Good day, everyone, and welcome to the ServiceSource Fourth Quarter and Full Year 2014 Earnings Results Call. This call is being recorded. Eric Bylin from investor relations will be opening today's call. Eric, please go ahead.

Thank you for joining us. Before we begin, I'd like to remind you that, during the course of this webcast and call, we may make projections or forward-looking statements that reflect our views as of today and are based upon the information currently available to us. This information will likely change over time. By discussing our current perception of our market and the future performance of our company and our solutions with you today, we are not undertaking an obligation to provide future updates. We caution you that such statements are just projections and actual events and results may materially differ from what we discussed. Please refer to the documents that we have filed with the SEC. These documents contain and identify important factors that could cause actual results to materially differ from those contained in our projections and forward-looking statements. During the course of this call, we will also be discussing certain non-GAAP financial results. Please note that we reference non-GAAP revenue, which excludes the impact of the haircut to deferred revenue from our acquisition of Scout as required by purchase accounting. The remainder of our non-GAAP metrics do not include noncash expenses related to stock-based compensation, the amortization of internally developed software, amortization of intangibles acquired from our acquisition of Scout, acquisition-related costs and noncash interest expense related to the issuance of convertible notes. We direct your attention to a reconciliation between GAAP and non-GAAP measures which can be found in today's earnings press release posted on the Investor Relations portion of the ServiceSource website. And with that, I'll turn the call over to Chris Carrington, ServiceSource's CEO.

Thank you, Eric. Good afternoon. Thank you for joining the ServiceSource Q4 and Full Year 2014 Earnings Call. I'm joined by Simon Biddiscombe, our Chief Financial Officer; and Ashley Johnson, our Chief Customer Officer. Today, I'll provide you a brief summary of our financial results, discuss the key areas of focus in 2015 and then turn the call over to Simon, who will cover our financials in more detail. We will then open the call up for Q&A. As you know, I'm joining this call for the first time as CEO for ServiceSource. Last week, I completed my 80-day around-the-world tour of all 9 ServiceSource locations throughout North America, EMEA and APJ. During the course of this tour, I was able to visit with and speak to the vast majority of our 3,000-plus employees. Additionally, I've conducted more than 90 one-to-one interviews across our leadership team and spoken to a cross-section of our clients. What is clear to me is that I've joined the undisputed leader in recurring revenue management in a marketplace that is strong and growing and where we have a tremendous opportunity to expand our market share. I am confident that by engaging our customers and prospects and driving our key strategic initiatives that I will speak to you momentarily, we will return ServiceSource to growth and profitability. The customers I have spoken with see ServiceSource as a critical partner to their success and recurring revenue and in the emerging customer success management evolution. All that said, 2014 was a year of significant challenges for ServiceSource. Our revenues were essentially flat. Gross margins declined, and our bottom line disappointed. Additionally, we experienced a significant decline in ACV as a result of our client engagements either ending, being renegotiated or a true-down of opportunity that had been identified.…

Thanks, Chris. In my comments today, I will discuss our Q4 and fiscal year 2014 financial results, share some color on the bookings trends we have seen in the business and provide our guidance for the first quarter of 2015, along with some early perspectives on Q2 revenues. We have posted a presentation on our website with the details of our guidance as well as our GAAP to non-GAAP reconciliations. As a reminder, all the numbers I will discuss today will be non-GAAP. We delivered Q4 results that exceeded expectations across all key metrics, including revenue, gross margin, operating expense, EBITDA and cash flow. We experienced better-than-expected performance in Managed Services across a broad set of customers and also benefited from our previously announced cost reductions and the cost-management activities that were undertaken during the quarter. However, the final quarter of 2014 proved to be very challenging from a customer churn perspective. On a full year basis, our ACV declined by $66 million from $311 million to $245 million as a result of customers taking some or all of their business back in-house, contract renegotiations and adjustments to ACV for accounts that did not produce revenues at expected levels, offset by new business signed during the year. We have come to this total through a deep evaluation of ACV, and we feel we have put heavy losses behind us. And while ACV was not a good indicator of revenue in 2014, we believe it will be more tightly correlated to revenue in 2015. Turning now to revenue. Non-GAAP revenue was $74.9 million, a decrease of 2.9% from the prior year. Our Cloud and Business Intelligence revenue grew by 63.7% year-over-year, but this was offset by Managed Services revenue, which declined by 7.5%. More details on those changes shortly. On a…

[Operator Instructions] Our first question comes from Jennifer Lowe with Morgan Stanley.

I wanted to -- maybe 2 questions quickly just around the guidance. One is, looking at that customer -- well, I guess, a, sort of the size of the magnitude in the ACV drop. You suggested that one of your larger customers was at least part of that. And so I guess, can you just give us any additional color? I know that there's 2 customers that are sort of kicking around 10% of revenue historically. Is it reasonable to think that one of those customers is the one driving at least some outsized portion of that ACV drop? And then maybe, two, outside of that customer, would the drop have been as dramatic as it was? And then also as we think about the full year growth outlook, should Q2 be -- the impact -- Q2 be kind of the bottom for you in terms of the growth trajectory? Or could there be further impacts in the second half of the year?

Jen, so this is Ashley. I'll take the first part of that question as it relates to churn. So as you know, we look at churn on an absolute basis, so it's not just customers that terminated or customers that partially took some business back in-house, but we also look at ACVs that the revenue wasn't equivalent to where we had expected it to be, so we threw that down; and also those accounts where we've done any renegotiation around either the opportunity or the commission rate. And I'd say that the ACV reduction over the course of the year kind of fell equally between the 3 buckets, so about 1/3, 1/3, 1/3. And of the ACV that we referenced as it related to a specific customer, I certainly wouldn't say that, that was the bulk of the ACV adjustment, by any measure, but it was a large customer that did decide to change the scope of the business that they're doing with us, including no longer subscribing to our legacy technology platform, so I do want to be clear that, that is the older-generation platform; and then changed the scope of the work that we're doing for them. So we've encapsulated all of those changes in the ACV reduction, but again, that was just a portion of it, certainly nowhere close to even the majority.

Jen, did you have any follow-on on that specifically, before I touch on the second part of your question?

Not on that yet. So if you can hit the second part I was looking [ph], that would be great.

So -- yes. So I think we're not providing any commentary beyond Q2 at this point in time. Clearly, we wanted to help you understand that even though Q4 had been strong and Q1 is a good quarter, that there was a step-down expected in Q2 associated with revenues. And beyond that, we're not able to provide any further color at this point in time.

Okay. And then maybe just one follow-up there too. You highlighted the $15 million of additional cost savings that you identified headed into '15. Can you give us a little more color on where the cost savings are coming from? And was any of that related to some of the customers that are moving business in-house, potentially alleviating some of your headcount needs on the Managed Services side?

Yes, so if you take the $15 million, that was roughly $10 million of the change that was associated with the cost of revenues. And there was roughly $5 million of the change that was associated with the operating expense structure. So we continue to undertake essentially all of the business that we were performing for that customer in the current period, clearly, which is why you don't see the revenue deterioration until the second quarter. So the costs -- cost reductions we've identified are primarily associated with churn in other customers, in cost of revenue, and not necessarily associated with that specific customer. On the OpEx side, it was really about continuing to drive focus. And what I would want to reiterate is that both Chris and I recognize that there's a critical importance associated with protecting the cash that exists in the business. There's a critical importance associated with driving further cost reductions as we move forward. And what we're cognizant of is the need to invest in the Managed Services business, as Chris touched on at length throughout his prepared remarks; and the offset associated with productivity improvements and cost reduction against the need to continue to invest. So we're pleased to have achieved what we have achieved in getting the cost structure down to where we are at this point in time, $70 million on a -- for the current quarter, but we recognize we've got more work to do. We also recognize the need to invest in Managed Services as well.

Our next question comes from Pat Walravens with JMP Securities.

Kind of, Chris, I think I'm just going to go pretty high level here. Could you just start by just telling us why you decided to take this role?

Sure, Pat, would be happy too. The opportunity to join ServiceSource was an exciting one to me for a multitude of reasons, but I think first and foremost was the brand that it has established over the past decade of being a winning team and really innovating and inventing an industry segment, certainly one that I was familiar with coming from my previous, I'll say, past years out of the customer contact center industry, where we actually kept an eye on ServiceSource. And I watched their tremendous growth over the years. Second, I felt it was a great alignment with my skill set and expertise of really my past 25 years of in the technology and tech-enabled services business world. Clearly, the ServiceSource business, with a split between our Managed Services organization and our Cloud and Business Intelligence organization, are 2 businesses that I'm very familiar with and how to make those successful. So I felt like there's a really good alignment, once again with my background. And then I'd say, last but not least, I had an opportunity to meet the team and was really excited with what I saw and joined a company that I think has clearly stumbled over the course of last year but has an easy ability to stand back up and run again. And I think I would just close and say I had to believe that a turnaround was possible, and I absolutely do believe that. I believe that, before I joined, when I joined and now 88 days into it, I still believe it. So I think I made a great decision. Glad to be here.

Great, that's helpful. And just because you have done such a deep analysis over the last quarter or so. I'd love to hear your perspective on just where you think things went wrong for ServiceSource.

Well, I think, from an outside perspective and in that 88 days of inside perspective, pretty obvious for me to observe and see actually many of the things that Ashley and team had identified Q3 to Q4 last year, which was we had spent an enormous amount of time over the past couple of years focusing on ourselves and our strategies, go-to-market and what to do, building some products, and the reality is we'd taken our eye off the ball as it related to our customer centricity. At the end of the day, if you're not talking to your clients or listening to their needs or desires, you wake up 12, 18 months later and find yourself off track. So I'd say, first and foremost, my observation is customer focus. The second observation that probably didn't have complete clarity to coming in, as far as understanding, but as I've gone now and visited all of our 8 office locations and spent a lot of time within our selling services centers, it came to my attention that really we -- our under-investment in technology from a Managed Services perspective has really brought us to a point whereby we've become a little inefficient in our ability to deliver our services to our clients from a cost perspective. And the good news, as I look at the shortfall in investment as it relates to technology, I think there are some pretty easy answers for us to go implement and execute to, to get our Managed Services organization back on track. And so I'd say those are really the 2 big key observations I came across.

Great. And then last one for me. When you -- for the reduction in scope with the big customer, what was the root cause of that reduction in scope?

So Pat, I'd say it was, frankly, that, that direction that we were originally going with our renew platform was not consistent with where this customer was going with their in-house technology platform; whereas I'd say, with our new architecture that we talked about in the fall, frankly, we're a bit more aligned. And we're hopeful that there'll be an opportunity for us to work with this customer down the road, but because when we initiated these conversations last year, there was a lack of alignment. Ultimately, they made the decision at the end of the year that they wanted to migrate to their in-house technology platform, but they did want to maintain our Managed Services. We continue to perform very well for the customer. They're a very enthusiastic supporter. It was really more an internal technology decision that made them decide to shift that piece away. And like I said, we're still -- it's a very strong customer relationship. And we do believe that there's opportunity for us to continue to grow and expand with them with time, so we view this as a short-term setback but still a lot of long-term opportunity.

Our next question comes from Scott Berg with Northland Capital Markets.

A couple of questions here for you. First of all, Chris, on the Head of Sales that you're going to bring in here in Q2, can you tell us a little bit about the profile of that person in terms of the types of places that this person has come from? Specifically trying to understand today more of a background in selling software versus services types of product offerings historical.

So certainly without getting into the details of the exact person, seeing how we have not announced that, I'd first reiterate that I'm very confident that person will be joining us early in Q2, but one of the things I was looking for is we are absolutely, first and foremost, a global company. And I think our target market and opportunity set is certainly on a global basis, and I felt like this person had to have that experience of leading a global enterprise sales organization. Second, I was looking for someone who had the experience in doing, I'd say, larger and more complex type of relationships with clients. I think we can expand our opportunities as a company with our current clients and future clients through thinking through our challenges slightly different. So I want that person to bring not only that global experience but once again the ability to work with a range of complexity within deal cycles and understanding of customer needs. Third, I want that person to have a strong exposure and experience set out of our largest vertical, the technology industry. And I believe that this candidate will address that component. Fourth, candidly, I always look for chemistry on the sector team and feel that this person will be a great fit from that perspective. So I'm really looking forward to that person joining the executive team and bringing some new ideas, some additional energy. I'd just reiterate, though, it's really a compliment to the current sales organization in the sense that I've been very pleased with the current sales organization that I've met. I like their industry knowledge, their passion for the business. And while we did spend some time, obviously, realigning our sales efforts in 2014 with the acquisition of Scout Analytics, I think we've brought real clarity to that now. And so I think the combination of kind of some new blood as well as our existing sales organization sets us up really nicely for 2015.

Okay, great. And then I was -- wanted to see if you can talk a little bit about the ACV in the year. Obviously, I understand, given the numbers that Simon gave, that ACV is declining $66 million, but your sales quarter in Q4 seems to be the best, at least, we've heard of in several quarters as -- can you provide any color in terms of the amount of ACV that those customer signings will actually add, knowing that it will take several, I don't know, quarters to ramp properly. But just trying to understand, I guess, how much sales you kind of recovered in the quarter.

Yes, Scott, so we don't break out [indiscernible] associated with new business and the deals we booked in the quarter. Your observation is absolutely right. There's a ramp associated with any piece of, in particular Managed Services, new business, right? So it takes time for new customers to ramp, in the same way as it -- there is typically a tail associated with customers as they depart. We're not going to break out the specifics around the numbers. Frankly, I want to find a better metric to help you moving forward so that we -- you can understand in more detail the specific trends we're seeing in the business. Historically, I've just given you that churn number obvious, which is only a part of the equation as it relates to the overall trajectory of the business. So I'm going to spend some time thinking about exactly how I help you understand what's going on within the business moving forward.

Yes. And I would just add to the first part of your question that it really validates, I think, the value proposition that ServiceSource is taking to market both on the Managed Services side and Cloud and Business Intelligence side. Clearly, as we already talked about, I think we had some missteps with former clients as to listening close enough to their needs and desires about what they want us to deliver. And some of those was around recoverable and contributed to the ACV churn, but I think, once again, with the great work that Ashley and the team started back in Q3 and into Q4, it really shows, by just getting your focus and attention back on the client and on the prospects, for that matter, as it relates to sales, we can really start to generate some positive momentum as we move into the future.

Sure. I guess kind of a follow-up on that, Chris. Is there any reason to think that ACV churn can't return to historical levels of, call it, roughly 10% a year sooner rather than later? Or is this still kind of work in progress to return that to a normalized rate or even improve up on a net historical rate?

Sure, yes, I think, clearly, Q4 in 2014 represented a set of numbers on the ACV churn that certainly hasn't been part of our historical norms. And certainly, qualifying it with 88 days in and a deep analysis by myself with the team and talking to many of our clients, I feel more comfort that the worst is likely behind us from a churn perspective. As to what the kind of new normal will look like, I think I'll come back to you at the Q2, after I've had another 90 days into the belt and be able to provide a better look-forward on that. But I certainly feel that what we experienced 2014 and coming out of Q4 is not the norm going forward and on an ACV churn perspective.

Our next question comes from Ed Maguire with CLSA.

This is Clarence Chan, filling in for Ed Maguire. I just want to ask about the competitive landscape. I just wanted -- wondering if you could give us a little bit more color in terms of any particular change in the last quarter in terms of the competitive environment. And then also, going forward, do you expect any particular changes that might have any visible impact to the business?

I can jump in on that. I would say, frankly, one of the great aspects of ServiceSource in the market that we're in is that we continue to be the market leader. We have not seen a system of competitive landscape. Our biggest competitor is, as it always has been, a company's decision to do it themselves, as opposed to work with an outsourced provider. And on the technology side, we continue to see, on the applications side, a very small handful of smaller players but no big competitive entrants into the market. So I'd say competitive landscape remains the same. The market opportunity continues to shift in a direction that's very favorable to us. And we still maintain the leading market position.

Great. Got it. And then maybe a quick follow-up. Just wanted to know if you could help characterize the difference in terms of demand for your Managed Services or the call services among your customers. Where is the cloud maybe replacing the Managed Services? Or how much opportunities do you see that might be coming up that has been a new customers?

It's really -- what's nice is our solutions are very complementary. They're not competitive with one another. So there tend to be a focus, for the Managed Services side of the house, on larger customers that are going to have more complex problems that need to be solved and where outsourcing is a logical solution. And we can complement our outsourcing capabilities with a strong technology platform and set of solutions. We're selling our cloud applications. We can have a broader market focus both into departments of big companies, big companies altogether or into even smaller companies that are looking for technology solutions to enhance any in-house efforts that they have. So I'd say the markets have overlapped, but there are portions of the market that are very attractive to Managed Services where we can upsell applications. And there are parts of the market where we're likely just to go after with our cloud solutions team selling applications. Does that help clarify?

Yes, absolutely.

This ends our Q&A session for today. I'll turn it back to Chris Carrington for closing remarks.

Thank you very much. I appreciate everyone's questions today and the time and intention towards ServiceSource. I just want to reiterate I really am excited to be here 88 days in; I'd say, even more excited to be a part of this team, very -- remain optimistic about our future. That's not to understate that, as I said early in my remarks, we are within a turnaround and we've got some heavy lifting ahead of us, but I think it's an opportunity for us to really continue the good trends we started coming out of Q4 and into Q1 and to be all focused on the work ahead of us. But I look forward to updating you on our next call, and thank you once again for your time.