuing operations for the quarter came in at $0.02 per share, also within our guidance of a loss of $0.02 to breakeven. For the full year revenue was $83 million and non-GAAP net income from continuing operations was $1.1 million or $0.02 per share. 2014 was a transformative year for Support.com. We entered the year managing a major business model shift in our contractual relationship with Comcast, planning the release of a nascent fast product into the Support market and navigating changes on the leadership team. We exited the year in a strong position in each of these areas. We now have more extensive relationships with Comcast and a number of our services partners. We have also seen growth in Comcast as well as other programs. Q3 saw Nexus validated in the market and wanted an increased investment in its go-to-market. Executive leadership has come together as a team lending existing deep knowledge of Support.com with new experience of SaaS markets and products development. We are a far more capable company today than when I joined in May of last year. As I’ve related in our other earnings calls our strategy is to balance our growing services programs with the world class SaaS offering for the Support market. We worked diligently in 2014 to execute on this strategy while maintaining a solid business profile and measured investment. We’ve made major steps to expand the external presence and reach of Support.com. We are gaining traction with Nexus in the support interaction optimization or SIO space, a $1.3 billion segment of the customer interaction management market. SIO is expected to double to $2.6 billion by 2020. Nexus is satisfying an unmet need in this emerging segment and has been identified as one of the few products in the market today to offer an end-to-end best of breed applications focused on SIO. I am happy to report that we were rewarded for this new initiative by being recognized by Frost and Solvent as the Company of the Year for growth, innovation and leadership in SIO. This award is an indication of the importance of the Nexus product, a testament to the capabilities of the company and building a SaaS product and gauge of the impact we are beginning to have in the industry. Towards that end as we recently announced, Sampath Gomatam, our Senior Vice President of Product has joined the Board of the Continental Automated Silvers association, a leading industry associated dedicated to the advancement of the Intelligent Home. By joining this prestigious board, we continue to leverage our services knowledge to develop thought leadership in the internet of things or IOT and maintained our first mover advantage. Judging from the reaction from customers and prospects at the consumer electronics show, the Support.com is resonating with current and potential partners as well. At this year’s event, we saw formal meeting activity increased remarkably from 2014. Demand for our time increased further after we presented our perspective at the Parks Associates Connection Summit on the consumer support for internet of things panel. Our Nexus IOT demonstration at CES was well received, where we showcased a proof of concept using Nexus to support the smart things platform, which currently supports over 100 consumer devices. Through Nexus guided paths, which is patent pending, we are able to retrieve detailed information for smart things devices, assess the device status, analyze the interaction information, check on the health of the systems and even control power and other settings remotely. This functionality applies the benefits of Nexus directly to problems of troubleshooting and onboarding for IOT ecosystems. Needless to say, the response to our IOT services expertise and Nexus capabilities was gratifying. I am encouraged by the opportunities that were generated at CES and view them as a harbinger of the success we expect to see throughout 2015. In Q4, we built the foundation for Nexus SaaS sales and marketing, building on the predictable revenue model pioneered by companies like Salesforce.com, we put in place marketing and sales automation to manage lead generation, opportunity creation and deal closure. We have staff to this model and now have a talented team of employees responsible for each major function. We’re happy thus far with the result. In Q4 we achieved our goal for Nexus new customer acquisition. This was an important step. After we had initial validation of the product, we wanted to see if customers were willing to play and indeed they did. In addition, we’re also pleased that our diverse pipeline has converted into customers and represents a range of industry types, such as warranty companies, ISPs as well as tech support outsourcers and a range of used cases such as technical troubleshooting and customer onboarding. This is an important indication of the size and breadth of the market. The pipeline continues to expand as we see interest from technical product companies, referral partners and telecom companies. On our Q3 call we noted the importance of tracking customer usage as a gauge of realized value and product stickiness. The number of Nexus users more than tripled from Q3 to Q4. At the same time, we saw a fourfold increase in the number of session. This shows the current customers are using the product more and more demonstrating the value they are receiving from Nexus. A further indication that our customers are receiving value from the product is the expansion we were already seeing in existing customers. One is the large warranty company that is expanding the use of Nexus to other areas of their business beyond mobile device support, this will include support of IOT devices. Another example is a BPO company that is planning a major expansion throughout their tech support team to drive consistency of service and to utilize Nexus analytics to further optimize their operations. In both cases the customers are confirming our expectations that Nexus will typically begin with specific used case or small deployment and then expand within an organization. Our confidence in the Nexus product continues and is being void by these early results, we are starting to mass quantitative information and this will translate to reliable measures of the health of Nexus going forward. We will continue to carefully monitor the growing usage of the product in our current customers as well as focus on new customer acquisition, which is the foundation for growing revenue for any SaaS product. I’d like to now turn to development and our services programs. We added to our services customers in Q4. In the past quarters, we’ve spoken about growing and diversifying our pipeline and we’re pleased to say that we’ve made additional progress during Q4 as well. Supporting our IOT strategy we’ve added opportunities in our services pipeline that include support for home automation and connected devices. In general but particularly in IOT we are discovering that new services discussions become opportunities for Nexus and the Nexus lead can evolve into our services conversations. This synergy gives us added impact with our go-to-market and we are encouraged by the trend. Nevertheless we need to be cognizant of two important characteristics of new services opportunities. First, as we have spoken about before new services programs take time to ramp up and we would not expect to see an immediate impact from these new customers. Second, a typical target customer for premium technical support in today’s market is much smaller than some of the marquee customer names in our current portfolio. Both of these characteristics mean that it will take time to grow significant revenue from our newest service partners. Nevertheless we are committed to building growth and diversification of the services programs. This effort will make us much stronger in the long run. We continue to do well with the ramp for our newer services partners and growth in retail program. We have found success in growing in SMB program through our relationship with Suddenlink, an MSO in the Southeastern U.S. We’re taking this recipe to similar MSOs in other geographic regions and have garnered initial interest. Our retail partners are executing well with their focused efforts on selling services as a key strategy and we are benefiting from this focus. We’re in the early planning stages of growth initiatives and other key programs that we expect to see contribute in 2015. The activities with our services partners give us great confidence and the stability of the relationship and the future health of these programs. And last but not least, our relationship with Comcast remains strong as evidenced by the positive momentum in our Comcast programs. Meeting the scale for Comcast wireless gateway program require Support.com to develop increased operational excellence for contact center management. Our unique work from home model has allowed us to continue to quickly scale the teams. As a result at the end of Q4 we were rewarded with a renewed master service agreement with Comcast. In addition, during the quarter our Xfinity Home program was deemed to success by Comcast. Consequently Comcast is expanding our Xfinity Home program. Moving on and as you may have seen, Staples has announced their intent to acquire Office Depot. Given the general nature of such large transactions we don’t anticipate any changes with Office Depot programs in the foreseeable future. Our relationship with Office Depot continues to be strong. We are working well together and we look forward to supporting them in 2015. Overall we made progress in services in 2014 and look forward to continued expansion as we head into 2015. Our positive Q4 results in both services in Nexus are a direct result of the talented team that has come together at Support.com. Newly hired senior leaders are bringing in their own talent from Silicon Valley and beyond. Tenured leaders at our company are having recruiting success from the internal buzz and the positive reputation that is growing externally. We have continued to expand across all areas of the company, accounting for Q4 success and confident in 2015 outlook. So we will continually be looking to add great talent to our team, the organization now has the right talent in place to execute on our strategy. Our company exits 2014 with a long list of accomplishment. We stated that we would revitalize our services programs and we now have new programs and an active pipeline. We have relationships that are stronger than ever with our major partners including Comcast and Office Depot. We said that we would balance our business with an industry leading SaaS offering in the contact center space and I am pleased with progress and traction that we are experiencing with Nexus. When I assess the last year the progress that we have made is ahead of expectations that I have when I joined in May. We are moving at a fast pace with a sense of urgency and in the right direction. 2015 will require us to continue to focus our efforts in every key area that we have discussed, but based on 2014’s progress I am confident in our future success. With that, I would like to turn the call over to Roop to discuss our financials. Roop?

Thank you, Elizabeth. Total non-GAAP revenue for Q4 was $22 million compared to 24.9 million in Q4 2013 and $22.2 million in Q3 2014. As a reminder, in Q4 2013, we incurred a contra-revenue charge of 394,000, related to the issuance of a warrant to Comcast upon achievement of certain performance milestones. Services revenue for the quarter was $20.6 million compared to $22.7 million in Q4 2013 and $20.8 million in Q3 2014. Sequentially, revenue decreased slightly due to the higher revenue in the prior year from additional Comcast service hours beyond their committed forecast as we have discussed on our prior earnings call. Software and other revenue declined year-over-year to $1.3 million in Q4 2014, from $2.2 billion in Q4 2013, and was comparable to Q3 2014 of $1.4 million. The year-over-year decline is due to our previously discussed decision to discontinue unprofitable advertising arrangements for our end-user software products. The Q4 2014 revenue mix was 94% services and 6% software, compared to 91% and 9% in Q4 2013 and 94% and 6% in Q3 2014. Total non-GAAP revenue for the full year was $83 million compared to $88.9 million in 2013. In Q4 and for the full year of 2014 both Comcast and Office Depot contributed more than 10% of total revenue. Overall, non-GAAP gross margin for Q4 was 22%, compared to 44% in Q4 2013 and 27% in Q3 2014. In Q4, non-GAAP service gross margin was 17% compared to 40% in Q4 2013, and 24% in Q3 2014. As Elizabeth noted in her comments, during the quarter Comcast decided to expand our Xfinity Home program. On receiving this notification we needed to invest in additional agent and support staff to support the program’s expansion. As a result, this impacted our Q4 services gross margins, looking ahead as the program ramps we expect margins to improve. Non-GAAP software gross margin was 87% in Q4 2014, Q4 2013 and Q3 2014 respectively. Total non-GAAP operating expenses in Q4 2014 came in at $5.8 million, an increase from the $5.7 million in Q4 2013 and $5.1 million in Q3 2014. The quarter-over-quarter increase is a result of our previously stated plans to make incremental investment in Nexus development and go-to-market capabilities. On a non-GAAP basis loss from continuing operations for Q4 was $915,000 or a loss of $0.02 per share. For the full year non-GAAP income and continuing operations was $1.1 million or $0.02 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 expense that we have future taxable income, the company will be subject to alternative minimal taxes in certain tax paying jurisdictions. Turning now to balance sheet, total cash and cash equivalents and investments were $73.8 million at December 31, compared to 75.3 million at September 30. DSOs for the quarter were 61 days as compared to 63 days in the prior quarter, year-over-year as of December 31 net cash, cash equivalents and investments increased by $1.4 million. At December 31 less than 1% of our outstanding receivables compared to the 90 days old. Deferred revenue was $2.7 million at December 31 and at September 30. Total headcount at December 31, 2014 was 2,023 consisting of 179 corporate employees and 1,844 work from home technicians. This compares to a September 30 headcount of 1,852 consisting of 160 corporate employees and 1,692 work from home technicians. In addition to our work from technicians we use contract labor in our operations. Turning to guidance for the first quarter of 2015 we expect our revenue range to be between $22 million to $23 million with a revenue similar to Q4 2014, up 94% services and 6% software. We expect the overall non-GAAP gross margin to be in the mid-20s. We expect our non-GAAP software gross margin to be approximately 86% and non-GAAP operating expenses to increase sequentially by approximately 15% as we continue to increase in Nexus development and go-to-market capabilities based on the foregoing our outlook for Q1 non-GAAP results from continuing operations is a loss of $0.01 to a loss of $0.04 per share. We plan the above profile of investment to continue throughout 2015, which will likely result in similar quarterly non-GAAP losses. With that I would like to turn the call back to Elizabeth.

Thanks, Roop. As the result show 2014 was a transformative year and we are in a strong position for 2015. Now I would like to turn the call over the operator for your questions, operator?

[Operator Instructions]. Our first question comes from Mike Latimore with Northland Capital Management. Your line is open.

Hi there, this is Jim Fitzgerald standing in for Mike Latimore, so you mentioned that you had two 10% customers in the quarter Office Depot and Comcast, I was wondering if you could break those out specifically what specific percentages was both were?

Sure Jim, Comcast was approximately 67% and Office Depot was 15% for the quarter.

Okay, great. And you also mentioned that you renewed the master service agreement Comcast, but I think I missed the timeframe when that happened could you repeat when you renewed that agreement?

Yeah, it was renewed in the fourth quarter, I mean it had a term date of December 31 and it’s been renewed into the subsequent 2015 year.

Okay. So now with that renewal does the mean pricing remain the same or did you get some changes there?

Yeah, as you know Comcast is a significant customers for us our contracts with Comcast are filed with the SEC and you can see the terms and conditions there, but effectively there was no significant changes in the terms as it rolls forward.

Okay, great. And then as Comcast given you guys a forecast about one quarter out are you getting some better visibility there?

No Comcast approach to managing their business continues to be the same, it’s a committed forecast that we did on a periodic basis.

Sure okay. And then my last question here are you guys seeing any revenues from small business or the home alarm program of Comcast and those revenues combined or they making up like a material percent of revenue yet?

Well as you know we don’t give customer by customer specific information, but let me breakdown a couple of your comments or your question just a little bit. We obviously have revenue from the Xfinity Home program for Comcast, which is bundled within our overall Comcast revenue. So that takes care of that piece of it. In terms of small businesses and other things, we have referral program that’s SCC direct that we do have a nice customer base for and we continue to support that and it’s doing well. We also as we discussed in our prepared comments we support regional MSO that supports the SMB market and through them they obviously have small businesses within their portfolio that we support from an end support standpoint.

Fair, okay. Thank you.

You’re welcome, Jim.

Thank you. Our next question comes from Stan Berenshteyn with Sidoti & Company. Your line is open.

Good afternoon, thank you for taking my questions.

Sure.

Sure. Hi Stan.

I guess I just want to get a better understanding, so the agent headcount growth is that really been driven stemming from Comcast is that being driven primarily by the Xfinity program or is it by Comcast as a whole?

Well Stan as you know we don’t give program level information whether it’s margins or headcount, overall we have we anticipate growth in our services areas and obviously that’s inclusive of Comcast and other services programs. Specifically in the prepared comments that we provided, as I indicated Xfinity Home was expanded in the quarter and as such for that expansion we did have to bring on additional agents and support staff as I had indicated and so a portion of that is obviously as for the Xfinity Home program.

I see and the headcount number for agents that you listed that includes the onboarding for this quarter?

That includes overall for all of our services programs.

Okay. And can you give us some color on what’s driving operating expenses going forward? Is that really going to be a focus on sales, R&D or a combination thereof?

The combination, as Elizabeth has indicated we are seeing traction, we're getting validation and we continue to invest commensurate with that traction in both product and sales capabilities.

Okay. And you’ve mentioned that you’ve hired the VP of Product and Engineering, subsequently has there been any change strategic or to the product that you’re planning on implementing?

No we’ve got Nexus in the market today, as I said several times it’s really validating in the SIO space and that’s a big space to taking concur so we’re still laser focused on the Nexus product, as a SaaS and having that be really vital part of Support.com.

Okay. And also regarding the BPO clients under Nexus, it seems to me that without Nexus they maybe be more of a competitor to that and now it’s somebody you can sell through is this kind of like a new really good opportunity for additional BPO clients in the space?

That’s an interesting way to look at it Stan. We are selling to companies that you could have formally thought of as competitors in the services space, but there is lots of different markets out there and there is lots of opportunities to cover. So an interesting thing about getting Nexus into the market is the synergy that we’re seeing between services and products. So conversations can start out with the services program and they can quickly morph into a discussion of how our technology can help that customer and vice versa we have been talking to some Nexus prospects and they discover that we’ve got world class premium technical support and that conversation will turn into a services program discussion and then often it will be both. What that means for us is that our go-to-market spend is getting leveraged in both areas, which is a great way to run the business.

Great. And lastly can you maybe touch based a bit more on the Staples and Office Depot acquisition Office Depot have you had at all any discussion with Staples has there been any color that you kind of garnered from what that might be for you guys in terms of an impact?

No we only know what’s reported in the press about the acquisition and we haven’t had any specific discussion, but as you know Office Depot is certainly one of our very large and close customers. And historically we’ve also done business with Staples. So we have good relationships with both companies and just look to see what happens we think it will be beyond this year, but that’s only based on what we see is the pace of the large transactions in the marketplace like this.

Great, thank you so much.

Thanks, Stan.

Thank you. Our next question comes from Joe [indiscernible] with Craig Hallum. Your line is open.

Hi, good afternoon, on here for Chad. Thanks for taking the question. Firstly, you’ve talked about the Nexus platform being a pretty broadly up and you’re seeing customer used cases from a wide variety of I don’t know if you want to call it verticals. I guess would you say that you are surprised by maybe the uptake in any of the verticals is there anything there that you’re seeing maybe used cases that you didn’t planned for are you seen better uptake in maybe a certain used case or certain vertical than you would have planned anything there?

We’re seeing a lot of interesting incoming demand that’s really outside of our focus target market. So right now just to reminder everybody we’re focused on companies with complex technical support and we’re targeting 50 to 1000 fee service organization. So we’re staying pretty focused in talking to those companies even though we’re getting incoming inquiries from outside of that. In terms of the used cases, certainly our heritage is technical support used case, so we really expected the product to resonate there and it is. But some of the other ones particularly onboarding I talked about Mural on the last call and they’re using Nexus to consistently and efficiently onboard customers that are moving their operations to the cloud. I think that’s probably one of the used cases that is more prevalent that I would have predicted earlier and it’s particularly also important in the IOT space we’re seeing a lot of companies that understand with adoption of new consumer devices that are all connected in the combination of technology with what’s formally just piece of hardware. They’re getting the customer to understand how to use it out of the box. It’s just a way to ensure success in the long run. So I think that’s probably the one used case it’s not a surprise that it’s there, but I think I am little interested and pleased that it’s so ubiquitous.

Great. And then I guess it’s maybe a little too early to response from this, but the new customers obviously kind a grabbing that base spending. Are your customer base as much as possible obviously a big focus, but as of right now do you see any of kind of the early stage customers that you could see becoming a 10% partner a 10% customer or maybe two three years down the road or do none of them look like they’re maybe going to scale to that?

Yeah we’re not going to comment on how big or any of these programs can grow to. And if and when that happens we’ll certainly let you know.

Fair. And then one last one from me starting your M&A strategy or I guess high level what’s your appetite for M&A and if you were to go after M&A activity I mean would you be more likely to pursue like kind of a technology tuck-in or would you be looking to kind of a customer based plan to grab it type acquisition I guess what your - what are your high level thoughts?

Our focus is to really accelerate the progress on our strategy and our strategy is to get a SaaS offering out in the market and grow it really quickly. So M&A is definitely a key way to accelerate the growth of the SaaS product. You see that the market segments here in that gives you some idea of the kinds of things that we’ve been interesting in expanding Nexus into in adjacent areas and we’re certainly looking to see if a buy versus a build decision make sense for us. Down to the level of customer base versus technology tuck-in I think it really is a combination of what we see and how the individual segments within SIO and the associated areas play out.

Okay, that will be all from me. Thank you.

Okay, thank you.

Thank you. This concludes our Q&A session. I would like to turn the call back to Elizabeth Cholawsky for closing remarks.

Thank you, operator. Thanks everybody for being on the call today.