SERVICESOURCE INTERNATIONAL, INC. The following MD&A should be read in conjunction with our unaudited Consolidated Financial Statements and notes thereto which appear elsewhere in this quarterly report on Form 10-Q. This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward looking statements may appear throughout this report. These forward-looking statements are generally identified by the words "believe," "project," "target," "forecast", "expect," "anticipate," "estimate," "intend," "strategy," "future," "opportunity," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and variations of such words or similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those identified elsewhere in this report, including the risks and uncertainties related to the impact and duration of the COVID-19 pandemic, as well as those discussed in the sections of our Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSEC onFebruary 19, 2020 entitled "Forward Looking Statements" and "Risk Factors", in the section of our Quarterly Report on Form 10-Q for the period endedMarch 31, 2020 filed with theSEC onApril 30, 2020 entitled "Risk Factors", and in our other filings with theSEC . Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise, except as required by applicable law. Overview ServiceSource is a leading provider of BPaaS solutions that enable the transformation of go-to-market organizations and functions for global technology clients. We design, deploy, and operate a suite of innovative solutions and complex processes that support and augment our clients' B2B customer acquisition, engagement, expansion and retention activities. Our clients - ranging from Fortune 500 technology titans to high-growth disruptors and innovators - rely on our holistic customer engagement methodology and process excellence, global scale and delivery footprint, and data analytics and business insights to deliver trusted business outcomes that have a meaningful and material positive impact to their long-term revenue and profitability objectives. Through our unique integration of people, process and technology - leveraged against our 20 years of experience and domain expertise in the cloud, software, hardware, medical device and diagnostic equipment, and industrial IoT sectors - we effect and transact billions of dollars of B2B commerce in more than 175 countries on our clients' behalf annually. "ServiceSource," "the Company," "we," "us," or "our", as used herein, refer toServiceSource International, Inc. and its wholly owned subsidiaries, unless the context indicates otherwise. For a summary of commonly used industry terms and abbreviations used in this report, see Glossary of Terms located at the end of this report. Impact of the COVID-19 Pandemic With the global outbreak of COVID-19 and the declaration of a pandemic by theWorld Health Organization onMarch 11, 2020 , we created a dedicated crisis team to proactively implement our business continuity plans. ByMarch 19, 2020 , more than 95% of our employees had moved from an in-office to a work-from-home environment and as ofApril 1, 2020 , we transitioned to a 100% virtual operating model, which includes virtual sourcing, hiring, and onboarding for new employees as well as a process for driving performance and culture in a virtual environment. As a result of the implementation of these business continuity measures, we have not experienced material disruptions in our operations. We believe we have sufficient liquidity on hand to continue business operations during this volatile period. As ofJune 30, 2020 , we had total available liquidity of$47.4 million consisting of cash on hand and our Revolver. See "Liquidity and Capital Resources" for additional information. Although there was no material adverse impact on the results of operations for the first half of 2020 as a result of COVID-19, the full impact of the pandemic remains to be seen. By way of example, we have seen some instances of delays in responsiveness from our clients' customers and end users on making purchasing or renewal decisions and customer payments, but on the other hand, we have seen some clients experience heightened levels of demand for their products and services. We have incurred and expect to continue to incur costs directly related to the COVID-19 pandemic such as costs for enhanced cleaning of our facilities, investing capital to allow our employees to function in our virtual, work-from-home operating model and increased paid time off costs resulting from employees taking less paid time off. However, we are also benefiting from decreases in certain costs related to our facilities and reduced travel and entertainment costs. We do not currently anticipate that these items will have a material adverse impact on our overall business and financial results. 17
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During 2020, ServiceSource received a grant from theSingapore government pursuant to its Job Support Scheme, which assists enterprises in retaining their local employees during the COVID-19 pandemic. ServiceSource received approximately$0.4 million from the grant during the three and six months endedJune 30, 2020 and is expected to receive an additional$0.7 million during the second half of 2020. The situation surrounding COVID-19 remains fluid and the potential for a negative impact on our financial condition and results of operations increases the longer the virus impacts the economic activity in theU.S. and globally. See Part II, Item 1A - "Risk Factors" for additional information. Key Financial Results for the Three Months EndedJune 30, 2020 • GAAP revenue was$47.6 million compared with$52.4 million reported for
the same period in 2019.
• GAAP net loss was
GAAP net loss of
same period in 2019.
• Adjusted EBITDA, a non-GAAP financial measure, was negative
compared with negative $0.5 million reported for the same period in 2019.
See "Non-GAAP Financial Measurements" below for a reconciliation of
Adjusted EBITDA from net loss.
• Ended the quarter with $43.2 million of cash and cash equivalents and
restricted cash and $20.0 million of borrowings under the Company's $40.0
million Revolver.
Results of Operations
For the Three Months Ended June 30, 2020 Compared to the Same Period Ended
June 30, 2019
Net Revenue, Cost of Revenue and Gross Profit
Net revenue is primarily attributable to commissions we earn from the sale of
renewals of maintenance, support and subscription agreements on behalf of our
clients. We also generate revenues from selling professional services.
Historically, we earned a small percentage of our total revenue from the sale of
subscriptions to our cloud-based applications.
Cost of revenue includes employee compensation, technology costs, including
those related to the delivery of our cloud-based technologies, and allocated
expenses which consist of depreciation, amortization of internally developed
software, facility and technology costs.
For the Three Months Ended June 30,
2020 2019
% of Net % of Net
Amount Revenue Amount Revenue $ Change % Change
(in thousands) (in thousands) (in thousands)
Net revenue $ 47,638 100 % $ 52,358 100 % $ (4,720 ) (9 )%
Cost of revenue 34,645 73 % 38,349 73 % (3,704 ) (10 )%
Gross profit $ 12,993 27 % $ 14,009 27 % $ (1,016 ) (7 )%
Net revenue decreased $4.7 million , or 9%, for the three months ended June 30,
2020 compared to the same period in 2019, primarily due to client churn and
lower bookings.
Cost of revenue decreased $3.7 million , or 10%, for the three months ended June
30, 2020 compared to the same period in 2019, primarily due to the following:
• $2.5 million decrease in employee related costs associated with a
reduction in headcount, the receipt of the
lower travel and entertainment expenditures, partially offset by increased
paid time off costs resulting from employees taking less paid time off
during the global pandemic;
• $1.0 million decrease in facility related costs primarily related tosublease income, reduced headcount and transitioning to a work-from-home
operating model; and
• $0.4 million decrease in information technology costs due to lower
headcount; partially offset by
•
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Operating Expenses
For the Three Months Ended June 30,
2020 2019
% of Net % of Net
Amount Revenue Amount Revenue $ Change % Change
(in thousands) (in thousands) (in thousands)
Operating expenses:
Sales and marketing $ 6,142 13 % $ 7,486 14 % $ (1,344 ) (18 )%
Research and development 1,516 3 % 1,274 2 % 242 19 %
General and administrative 10,619 22 % 10,970 21 % (351 ) (3 )%
Restructuring and other
related costs 236 - % 148 - % 88 59 %
Total operating expenses $ 18,513 39 % $ 19,878 38 % $ (1,365 ) (7 )%
Sales and Marketing
Sales and marketing expenses primarily consist of compensation expense and sales
commissions to our sales and marketing employees, amortization of contract
acquisition costs, marketing programs and events, as well as allocated expenses,
which consist of depreciation, amortization of internally developed software,
facility and technology costs.
Sales and marketing expenses decreased $1.3 million , or 18%, for the three
months ended June 30, 2020 compared to the same period in 2019, primarily due to
a $0.9 million decrease in employee related costs associated with lower bookings
and lower travel and entertainment expenditures and a $0.2 million decrease in
facility related costs related to sublease income and transitioning to a
work-from-home operating model.
Research and Development
Research and development expenses primarily consist of employee compensation
expense.
Research and development expenses increased $0.2 million , or 19%, for the three
months ended June 30, 2020 compared to the same period in 2019, primarily due to
a $0.4 million increase due to a reduction in third party capitalizable software
development costs, partially offset by a $0.2 million decrease in facility
related costs related to sublease income and transitioning to a work-from-home
operating model.
General and Administrative
General and administrative expenses primarily consist of employee compensation
expense for our executive, human resources, finance and legal functions and
expenses for professional fees for accounting, tax and legal services, as well
as allocated expenses, which consist of depreciation, amortization of internally
developed software, facility and technology costs.
General and administrative expenses decreased $0.4 million , or 3%, for the three
months ended June 30, 2020 compared to the same period in 2019, primarily due to
the following:
• $0.6 million decrease in depreciation and amortization expense; and
•
•$0.6 million increase in information technology support and other operating costs. Restructuring and Other Related Costs Restructuring and other related costs consist primarily of employees' severance payments and related employee benefits, related legal fees and charges related to lease termination costs. Restructuring and other related costs increased$0.1 million , or 59% for the three months endedJune 30, 2020 compared to the same period in 2019, due to timing of headcount reductions related to the 2019 restructuring effort that resulted in a reduction of headcount and office lease costs. 19
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Interest and Other Income (Expense), Net
Interest and other income (expense), net consists of interest expense associated
with our Revolver, imputed interest from finance lease payments, interest income
earned on our cash and cash equivalents, amortization of debt issuance costs and
foreign exchange gains and losses.
For the Three Months Ended June 30,
2020 2019
% of Net % of Net
Amount Revenue Amount Revenue $ Change % Change
(in thousands) (in thousands) (in thousands)
Interest expense $ (235 ) - % $ (120 ) - % $ (115 ) (96 )%
Other income, net $ 559 1 % $ 62 - % $ 497 *
* Not considered meaningful.
Interest expense increased $0.1 million , or 96%, for the three months ended June
30, 2020 compared to the same period in 2019, primarily due to borrowings on the
Company's Revolver during 2020.
Other income, net increased $0.5 million for the three months ended June 30,
2020 compared to the same period in 2019, primarily due to foreign currency
fluctuations.
Provision for Income Tax Expense
For the Three Months Ended June 30,
2020 2019
% of Net % of Net
Amount Revenue Amount Revenue $ Change % Change
(in thousands) (in thousands) (in thousands)
Provision for income tax expense
(108 ) - % $ (53 ) (49 )%
Provision for income tax expense resulted primarily from profitable jurisdictions where no valuation allowance has been provided. Provision for income tax expense increased for the three months endedJune 30, 2020 compared to the same period in 2019, due to an increase in profitable operations in certain foreign jurisdictions. For the Six Months EndedJune 30, 2020 Compared to the Same Period EndedJune 30, 2019 Net Revenue, Cost of Revenue and Gross Profit For the Six Months Ended June 30, 2020 2019 % of Net % of Net Amount Revenue Amount Revenue $ Change % Change (in thousands) (in thousands) (in thousands) Net revenue$ 97,752 100 % $
107,869 100 %
70,205 72 % 77,825 72 % (7,620 ) (10 )%
Gross profit $ 27,547 28 % $ 30,044 28 % $ (2,497 ) (8 )%
Net revenue decreased $10.1 million , or 9%, for the six months ended June 30,
2020 compared to the same period in 2019, primarily due to client churn and
lower bookings.
Cost of revenue decreased $7.6 million , or 10%, for the six months ended June
30, 2020 compared to the same period in 2019, primarily due to the following:
• $5.6 million decrease in employee related costs associated with a
reduction in headcount, the receipt of the
lower travel and entertainment expenditures, partially offset by increased
paid time off costs resulting from employees taking less paid time off
during the global pandemic;
• $1.9 million decrease in facility related costs primarily related tosublease income, reduced headcount and transitioning to a work-from-home
operating model; and
• $0.7 million decrease in information technology costs due to lower
headcount; partially offset by
•
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Operating Expenses
For the Six Months Ended June 30,
2020 2019
% of Net % of Net
Amount Revenue Amount Revenue $ Change % Change
(in thousands) (in thousands) (in thousands)
Operating expenses:
Sales and marketing $ 13,410 14 % $ 15,435 14 % $ (2,025 ) (13 )%
Research and development 2,697 3 % 2,537 2 % 160 6 %
General and administrative 21,307 22 % 21,952 20 % (645 ) (3 )%
Restructuring and other
related costs 703 1 % 1,206 1 % (503 ) (42 )%
Total operating expenses $ 38,117 39 % $ 41,130 38 % $ (3,013 ) (7 )%
Sales and Marketing
Sales and marketing expenses decreased $2.0 million , or 13%, for the six months
ended June 30, 2020 compared to the same period in 2019, primarily due to a $1.5
million decrease in employee related costs associated with lower bookings and
lower travel and entertainment expenditures and a $0.2 million decrease in
facility related costs related to sublease income and transitioning to a
work-from-home operating model.
Research and Development
Research and development expenses increased $0.2 million , or 6%, for the six
months ended June 30, 2020 compared to the same period in 2019, primarily due to
$0.4 million increase due to a reduction in third party capitalizable software
development costs, partially offset by a $0.2 million decrease in facility
related costs related to sublease income and transitioning to a work-from-home
operating model.
General and Administrative
General and administrative expenses decreased $0.6 million , or 3%, for the six
months ended June 30, 2020 compared to the same period in 2019, primarily due to
the following:
• $0.8 million decrease in depreciation and amortization expense;
•
travel and entertainment expenditures and recruiting costs, partially
offset by merit increases and increased paid time off costs resulting from
employees taking less paid time off during the global pandemic; and
•
•$1.0 million increase in information technology support and other operating costs. Restructuring and Other Related Costs Restructuring and other related costs decreased$0.5 million , or 42% for the six months endedJune 30, 2020 compared to the same period in 2019, due to decreased costs incurred related to the 2019 restructuring effort that resulted in a reduction of headcount and office lease costs. Interest and Other Income (Expense), Net For the Six Months Ended June 30, 2020 2019 % of Net % of Net Amount Revenue Amount Revenue $ Change % Change (in thousands) (in thousands) (in thousands) Interest expense$ (316 ) - % $ (212 ) - % $ (104 ) (49 )% Other expense, net$ (234 ) - % $ (336 ) - % $ 102 30 % Interest expense increased$0.1 million , or 49%, for the six months endedJune 30, 2020 compared to the same period in 2019, primarily due to borrowings on the Company's Revolver during 2020. Other expense, net decreased$0.1 million , or 30%, for the six months endedJune 30, 2020 compared to the same period in 2019, primarily due to foreign currency fluctuations. 21
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Provision for Income Tax Expense
For the Six Months Ended June 30,
2020 2019
% of Net % of Net
Amount Revenue Amount Revenue $ Change % Change
(in thousands) (in thousands) (in thousands)
Provision for income tax expense
(120 ) - % $ (59 ) (49 )%
Provision for income tax expense resulted primarily from profitable jurisdictions where no valuation allowance has been provided. Provision for income tax expense increased for the six months endedJune 30, 2020 compared to the same period in 2019, due to an increase in profitable operations in certain foreign jurisdictions. Liquidity and Capital Resources Our primary operating cash requirements include the payment of compensation and related costs and costs for our facilities and information technology infrastructure. Historically, we have financed our operations from cash provided by our operating activities. We believe our existing cash and cash equivalents and available funds from the Revolver will be sufficient to meet our working capital and capital expenditure needs over the next twelve months. We have considered the effects of the COVID-19 pandemic, including customer purchasing and renewal decisions and any delay in customer payments, in our assessment of the sufficiency of our liquidity and capital resources. We will continue to monitor our financial position as pandemic-related challenges develop over time. As ofJune 30, 2020 , we had cash and cash equivalents of$40.9 million , which primarily consisted of demand deposits and money market mutual funds. Included in cash and cash equivalents was$8.0 million held by our foreign subsidiaries used to satisfy their operating requirements. We consider the undistributed earnings ofServiceSource Europe Ltd. andServiceSource International Singapore Pte. Ltd. permanently reinvested in foreign operations and have not provided forU.S. income taxes on such earnings. As ofJune 30, 2020 , the Company had no unremitted earnings from our foreign subsidiaries. DuringJuly 2018 , the Company entered into a$40.0 million Revolver that allows us to borrow against our domestic receivables as defined in the Credit Agreement. The Revolver maturesJuly 2021 and bears interest at a variable rate per annum based on the greater of the prime rate, the Federal Funds rate plus 0.50% or the one-month LIBOR rate plus 1.00%, plus, in each case, a margin of 1.00% for base rate borrowings or 2.00% for Eurodollar borrowings. DuringMarch 2020 , the Company borrowed$27.0 million under the Revolver through a six-month Eurodollar borrowing at an effective interest rate of 3.07%. As ofJune 30, 2020 , the Company repaid$7.0 million of the outstanding balance and converted the remaining$20.0 million of borrowings into a one-month Eurodollar borrowing at an effective interest rate of 2.18% maturingJuly 2020 . An additional$6.5 million was available for borrowing under the Revolver as ofJune 30, 2020 . The Eurodollar borrowings may be extended upon maturity, converted into a base rate borrowing upon maturity or require an incremental payment if our borrowing base decreases below our current amount outstanding during the term of the Eurodollar borrowing. Subsequent toJune 30, 2020 , the one-month$20.0 million Eurodollar borrowing was extended at an effective interest rate of 2.17% and maturingAugust 2020 . Proceeds from the Revolver are used for working capital and general corporate purposes. Obligations under the Credit Agreement are secured by substantially all of the assets of the Borrowers and certain of their subsidiaries, including pledges of equity in certain of the Company's subsidiaries. The Revolver has financial covenants which the Company was in compliance with as ofJune 30, 2020 andDecember 31, 2019 . Letters of Credit and Restricted Cash In connection with two of our leased facilities, the Company is required to maintain two letters of credit totaling$2.3 million . The letters of credit are secured by$2.3 million of cash in money market accounts, which are classified as restricted cash in "Other assets" in the Consolidated Balance Sheets. 22
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Cash Flows
The following table presents a summary of our cash flows:
For the Six Months Ended June 30,
2020 2019
(in thousands)Net cash (used in) provided by operating activities $ (3,070 )
$ 6,717
Net cash used in investing activities (2,596 ) (6,095 )
Net cash provided by (used in) financing activities 19,595 (299 )
Effect of exchange rate changes on cash and cash
equivalents and restricted cash (68 ) (156 )
Net change in cash and cash equivalents and restricted cash
$ 13,861 $ 167
Depreciation and amortization expense were comprised of the following:
For the Three Months Ended June 30 ,
For the Six Months Ended
2020 2019 2020 2019
(in thousands)
Internally developed software
amortization $ 1,849 $ 1,407 $ 3,614 $ 2,666
Property and equipment
depreciation 1,574 2,302 3,205 4,328
Total depreciation and
amortization $ 3,423 $ 3,709 $ 6,819 $ 6,994
Operating Activities
Net cash used in operating activities increased $9.8 million for the six months
ended June 30, 2020 compared to the six months ended June 30, 2019 , primarily as
a result of decreased cash collections from customers during the current period
compared to the prior period and a decrease in earnings, partially offset by
lower cash payments made during the current period compared to the prior period
related to operating costs accrued for previously.
Investing Activities
Net cash used in investing activities decreased $3.5 million for the six months
ended June 30, 2020 compared to the six months ended June 30, 2019 , primarily as
a result of a decrease in cash outflows related to the purchases of property and
equipment during the six months ended June 30, 2020 .
Financing Activities
Net cash provided by financing activities increased $19.9 million for the six
months ended June 30, 2020 compared to the six months ended June 30, 2019 ,
primarily as a result of $20.0 million in net cash inflows from borrowings on
the Revolver during the six months ended June 30, 2020 .
Off-Balance Sheet Arrangements
As of June 30, 2020 , we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires
management to use judgment in the application of accounting policies, including
making estimates and assumptions. The Company's significant accounting policies
and estimates are described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Critical Accounting Policies and
Estimates" in our Annual Report on Form 10-K for the year ended December 31,
2019 . These policies were followed in preparing the Consolidated Financial
Statements for the three and six months ended June 30, 2020 and are consistent
with the year ended December 31, 2019 .
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2 - "Summary of
Significant Accounting Policies" to the Consolidated Financial Statements.
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Non-GAAP Financial Measurements
ServiceSource believes net income (loss), as defined by GAAP, is the most
appropriate financial measure of our operating performance; however,
ServiceSource considers Adjusted EBITDA to be useful supplemental, non-GAAP
financial measure of our operating performance. We believe Adjusted EBITDA can
assist investors in understanding and assessing our operating performance on a
consistent basis, as it removes the impact of the Company's capital structure
and other non-cash or non-recurring items from operating results and provides an
additional tool to compare ServiceSource's financial results with other
companies in the industry, many of which present similar non-GAAP financial
measures.
EBITDA consists of net income (loss) plus provision for income tax expense
(benefit), interest and other expense (income), net and depreciation and
amortization. Adjusted EBITDA consists of EBITDA plus stock-based compensation,
restructuring and other related costs and amortization of contract acquisition
costs related to the initial adoption of ASC 606.
This non-GAAP measure should not be considered a substitute for, or superior to,
financial measures calculated in accordance with GAAP.
The following table presents the reconciliation of "Net Loss" to Adjusted
EBITDA:
For the Three Months Ended June 30, For the Six Months Ended June 30,
2020 2019 2020 2019
(in thousands)
Net loss $ (5,357 ) $
(6,035 )
161 108 179 120
Interest and other (income)
expense, net (324 ) 58 550 548
Depreciation and amortization 3,423 3,709 6,819 6,994
EBITDA (2,097 ) (2,160 ) (3,751 ) (4,092 )
Stock-based compensation 1,275 1,236 2,320 2,806
Restructuring and other related
costs 236 148 703 1,206
Amortization of contract
acquisition asset costs - ASC
606 initial adoption 162 255 380 512
Adjusted EBITDA $ (424 ) $ (521 ) $ (348 ) $ 432© Edgar Online, source
