Gregory J. Wrenn - Senior Vice President of Business Affairs, General Counsel, Corporate Secretary and Member of Ethics Committee Elizabeth Cholawsky - Chief Executive Officer, President and Director Roop K. Lakkaraju - Chief Financial Officer, Chief Operating Officer, Principal Accounting Officer and Executive Vice President.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division Jim Fitzgerald Stan Berenshteyn - Sidoti & Company, Inc..

Good day, ladies and gentlemen, and welcome to the Support.com Third Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference 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 third quarter 2014 earnings conference call. Today, I'm pleased to report that our financial results for the third quarter of 2014 were strong, with revenue coming in at $22.2 million, which was above our revenue guidance of $20.5 million to $22 million.

Non-GAAP income from continuing operations for the quarter came in at $0.02 per share, also ahead of guidance of a loss of $0.03 to breakeven. Later, Roop will take you through the financial details for the quarter. But first, let me update you on recent developments and our overall business. I passed my 100-day mark last month.

During this initial period, I've had conversations with many of our employees, customers and shareholders and thought a lot about what makes Support.com different and what really drives the company. Over and over again I heard the commitment to support, being true to our name and making the lives of our customers easier.

Whether it's through our technology or by our delivery of service, our vision came through loud and clear. We believe that life is better when technology does what it's supposed to do. And our job is to make that happen for everyone, by providing dramatically easier ways to solve complex technical support problems.

We sell to mid- and large-sized technology products or services companies, who are looking to solve these same complex technical support problems for their customers.

Our mission is to provide them with effortless problem-solving, resulting in many benefits, such as increased issue resolution rate, greater agent productivity and a fantastic customer experience. We can make that claim because we resolve over 20,000 complex technical support problems every single day.

These beliefs are driving our progress in both services and our SaaS product. Its embodiment in everything we do underlies our success. I think you'll see that in the review of our progress during Q3, which I'll turn to now. Overall, our services partners see opportunity to grow their programs with us, and I've heard this first hand.

In addition, Nexus is gaining traction. Our strategy to balance our services revenue with growth and our SaaS offering is going well. Now turning first to services. Services revenue grew in Q3, where we saw growth in both Comcast and other programs.

In the last few months, I've visited with key executives at our major customers, and I'm pleased with the strength of our relationships. They are recognizing the increasing importance of the customer experience, and are putting even more emphasis on the part that services play.

Importantly, we have heard from these key executives about their ideas for potential expansion opportunities within their respective businesses, and we are looking forward to working with them closely on these opportunities. We continue to be focused on warranty and referral opportunities.

In these markets, there's no one large dominant player to partner with. Most of the players are small to moderate in size, but there are lots of them.

Therefore, our strategy is to acquire numerous new warranty and referral customers, as well as other subscription-based service partners, as a way to diversify our customer base and continue to grow our services revenue overall. My expectation is that the programs in development will contribute to our services growth in the next couple of quarters.

As I stated on our last call, part of what drew me to Support.com was our unique capabilities in the services area. And I am committed to extending this leadership position going forward. Our strategy to balance services revenue with growth in Nexus, our SaaS offering, is going well.

Nexus is poised to take a leadership role in support interaction optimization, which is an emerging segment of the $2 billion customer interaction management market.

Nexus achieved 4 significant milestones during the third quarter, increasing our confidence that we have a differentiated product that will be in high demand by any company needing to help their customers with complex technical support problems.

First, we have gotten confirmation that Nexus is delivering real value by optimizing the live agent interaction. Our belief that guided path, streamline and improve the agents' troubleshooting of complex technical support issues, has been validated in a number of deployments. One example is Mural, an early customer of Nexus.

Their business, which is onboarding SMBs to cloud IT services, requires consistent high-quality processes, which guided paths help to ensure. They are also able to use the analytics provided by Nexus to continually improve the support for their customers, resulting in a better customer experience and cost savings.

Our second milestone is that we have seen from customer interest that Nexus is broadly applicable in our large and growing market, giving us conviction that we will be able to sell to a wide variety of customer types.

Applications for Nexus include home security and automation, cloud services enablement, smartphone troubleshooting and premium tech support. Market verticals represented by interested prospects include major retailers, extended warranty companies, BPOs, outsourced tech support, ISPs and cable companies.

Third, our commitment to building Nexus as an open product with easy integration capabilities into the customer interaction management ecosystem is bearing fruit. For example, to meet the demand for Nexus used with CRM applications, we have developed functionality to integrate with Salesforce.com and SugarCRM.

Our open product strategy is based on comprehensive APIs, so that we can integrate with these products and many others. Also during the quarter, we completed an integration for full connectivity and remote control of the Icontrol Networks' touch pad tablet for support of home automation and security implementations.

This is a first and exciting step in building out explicit capabilities for the Internet of Things. Fourth, we have seen an increased use of the product by prospects and customers.

We're looking carefully at usage indicated by such things as an increase in creation of guided path, number of remote-controlled sessions and use of analytics to drive continuous improvement initiatives. Usage is important because it is an indication of the compelling nature of the product and its future stickiness.

The achievement of milestones 1 through 4 indicates that now is the time to expand our resource investment in the Nexus go to market. As I said on the last call, I wanted to see external validation of Nexus before stepping up these kinds of investments.

We now have that validation, and therefore, we'll be increasing our marketing lead generation and the buildout of our sales team to further capture the demand we are seeing. This initial success for Nexus is following a typical growth path for SaaS products, but it's still somewhat early to externally report specific KPIs.

We see a bright future for Nexus to take the lead in the emerging support interaction optimization segment. We look forward to continuing to report our progress with Nexus in the coming quarters. Finally, I would like to update you on what we've done to add talent, resources and experience to the team.

Key to the effort has been the hire in Q3 of our Senior Vice President of Product and Vice President of Engineering. Sampath Gomatam has joined as SVP of Product and will be leading product management, product marketing and product design. Most recently from BMC, Sampath is a customer-centric product leader, with over 20 years of experience.

Prior to BMC, Sampath was with Citrix, where under his leadership, the GoToMeeting business, gained significant market share and achieved the #2 global position in web conferencing. His credentials also include executive product management and strategy roles at Click Commerce and StarSite.

In addition, we hired Chris Koverman as our new VP of Engineering, leading our application development teams and our development operations function, which is a critical capability for any SaaS company. Previously, Chris was Vice President of Engineering at Casabi, a cloud content startup acquired by Broadsoft.

He also led the engineering teams for the IT services line of business at Citrix. I worked with both individuals during my tenure at Citrix, and I'm confident that their experience and expertise will accelerate our efforts to grow our overall business. In summary, on exiting Q3, more convinced than ever before in Support.com's future success.

I have confidence that we will continue to execute well for our current and future services partners. The product momentum we are experiencing with Nexus is strong. Our team is forming with the right skills, and more importantly, the right commitment and energy to drive all aspects of our business. I'm looking forward to Q4.

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 Q3 was $22.2 million compared to $23.7 million in Q3 2013 and $20.2 million in Q2 2014. In Q3 2014, revenue was down 6% from the prior year third quarter and up 10% sequentially.

As a reminder, in Q3 2013, we incurred a contra-revenue charge of $383,000, related to the issuance of a warrant to Comcast upon achievement of certain performance milestones. Services revenue for the quarter grew year-over-year and sequentially to $20.8 million compared to $20 million in Q3 2013 and $18.7 million in Q2 2014.

Services revenue grew year-over-year due to the top line growth of Comcast overall as a customer. Sequentially, revenue increased in Q3 2014 due to strength, primarily in Comcast, and growth in other service partners. Q3 services revenue benefited from additional service hours requested by Comcast beyond their committed forecast.

Software and other revenue declined year-over-year to $1.4 million in Q3 2014, from $3.8 million in Q3 2013, and was consistent with $1.4 million in Q2 2014. The year-over-year decline is due to our previously discussed decision to discontinue unprofitable advertising arrangements for our end-user software products.

The Q3 2014 revenue mix was 94% services and 6% software compared to 84% and 16% in Q3 2013 and 93% and 7% in Q2 2014. As discussed in footnote 3 of today's press release, in Q3 2014, we reclassified the manner in which we account for our software as a service revenue.

Beginning in Q3 2014, to better conform to standard accounting principles, this will now be presented as services revenue as opposed to software revenue, where we previously presented this item. All periods presented within today's press release have been updated accordingly.

These reclassifications are not material and had no impact on reported total revenue, net income or loss and cash flows. During the quarter, both Comcast and Office Depot contributed more than 10% of total revenue. Overall, non-GAAP gross margin for Q3 was 27% compared to 53% in Q3 2013 and 28% in Q2 2014.

In Q3, non-GAAP services gross margin was 24% compared to 45% in Q3 2013, and 24% in Q2 2014. The non-GAAP services gross margin declined year-over-year, due to the change in mix of our programs. Non-GAAP software gross margin was 87% in Q3 2014, down from 92% in Q3 2013, but up slightly from 84% in Q2 2014.

Total non-GAAP operating expenses in Q3 2014 came in at $5.1 million, a decrease from the $7.9 million in Q3 2013 and flat from Q2 2014. As I mentioned earlier, the year-over-year decline is due to changes in our advertising arrangements for our end-user software products.

Sequentially, operating expenses were below plan, due to Nexus new hires occurring later in the quarter. On a non-GAAP basis, income from continuing operations for Q3 was $1.1 million or $0.02 per share. As Elizabeth mentioned, this was higher than our third quarter guidance, which was for breakeven to a loss of $0.03 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 carryforwards. However, to the extent that we have future taxable income, the company will be subject to alternative minimum taxes in certain taxpaying jurisdictions. Turning now to the balance sheet.

Total cash, cash equivalents and investments were $75.3 million at September 30, compared to $75.6 million at June 30. DSOs for the quarter were 63 days, as compared to 59 days in the prior quarter. At September 30, less than 1% of our outstanding receivables were greater than 90 days old.

Deferred revenue was $2.7 million at September 30, compared to $2.9 million at June 30. Total headcount at September 30 was 1,852, consisting of 160 corporate employees and 1,692 work-from-home technicians. This compares to a June 30 headcount of 1,766, consisting of 149 corporate employees and 1,617 work-from-home technicians.

In addition to our work-from-home technicians, we use contract laborer in our operations. Turning to guidance. For the fourth quarter of 2014, we expect our revenue range to be between $21 million to $22.5 million, with a revenue mix similar to Q3 2014 of 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 88% and non-GAAP operating expenses to increase sequentially by approximately 20%, as we continue to invest in Nexus development and go-to-market capabilities.

Based on the foregoing, our outlook for Q4 non-GAAP results from continuing operations is breakeven to a loss of $0.02 per share. With that, I'd like to turn the call back to Elizabeth..

Thanks, Roop. As the results show, we had a terrific quarter. Now I would like to turn the call over to the operator for your questions.

Operator?.

[Operator Instructions] Our first question comes from the line of Chad Bennett from Craig-Hallum..

So a couple of questions for me. Regarding the investment, stepped up investment, in the Nexus product and go to market. Obviously, you see a little bit in the December quarter.

But is there any way to kind of look at it further out than that? Kind of what you're thinking about in terms of investment there from a sales headcount standpoint or a marketing spend standpoint, looking kind of on an annual basis?.

Yes. And first of all, I'm just really glad to be at the point where we're talking about investing in the go to market. We've seen the customer validation and we switched the priority to customer acquisition now. So we've just started with the ramp in the recruitment efforts on both the marketing, lead generation and the sales team.

We'll be continuing to monitoring -- to monitor the kinds of milestones that are discussed in the prepared remarks, to make sure that we're getting traction -- continued traction on Nexus, as well as traction on acquiring the customers. And we'll continue to invest accordingly to that.

I think right now, it's premature to look out to 2015 and really predict what those ramps will be specifically. And we don't release on a per headcount basis on those groups anyway. But I'll keep you up-to-date as we have traction and start making investments, just like I did in today's call..

Okay.

And what should we expect from kind of metrics from you on the Nexus product over the next couple of quarters? Is it going to be focused on customer wins? And kind of bookings in that business? Or how should we kind of evaluate that business?.

Yes. Well, as you know, there are standard SaaS metrics such as churn and customer acquisition cost, as well as revenue and other KPIs. So right now, we're at the point where we're tracking more behavioral use of Nexus.

As I mentioned, usage is really important metric for us, as well as growth of various seats and things like that to make sure that we're getting the kind of traction. We'll be continuing to monitor that to make sure that we pick the best KPIs that will really indicate the health of Nexus on a long-term basis.

But I have to say it's still premature to be talking about that as a predictor for Nexus' success..

Okay. And a couple of more questions for me, maybe on the service side of the business, which hopefully, you're more comfortable talking about longer term. So what -- it sounds like Comcast, that relationship expanded or they asked for kind of increased capacity.

What really drove that increase? And are you expanding into other places within Comcast that's driving that?.

So Chad, this Roop. In terms of expansion within Comcast, we obviously feel good about our relationship. We continue to talk to different parts of Comcast and feel that we've got a set of diversified relationships there. Obviously, we've got the XFINITY Home pilot and the wireless gateway program that we support them on.

The in quarter -- in the third quarter, we -- obviously, we manage to a forecast that Comcast gives us. They don't provide intelligence in terms of the number of wireless gateway deployments and these sort of things. It's based off a forecast.

And what they came in, within the quarter, intra quarter, they came back to us with some additional hours that they needed supported. And because of the effectiveness and efficiency in which we were operating, we were able to support that.

And as we look forward, again, we've got a forecast that we manage to and that's reflected in the guidance that we provided for the fourth quarter. And in the event that there's potential hours that they come to us within the quarter again, we'll evaluate that and our ability to support it.

But obviously, we're building an organization to scale and support these sort of situations..

Okay.

And then last one for me, just as we annualize in the December quarter here the kind of change in the Comcast arrangement and look out into next year and the overall services business, I guess, Elizabeth, first question is, do you believe the services business is a growth business? And if so, is there any type of kind of wide range we should think about from a services growth standpoint longer term?.

Yes. Well, we certainly do believe that services is a growth business, and it can grow robust with our current partners and with new partners. The -- I've been out talking to almost all of our major customers and their commitment is really what gives me the optimism that the services business is going to continue to grow overall.

As you know, the programs do take time, though, particularly, these large complex organizations. And we're just now seeing some of the programs that were launched a year ago having an uptick, as the operational models start become proven and they begin to scale.

And on the new partners, so though we didn't announce any in Q3, we're absolutely making progress on new warranty and referral customers, as well as other subscription-based service partners.

So we're focused on that end on putting together a number of these types of programs, so that we can diversify the pool of services with the warranty and referral programs. So overall, both of these things will contribute to the growth in services. Looking out into the next year, I think it's early to try to predict a growth rate on services.

We're just in the process of planning now. But as I said, we do expect to see good progress and success for services..

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

This is Jim Fitzgerald sitting in for Mike Latimore.

So my first question here, are you guys seeing good near-term opportunities on the business segment, as well as the home automation segments within Comcast?.

So just in terms of the business segment, just want to clarify, you mean the SMB side of things?.

Correct. Yes..

Yes. For the SMB side, we have a small pilot with Comcast and we obviously support other partners on the SMB side, and that is an area of continued focus for us. That's a small pilot at this point with Comcast, and isn't really material.

But we continue to have good conversations with the different relationships that we have in Comcast through the different business areas.

And Jim, I apologize, could you repeat the other part of your question?.

Just on the home automation side within Comcast, have you seen good growth opportunities there?.

Yes. Comcast overall manages us to a forecast on the XFINITY Home side of things. The program launched in late Q2, so third quarter was the first quarter that we had a full quarter's revenue. And the launch and service delivery has been very good. Again, that's a pilot program. And there's certain business objective that Comcast is evaluating.

We are in conversations with them as to where we are against those objectives. And are having conversations about where that might go into the future. But again, that's a pilot program that's not a full-fledged program..

Great. Okay. And then you mentioned that forecast.

Do they give you more than a 1 quarter forecast? Or is that just 1 quarter?.

What's committed is a 1 quarter forecast, which obviously supports our ability to put together guidance in these sort of things. We do get broader visibility, but it's not committed information..

Okay. Got you.

And then, I don't know if you guys are disclosing this, but did you have more than one 10% customer in this quarter?.

We did. We had Comcast and Office Depot..

Okay. Got you.

And then what percent was your largest customer?.

68%.

Our next question comes from the line of Stan Berenshteyn of Sidoti & Company..

I just wanted to start out, quickly, to rehash, the corporate headcount, you said excluding agents, what was the number?.

160..

And of that number, what was the size of the sales force?.

We don't provide the -- by functional area, but just to give you a perspective, Stan, at the end of Q2, we were at 149. That corporate headcount grew to 160, and much of that was late in the quarter..

I see. Okay. And if we could just jump to the Nexus side, how big is the pipeline of interested clients.

Can you give us any color on that?.

Yes. So it's a good pipeline. Just as you heard at the begin of ramping up, a lot of the lead generation and go to market. So it's growing every day. But what we're most pleased with the pipeline that we've got is that it's representative of the target market that we really thought was going to be applicable for the Nexus offering.

So it's really the sweet spot that we thought of mid- and large-size technology companies, with agent pools ranging from about 50 to about 1,000 agents. So it's plenty -- so there's plenty for us to handle and keep working with and see good uptick in the early customer acquisition. So we're pleased with it..

Okay.

And as far as lead generation is concerned, can we reasonably expect to see sales and marketing kind of continue to tick upwards, as this ramps up?.

Yes. And as you saw sort of with my philosophy with product development, I'm very careful to monitor certain milestones and make investments as those milestones prove out.

And right now, we're assuming that everything is going as it has been, which is very positively on the customer uptick side, and as that happens and continues to happen, we'll continue to invest in more marketing and the sales teams..

Okay.

And as far as the note regarding the software sales, obviously, the reclass with Nexus going to services, was that really the cause for the decrease in the software sales, on a sequential basis?.

That's correct, Stan..

Okay.

And so software, excluding the Nexus piece of that, really been flat quarter-on-quarter?.

Yes. It's relatively flat. Yes..

Okay.

And what about for Office Depot now obviously the merger with OfficeMax, has that really provided some kind of attrition towards revenue that you're seeing from that client?.

No. We haven't seen attrition with the combined Office Depot. That merger was completed in November of last year. We've maintained, and I think, strengthened our relationships with the combined Office Depot and the new management team. We're actually working with them closely, in terms of potential new opportunities.

And Elizabeth has recently visited them. So I think the relationship is strong, and we think that there's potential opportunity, as we move forward with them, and we haven't necessarily seen a decline.

With that said, we did announce after the second -- during our second quarter results, that we signed a new 2-year extension of our deal with the combined organization.

As part of that, there were certain SKUs that had price reductions, which kicked in, in the third quarter, and that's obviously reflected in our results from the third quarter -- within the third quarter..

I'll just add one thing to that, Stan, when I was out visiting with the execs at Office Depot, what I heard was that with the combined organization that services are becoming more important to them in terms of driving their business.

So a lot of the discussion I have with the Office Depot execs was not just how to ramp up what they're doing today, but what are the new programs that we can launch with them, as they really go out to market with a strength and combined Office Depot OfficeMax organization..

I see. And obviously, the agent headcount has increased, there seems to be a bit more business in the services side.

I'm just trying to get a better gauge as to, on a percentage basis, is that growth primarily being drawn by Comcast or the balance of all the other accounts? Like what's kind of the contribution difference?.

Yes. We don't get to by program level headcount detail. With that said, we had strength in -- or growth in the agent headcount or technician headcount quarter-over-quarter, as we've indicated in our prepared remarks, we had strength in both Comcast, as well as some growth with some other service partners.

So -- and we'll obviously continue to support further growth..

Okay. And just to quickly touch on Nexus.

You discussed -- I think Elizabeth discussed various articles retailers, extended warranty providers, BPOs, are all of these verticals right now testing the Nexus platform? Or these are just opportunities and actual potential clients that are testing that are more limited in terms of verticals?.

It's a mix of prospects and customers. Not all verticals have customers in it yet. But there's absolutely companies who have production systems that are running the Nexus product today. And that's really great for us to see..

Okay. And just one more question.

When you, I guess, go out and prospect for potential clients, is there any overlap between a client that may be interested in getting the service business, and then starts looking closely at Nexus? Is there any overlap for potentially selling one service or one software to a client?.

Yes. Absolutely. I think that that's one of our key assets and a differentiator between Support.com and some other companies that have either a services or a SaaS-based business. We are in active discussions with our customers who might want us to supply both or get interested and looking at the Nexus product.

And then realize that we can actually help them out with services also. And it's very synergistic in terms of customer acquisition and customer growth..

So from your prospective, which would you want to push to the client? Would you want to put Nexus or would you want to push services?.

Yes. I mean, it really does depend on the customer themselves and what they need the most, right? So if they need our help with services and technical support operations, we're happy to supply that.

Nexus is a long-term tool that they can use, but we really go in and on a customer by customer basis, take a look at what their needs are and what is best for them. I think you heard me use the term customer-centric, customer-driven several times, and that's really what it's all about.

And it's great to have both types of offerings to go into a customer situation with..

Sure. And now final question, for Roop.

Is there any plans to your cash balance deployment in anyway? Or it's just strategic for now?.

Yes. I mean, from our standpoint, we obviously continuously evaluate our usage of cash and we're in a position where it's a strength for us. And at this time, as we look at the best usage of cash, its reinvestment back into our business, both services and Nexus.

And obviously, with the -- through our prepared remarks and the comments we've made, we've gained traction in some of the key areas that we wanted to validate with Nexus. And as we're starting to get that validation, we'll be investing in that area. And I think that deployment of cash is best used, at this time, in those ways..

At this time, we are out of the allotted time. I would like to turn the call over to Ms. Elizabeth Cholawsky for closing remarks..

Thanks, everyone, for your participation today. We very much appreciate your time, and we look forward to talking with you in the near future. Goodbye..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day..