Michelle Johnson - General Counsel Richard Bloom - Interim President & CEO Roop Lakkaraju - CFO & COO.

Analysts:.

Good day, ladies and gentlemen and welcome to the Q3 2016 Support.com Inc. Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference Michelle Johnson, General Counsel, you may begin..

Thank you. Good afternoon, everyone. Joining me here today is Rick Bloom, our, our Interim 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 filed 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 webpage. The statements we'll make on 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 Interim President and CEO, Rick Bloom..

Thanks, Michelle. Good afternoon, everyone thanks for joining our third quarter 2016 earnings conference call. I'll try to make a couple of comments and then I'll turn the call over to Roop who will discuss the quarter in more detail.

As you know, I was elected by the Board in June of this year and since then, I as well as the rest of the Board have been working closely with the management team to more deeply understand the business and it's potential.

I look forward to working with the entire team and the Support.com community and I'm excited about the prospects with the business and for delivering some shareholder value. I also look forward to speaking with all of you over the coming weeks as I get a little bit more situated in my new role. And with that, I'm going to turn the call over to Roop.

Roop?.

Thank you, Rick. Total revenue for Q3 was $15.5 million compared to $17.9 million in Q3 2015 and $14.9 million in Q2 2016. Services revenue for the quarter was $14.2 million compared to $16.6 million in Q3 of 2015 and $13.6 million in Q2 2016.

Sequentially, services revenue increased as revenue from Comcast was higher due to onetime for more updates, they were pushed out to their wireless gateway subscribers which resulted in slightly higher call volume, as well as strength in our Office Depot as attached sales.

The year-over-year decline is primarily due to Comcast customer experience improvement efforts. Software and other revenue was $1.4 million in Q3 2016, up from $1.3 million and in both Q3 2015 and Q2 2016. The Q3 2016 revenue mix was 91% services and 9% software compared to 93% and 7% in Q3 2015 and 91% and 9% in Q2 2016.

In Q3 Comcast represented 60% of our total revenue and Office Depot represented 15%. I want to take a moment to provide some further detail around the third quarter's activity. The two services wins we now extend are July 2016 earnings conference call have launched as expected in Q3 2016.

First, Sears; as a reminder this is a bundled offering combined with the Sears extended warranty to offer whole home hardware and tech support coverage. This is a new offering to the marketplace, it will start small with subscriptions expected to grow overtime. Sears is pleased with initial customer reaction to the offer.

The second is target which was the large national retailer not named but announced on our July 2016 conference call. Targets 'My Target Tech' and program is now fully transitioned to Support.com, a short 69 days after selection.

Our technology capabilities were an important differentiator in this competitive bid in combination with our deep retail expertise and high quality service delivery. We're looking forward to partnering with these two great retail names for the 2016 holiday season and potentially expanding both programs in 2017.

Moving to Support.com Cloud, all of our bookings in the quarter were in vertical market segments outside of the Premium Tech Support or PTS segment. Our bookings included customers in the following market segments; telecom, consumer electronics, software and managed service providers.

We acquired our second enterprise customer in a competitive win; this was a SeeSupport used case around remote video support where the customer was able to demonstrate a compelling ROI during their pilot.

The SeeSupport application allowed their agents to have 'eyes on the problem' their customers were facing and reduce the amount of unnecessary truck rolls to customer locations. We're expecting to see the customer launch moves of the product in late November.

Our first enterprise customer which we announced on our July 2016 conference call was successfully launched. The launch began at the end of September rolling out to several hundred agents and is expected to be completed in Q4 to an agent base of approximately 2,000.

The enterprise customer is using the official Support.com Cloud app from the Zendesk App Store. We have made progress in 2016, expanding our customer base into new companies across a variety of vertical market segments.

That said, a majority of our customers entering 2016 were in the PTS segment where there has been some instability as that space continues to evolve. As a result of the PTS segment's instability, we expect to see churn of approximately $450,000 in annual recurring revenue for 2016.

Based upon the continued traction we are making in the various market segments and net of the churn noted above, we now expect to exit 2016 with an annual recurring revenue run rate of between $1.1 million and $1.4 million for our Cloud product.

The total number of seats that have been reported to-date has already exceeded the high-end of our seat count our goal for 2016. We are now targeting total seat count, net of churn for the year to be in the range of 4,000 to 4,500 seats.

Turning to Cloud usage metrics; in vertical market segments outside of PTS we saw over 70% growth sequentially in average number of customer sessions per week. We saw over 75% growth sequentially in total sessions and over 100% growth in maximum sessions per week in these non-PTS market segments.

However, as a result of the churn with the aforementioned PTS customers, overall Q3 usage activity declined sequentially given that we have historically had a large percentage of PTS type companies within our customer base. The average number of customer sessions per week decreased by 24% from the second quarter to the third quarter.

Total sessions declined 19% sequentially and maximum sessions per week declined by 18% sequentially. Moving now to our services and overall gross margins for Q3 2016; overall non-GAAP gross margin for Q3 2016 was 23% compared to 19% in Q3 2015 and 14% in Q2 2016.

In Q3 2016, non-GAAP services gross margin was 17% compared to 13% in Q3 2015 and 7% in Q2 2016. Q3 2016 services and overall gross margin were favorably impacted by lower than expected large medical claims under our self-insured medical program.

Medical claims in Q3 were approximately 50% lower than Q2 2016, the lower medical claims resulted in a sequential increase in gross margin. The sequential margin increase was also a result of improved productivity within Comcast and Office Depot as a result of revenue upside achieved within Q3 2016.

Additionally, we saw improved productivity in certain of our other large service programs which we expect to be sustained. Non-GAAP software gross margin was 91% in Q3 of 2016, 90% in Q3 2015 and 90% in Q2 2016. Total non-GAAP operating expenses in Q3 2016 came in at $4.9 million, a decrease from $6.4 million in Q3 2015 and $7.1 million in Q2 2016.

The sequential decrease was primarily a result of the absence of proxy contest related costs, as well as savings from the April 2016 cost reduction plan that we completed as planned. On a non-GAAP basis loss from continuing operations for Q3 was $1.2 million or a loss of $0.02 per share.

We do not anticipate incurring meaningful federal or state income taxes for the foreseeable future as a result of our net operating loss carry forwards. However, to the extent that we have future taxable income, the company will be subject to alternative minimum taxes and certain tax paying jurisdictions.

Turning now to the balance sheet; total cash, cash equivalents and investments were $54.5 million at September 30, 2016 compared to $58 million at June 30, 2016. DSOs for the quarter were 60 days compared to 58 days in Q2 2016. At September 30, 2016 less than 1% of our outstanding receivables were greater than 90 days old.

Deferred revenue was $2.7 million at September 30, 2016 and $2.5 million at June 30, 2016. Total headcount as of September 30, 2016 was 1,608 consisting of 166 corporate employees and 1,442 work from home technicians. This compares to a June 30, 2016 headcount of 1,433 consisting of 169 corporate employees and 1,264 work from home technicians.

In addition to our work from home technicians, we used contract labor in our operations. For the fourth quarter of 2016, we expect our revenue range to be between $14.5 million to $15 million. We expect a revenue mix of 91% services and 9% software. We expect the overall non-GAAP gross margin to be in the range of 18% to 20%.

Q4 2016 gross margin is being impacted by an expected increase in large medical claims. The increase is expected to be at a level that is comparable to Q1 2016. The Q3 2016 sequential drop in large medical claims we do not believe is sustainable. And to that point after having reviewed with our medical broker are incurred but not paid medical claims.

For October 2016 we are seeing that our large medical claims have increased to levels of the first half of the year and has been considered within our Q4 2016 guidance range.

We expect our non-GAAP software gross margin to be between 89% to 91% and we expect non-GAAP operating expenses to increase sequentially by approximately 12% to 14% as a result of the higher benefit costs and timing of certain expenses which are incurred as matters of normal course of business in Q4 four of our fiscal year.

Based on the foregoing, our outlook for Q4 non-GAAP results from continuing operations is a loss of $0.04 to a loss of $0.06 per share. During Q4 we do not expect to incur any meaningful capital expenditures, we expect to exit Q4 2016 with a cash balance of approximately $52 million. With that, we'd like to open the call to questions..

[Operator Instructions] And our first question comes from the line of Bill Fadgen [ph] from Craig-Hallum. Your line is now open..

I'm here for Chad, thanks for taking the question.

I guess first one, probably for Rick; real high level I guess -- you can roll -- I guess, can you kind of outline what the overall strategic plan is in your eyes as of right now? And related to that, have you been able to speak with some of your key customers, key partners, of course Comcast being one, about kind of the new strategy in your relationship with them?.

To answer your second question first, no; I've been here three days, I haven't had a chance to talk to the customers yet, although clearly, will undertake that effort shortly. And as for the change in strategy; I don't think or your question has to -- is there a change in strategy, I don't think any decisions with respect to that have been made.

We're still trying to figure out exactly how we can help build the value and bring some of the pieces together in a way that is good for the business and so I don't think there is any big moves to talk about things are moving the way they were before..

And Joe just to add -- just a couple of additional comments related to the customers; Rick -- that we were coordinating potential customer conversations with Rick and our primary contacts at those customers.

Those of us who do have lead relationships at those customers have been in contact with them; for example, myself with Comcast and others within our customer base and our executive ranks. So I just wanted to add that as well..

We've been proactive..

That's right..

Okay.

But I guess based on the conversations you've had so far, I mean there are no like meaningful change -- just kind of keeping in touch and you wanted -- I guess to keep right in front of them but no meaningful change, no meaningful conversations yet?.

Yes, there is no change in the business, I mean if you think about the guidance and the comments that we prepared today around -- the traction we've got around Cloud and that initial enterprise customer and the second enterprise customer, as well as the resetting the annual target brand of recurring revenue, as well as the progress on the services side where we continue to be focus on executing what we've been doing..

And then I guess one quick follow-up; Rick, it looks like your title is Interim President and CEO, I assume there is a search underway for a permanent CEO.

Are you looking internal/external and are there any specific qualities or specific background or characteristics that you're really trying to key in on?.

So far I'm not sure I can answer the question clearly because I think we're dealing with some things that happened really quickly here; and so we're still getting our arms around exactly what that might look like and what we need to do..

All right, that will be all for me for now, thanks..

Okay, thanks Jeff..

Thank you. And I would like to turn the call back over to Rick Bloom for closing remarks..

Yes, we just appreciate everybody. This is Roop Lakkaraju, I just want to say thanks for joining our call today. Thank you..

Thanks, everybody..

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