ServiceSource Reports Third Quarter 2018 Financial Results

Total Revenue of $57.2 million

GAAP Net Loss of $6.6 million; Non-GAAP Net Income of $0.7 million

Adjusted EBITDA of $3.1 million

DENVER–(BUSINESS WIRE)–$SREV–ServiceSource (NASDAQ: SREV), a global leader in outsourced inside
sales, customer success and recurring revenue growth and retention
solutions, today announced financial results for the three months ended
September 30, 2018, following its release of preliminary results on
October 18, 2018.

“Our third quarter financial results and updated outlook for the year
are disappointing, particularly given the recent underlying progress and
momentum in the business,” said Christopher M. Carrington, CEO of
ServiceSource. “In Q3 we experienced instances of volatility and
different purchasing behavior by end users at three clients in
particular that impacted the accuracy of our previous forecast. We
anticipate these factors will likely persist with these clients in the
coming quarters and we are adjusting our expectations accordingly.”

Mr. Carrington added, “Longer-term we believe dynamics in the
marketplace support durable opportunity for ServiceSource. As companies
progress through their digital go-to-market transformations, our model
is squarely aligned to help them rationalize legacy channel models,
migrate from field sales to inside sales models, and deploy customer
success at scale to improve customer retention and lifetime value in a
subscription and consumption world. We remain focused on positioning the
Company to capture this opportunity in a way that will create
sustainable value for all stakeholders.”

Key Financial Results

• GAAP revenue for Q3 2018 was $57.2 million, a decrease of 1.7%,
  compared with $58.1 million reported for Q3 2017.
• GAAP net loss for Q3 2018 was $6.6 million or $0.07 per diluted share,
  unfavorable compared with GAAP net loss of $5.2 million or $0.06 per
  diluted share reported for Q3 2017.
• Non-GAAP net income for Q3 2018 was $0.7 million or $0.01 per diluted
  share, compared with non-GAAP net income of $2.0 million or $0.02 per
  diluted share reported for Q3 2017.
• Adjusted EBITDA for Q3 2018 was $3.1 million, compared with $5.7
  million reported for Q3 2017.

A reconciliation of GAAP to non-GAAP financial measures is provided
following the Consolidated Financial Statement tables contained within
this press release.

Key Business Highlights

• Recruitment of inside sales and customer success visionary Debbie
  Dunnam to the executive leadership team.
• Solid sales momentum with year-over-year growth in transaction value,
  inclusive of four new logo wins and 13 expansion transactions.
• Signing of a multi-million dollar expansion into EMEA and APJ for a
  nine-year tenured client.
• More than 50% of team members now located in lower cost markets, with
  90% year-over-year growth in the Manila and Sofia offices.

Fourth Quarter 2018 Outlook

For Q4 2018, ServiceSource is providing the following guidance:

• Revenue of $60.0 million to $63.0 million.
• GAAP net loss per share of $0.01 to $0.03; non-GAAP net income per
  share of $0.02 to $0.04.
• Adjusted EBITDA of $4.0 million to $6.0 million.

Fiscal 2018 Outlook

Considering the year-to-date results and Q4 2018 outlook, ServiceSource
anticipates the following full-year financial results that are based on
a number of assumptions that management believes are reasonable at the
time of this earnings release:

• Revenue of $237.0 million to $240.0 million.
• GAAP gross margin of 30.0% to 31.0%; non-GAAP gross margin of 34.0% to
  35.0%.
• GAAP operating expenses of 38.5% to 39.0%; non-GAAP operating expenses
  of 32.0% to 32.5%.
• GAAP net loss of $28.2 million to $30.2 million; non-GAAP net income
  of $2.5 million to $4.0 million.
• GAAP net loss per share of $0.31 to $0.33; non-GAAP net income per
  share of $0.03 to $0.04.
• Adjusted EBITDA of $12.0 million to $14.0 million.

Please see the third quarter 2018 Earnings Call Deck on the Events and
Presentations section of the Investor Relations website (http://ir.servicesource.com/events-and-presentations)
for a reconciliation between GAAP and non-GAAP measures in our guidance.

Quarterly Conference Call

ServiceSource will discuss its third quarter 2018 results and financial
guidance today via teleconference at 1:30 p.m. Pacific Time. To access
the call within the U.S., please dial (877) 293-5486, or outside the
U.S. (914) 495-8592, at least five minutes prior to the start time.
Conference ID number: 2783779. In addition, a live webcast of the call
will also be available on the Investor Relations section of the
ServiceSource website under Events and Presentations. A replay of the
webcast will also be available on the Company’s website at http://ir.servicesource.com.

Forward-Looking Statements

This press release contains forward-looking statements, including
statements regarding our expectations for financial and operational
performance, whether our go-forward model will produce anticipated
benefits, and whether our improved execution and emerging capabilities
will translate into desired results. These forward-looking statements
are based on our current assumptions and beliefs, and involve risks and
uncertainties that could cause our results to differ materially from our
forward-looking statements. Those risks and uncertainties include: a
decline in client renewals, the loss of one or more of our key clients
or the contraction in our revenue from one or more of our key clients,
in each case resulting in churn, or our clients not expanding their
relationships with us; the risk of problems implementing our
technologies or that our technologies will not meet customer
expectations; that the market for our solution is underdeveloped and may
not grow; errors in estimates as to the renewal rate improvements and/or
service revenue we can generate for our customers; changes in market
conditions that impact our ability to sell our solutions and/or generate
service revenue on our customers’ behalf; the possibility that our
estimates of service revenue, opportunity under management, and other
metrics may prove inaccurate; our ability to keep customer data and
other confidential information secure; our ability to adapt our solution
to changes in the market or new competition; problems encountered by our
clients in their business that may cause them to cancel or reduce their
business with us; our ability to achieve our expected benefits from
international expansion; economic or other adverse events or conditions
affecting the technology industry; our ability to protect our
intellectual property rights; the risk of claims that our offerings
infringe the intellectual property rights of others; and other risks and
uncertainties described more fully in our periodic reports filed with
the Securities and Exchange Commission, which can be obtained online at
the Commission’s website at http://www.sec.gov.
All forward-looking statements in this press release are based on
information currently available to us, and except as may be legally
required we assume no obligation to update these forward-looking
statements.

About ServiceSource

ServiceSource International, Inc. (NASDAQ:SREV) helps the world’s
leading brands grow closer to their customers. As a global leader in
outsourced inside sales, customer success and recurring revenue growth
and retention solutions, ServiceSource expands customer lifetime value
by helping companies to more efficiently and effectively find, convert,
grow and retain their B2B customer relationships. Trusted by global
market leaders in the cloud/XaaS, software, technology hardware, medical
device & diagnostic equipment and industrial IoT sectors, ServiceSource
sells, manages or renews $9 billion of revenue annually on behalf of its
clients. Leveraging a robust technology suite, predictive data models
and more than 3,000 revenue delivery professionals speaking 45
languages, only ServiceSource brings to market nearly 20 years of
expertise and the ability to drive recurring revenue growth to more than
170 countries. To learn more, visit http://www.servicesource.com.

Connect with ServiceSource:

http://www.facebook.com/ServiceSource

http://twitter.com/servicesource

http://www.linkedin.com/company/servicesource

http://www.youtube.com/user/ServiceSourceMKTG

ServiceSource International, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Net revenue		$	57,173			$	58,132			$	176,869			$	173,103
Cost of revenue(1)		39,949				40,803				124,136				121,729
Gross profit		17,224				17,329				52,733				51,374
Operating expenses:
Sales and marketing(1)		8,622				7,829				27,112				24,790
Research and development(1)		1,395				1,048				4,691				4,534
General and administrative(1)		12,907				12,543				38,953				40,029
Restructuring and other(1)		—				545				209				6,259
Total operating expenses		22,924				21,965				70,965				75,612
Loss from operations		(5,700		)		(4,636		)		(18,232		)		(24,238		)
Interest expense and other, net		(1,058		)		(2,839		)		(6,680		)		(7,555		)
Gain on sale of cost basis equity investment		—				2,100				—				2,100
Impairment loss on investment securities		—				—				(1,958		)		—
Loss before income taxes		(6,758		)		(5,375		)		(26,870		)		(29,693		)
Provision for income tax benefit (expense)		133				180				(294		)		(227		)
Net loss		$	(6,625	)		$	(5,195	)		$	(27,164	)		$	(29,920	)
Net loss per share, basic and diluted		$	(0.07	)		$	(0.06	)		$	(0.30	)		$	(0.34	)
Weighted average common shares outstanding, basic and diluted		92,113				89,511				91,271				88,907
(1) Reported amounts includes stock-based compensation expense as follows:
		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2018				2017				2018				2017
Cost of revenue		$	194			$	385			$	752			$	969
Sales and marketing		717				982				2,436				2,834
Research and development		24				42				146				107
General and administrative		1,560				2,074				5,699				6,486
Restructuring and other		—				352				—				352
Total stock-based compensation		$	2,495			$	3,835			$	9,033			$	10,748

ServiceSource International, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
		September 30, 2018				December 31, 2017
Assets
Current assets:
Cash and cash equivalents		$	63,527			$	51,389
Short-term investments		—				137,181
Accounts receivable, net		48,812				56,516
Prepaid expenses and other		5,365				6,112
Total current assets		117,704				251,198
Property and equipment, net		36,216				34,119
Contract acquisition costs		2,938				—
Deferred income taxes, net of current portion		68				70
Goodwill and intangible assets, net		6,334				6,419
Other assets		4,484				3,566
Total assets		$	167,744			$	295,372
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	2,358			$	4,574
Accrued taxes		145				651
Accrued compensation and benefits		17,059				19,257
Convertible notes, net		—				144,167
Deferred revenue		—				1,282
Accrued expenses		4,292				6,625
Other current liabilities		6,230				2,104
Total current liabilities		30,084				178,660
Revolving line of credit		32,000				—
Other long-term liabilities		6,519				4,603
Total liabilities		68,603				183,263
Stockholders’ equity:
Common stock		9				8
Treasury stock		(441		)		(441		)
Additional paid-in capital		368,628				359,347
Accumulated deficit		(269,662		)		(246,207		)
Accumulated other comprehensive income (loss)		607				(598		)
Total stockholders’ equity		99,141				112,109
Total liabilities and stockholders’ equity		$	167,744			$	295,372

ServiceSource International, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
		For the Nine Months Ended September 30,
		2018				2017
Cash flows from operating activities:
Net loss		$	(27,164	)		$	(29,920	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		13,398				17,167
Amortization of debt discount and issuance costs		5,843				6,951
Amortization of contract acquisition costs		1,361				—
Amortization of premium on short-term investments		(1,204		)		(172		)
Deferred income taxes		—				177
Stock-based compensation		9,033				10,396
Restructuring and other		470				2,522
Gain on cost basis equity investment		—				(2,100		)
Impairment loss on investment securities		1,958				—
Other		74				—
Changes in operating assets and liabilities:
Accounts receivable, net		7,322				12,307
Deferred revenue		174				(2,440		)
Prepaid expenses and other		180				387
Contract acquisition costs		(955		)		—
Accounts payable		(2,204		)		(813		)
Accrued taxes		(494		)		(1,019		)
Accrued compensation and benefits		(2,037		)		(4,713		)
Accrued expenses		(4,652		)		(839		)
Other liabilities		4,182				(1,375		)
Net cash provided by operating activities		5,285				6,516
Cash flows from investing activities:
Acquisition of property and equipment		(12,484		)		(13,843		)
Proceeds from sale of cost basis equity investment		—				2,100
Purchases of short-term investments		(480		)		(56,589		)
Sales of short-term investments		133,920				51,119
Maturities of short-term investments		4,240				3,506
Net cash provided by (used in) investing activities		125,196				(13,707		)
Cash flows from financing activities:
Repayment on capital lease obligations		(278		)		(52		)
Repayment of convertible notes		(150,000		)		—
Debt issuance costs		(192		)		—
Proceeds from revolving line of credit		32,000				—
Proceeds from issuance of common stock		759				1,062
Payments related to minimum tax withholdings on restricted stock unit releases		(766		)		(735		)
Net cash (used in) provided by financing activities		(118,477		)		275
Net increase/(decrease) in cash, cash equivalents and restricted cash		12,004				(6,916		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		134				(1,191		)
Cash, cash equivalents and restricted cash, beginning of period		52,633				48,936
Cash, cash equivalents and restricted cash, end of period		$	64,771			$	40,829

Use of Non-GAAP Financial Measures

To supplement its Condensed Consolidated Financial Statements presented
in accordance with generally accepted accounting principles, or GAAP,
ServiceSource provides investors with non-GAAP gross profit, net income
(loss), net income (loss) per diluted share and Adjusted EBITDA. A
reconciliation of these non-GAAP financial measures to the closest GAAP
financial measure is presented in the financial tables below under the
heading, “GAAP to Non-GAAP Reconciliation.”

ServiceSource believes non-GAAP financial information provided in this
release can assist investors in understanding and assessing its on-going
core operations and prospects for the future and provides an additional
tool for investors to use in comparing ServiceSource’s financial results
with other companies in the industry, many of which present similar
non-GAAP financial measures to investors.

Non-GAAP gross profit consists of gross profit plus adjustments to
stock-based compensation, amortization of internally-developed software
and amortization of purchased intangible assets.

Non-GAAP net income (loss) consists of net income (loss) plus
stock-based compensation, amortization of internally-developed software,
amortization of purchased intangible assets, restructuring and other
related costs, impairment loss on investment securities, gain on cost
basis equity investment, litigation reserve and amortization of contract
acquisition costs related to the initial adoption of ASC 606, non-cash
interest expense and applying an income tax rate of 26.5% and 40.0% as
of September 30, 2018 and September 30, 2017, respectively, on non-GAAP
adjustments as well as the impact of normalizing the effective income
tax rate. Stock-based compensation expense is expected to vary depending
on the number of new grants issued, changes in the Company’s stock
price, stock market volatility, expected option lives and risk-free
interest rates, all of which are difficult to estimate.

EBITDA consists of net income (loss) plus depreciation and amortization,
interest expense and other income/(expense), and income tax benefit
(expense). Adjusted EBITDA consists of EBITDA plus non-cash stock-based
compensation expense, amortization of contract acquisition costs related
to the initial adoption of ASC 606, restructuring and other related
costs, gain on cost basis equity investment, litigation reserve and
impairment loss on investment securities. ServiceSource uses Adjusted
EBITDA as a measure of operating performance because it assists the
Company in comparing 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.

These non-GAAP measures should not be considered a substitute for, or
superior to, financial measures calculated in accordance with GAAP.

ServiceSource International, Inc.
GAAP To Non-GAAP Reconciliation
(in thousands, except per share amounts)
(unaudited)
						For the Three Months Ended September 30,								For the Nine Months Ended September 30,
						2018				2017				2018				2017
Net revenue
GAAP net revenue						$	57,173			$	58,132			$	176,869			$	173,103
Non-GAAP net revenue						$	57,173			$	58,132			$	176,869			$	173,103
Gross profit
GAAP gross profit						$	17,224			$	17,329			$	52,733			$	51,374
Non-GAAP adjustments:
Stock-based compensation				(A)		194				385				752				969
Amortization of internally-developed software				(B)		1,415				3,514				6,924				8,998
Amortization of purchased intangible assets				(C)		—				247				55				741
Non-GAAP gross profit						$	18,833			$	21,475			$	60,464			$	62,082
Gross profit %
GAAP gross profit						30.1		%		29.8		%		29.8		%		29.7		%
Non-GAAP adjustments:
Stock-based compensation				(A)		0.3		%		0.7		%		0.4		%		0.6		%
Amortization of internally-developed software				(B)		2.5		%		6.0		%		3.9		%		5.2		%
Amortization of purchased intangible assets				(C)		—		%		0.4		%		—		%		0.4		%
Non-GAAP gross profit						32.9		%		36.9		%		34.2		%		35.9		%
Certain totals do not add due to rounding
Operating expenses:
GAAP operating expenses						$	22,924			$	21,965			$	70,965			$	75,612
Non-GAAP adjustments:
Stock-based compensation				(A)		(2,301		)		(3,098		)		(8,281		)		(9,427		)
Amortization of internally-developed software				(B)		(265		)		(476		)		(632		)		(1,151		)
Amortization of purchased intangible assets				(C)		—				(131		)		(30		)		(394		)
Restructuring and other				(D)		—				(545		)		(209		)		(6,259		)
Amortization of contract acquisition costs – ASC 606 initial adoption				(E)		(367		)		—				(1,213		)		—
Litigation reserve				(K)		(2,250		)		—				(2,250		)		—
Non-GAAP operating expenses						$	17,741			$	17,715			$	58,350			$	58,381
Net income (loss)
GAAP net loss						$	(6,625	)		$	(5,195	)		$	(27,164	)		$	(29,920	)
Non-GAAP adjustments:
Stock-based compensation				(A)		2,495				3,483				9,033				10,396
Amortization of internally-developed software				(B)		1,680				3,990				7,556				10,149
Amortization of purchased intangible assets				(C)		—				378				85				1,134
Restructuring and other				(D)		—				545				209				6,259
Amortization of contract acquisition costs -ASC 606 initial adoption				(E)		367				—				1,213				—
Impairment loss on investment securities				(F)		—				—				1,958				—
Gain on cost basis equity investment				(G)		—				(2,100		)		—				(2,100		)
Litigation reserve				(K)		2,250				—				2,250				—
Non-cash interest expense				(H)		922				2,394				5,854				6,951
Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate				(I)		(385		)		(1,506		)		(46		)		(1,012		)
Non-GAAP net income						$	704			$	1,989			$	948			$	1,857
Diluted net income (loss) per share
GAAP net loss per share						$	(0.07	)		$	(0.06	)		$	(0.30	)		$	(0.34	)
Non-GAAP adjustments:
Stock-based compensation				(A)		0.03				0.04				0.10				0.12
Amortization of internally-developed software				(B)		0.02				0.04				0.08				0.11
Amortization of purchased intangible assets				(C)		0.00				0.00				0.00				0.01
Restructuring and other				(D)		0.00				0.01				0.00				0.07
Amortization of contract acquisition costs -ASC 606 initial adoption				(E)		0.00				0.00				0.01				0.00
Impairment loss on investment securities				(F)		0.00				0.00				0.02				0.00
Gain on cost basis equity investment				(G)		0.00				(0.02		)		0.00				(0.02		)
Litigation reserve				(K)		0.02				0.00				0.02				0.00
Non-cash interest expense				(H)		0.01				0.03				0.06				0.08
Income tax effect on non-GAAP adjustments and impact of normalizing the effective income tax rate				(I)		0.00				(0.02		)		0.00				(0.01		)
Non-GAAP diluted net income per share						$	0.01			$	0.02			$	0.01			$	0.02
Certain totals do not add due to rounding
Shares used in calculating diluted net income per share on a non-GAAP basis				(J)		92,113				89,511				91,271				88,907

Footnotes to GAAP to Non-GAAP Reconciliation

(A) Stock-based compensation. Included in our GAAP presentation
of cost of revenue and operating expenses, stock-based compensation
consists of expenses for stock options, awards and purchase rights under
our stock purchase plan. We exclude stock-based compensation expense
from our non-GAAP measures because some investors may view it as not
reflective of our core operating performance as it is a non-cash expense.

(B) Amortization of internally-developed software. Included in
our GAAP presentation of cost of revenue and operating expenses,
amortization of internally-developed software reflects non-cash expense
for certain software purchases and software developed or obtained for
internal use. We exclude these expenses from our non-GAAP measures
because we believe they are not indicative of our core operating
performance.

(C) Amortization of purchased intangibles. Included in our GAAP
presentation of gross margin and operating expenses is amortization of
purchased intangible assets. We believe amortization of
acquisition-related intangible assets, such as amortization of costs
associated with an acquired company’s research and development efforts,
trade names and customer relationships, are items arising from
pre-acquisition activities and determined at the time of an acquisition.
Although these intangible assets are continually evaluated for
impairment, amortization of purchased intangibles is a static expense
and not typically affected by operations during any particular period.

(D) Restructuring and other. Included in our GAAP presentation,
we incurred expenses related to our restructuring effort to better align
our cost structure with current revenue levels. Restructuring and other
expenses consist primarily of stock-based compensation related to the
accelerated vesting of certain equity awards, employees’ severance
payments, related employee benefits, related legal fees, asset
impairment charges and charges related to leases and other contract
termination costs. These are one-time in nature costs that are not
indicative of our core operating performance.

(E) Amortization of contract acquisition costs – ASC 606 initial
adoption. Upon adoption of Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606) (“ASU 606”) using the
modified retrospective approach, we capitalized approximately $3.3
million of previously expensed sales commissions from 2015, 2016 and
2017. Amortization of these amounts are included in our GAAP
presentation as sales and marketing expense. We believe this non-cash
amortization expense is not related to or indicative of our ongoing
operating performance.

(F) Impairment loss on investment securities. We liquidated our
investment securities during the first half of 2018 to have sufficient
cash on hand to repay our $150.0 million convertible notes due August 1,
2018. Based on our decision to sell these investment securities, we
determined an other-than-temporary impairment occurred as of March 31,
2018 and recorded an impairment loss, which represented the difference
between the investment securities’ amortized cost basis and fair value.
This charge is not related to or indicative of ongoing operating
performance.

(G) Gain on cost basis equity investment. In 2013, we made an
equity investment in a private company for $4.5 million, which
represented less than 5% of the outstanding equity of the company. Based
on unfavorable growth trends and declining financial performance of this
private company, we determined that the investment was fully impaired
and recorded a $2.

Contacts

Investor Relations Contact for ServiceSource:
ServiceSource
International, Inc.
Chad Lyne
clyne@servicesource.com

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