SPRT

support.com, Inc. (SPRT)

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SupportSoft Inc. (SPRT)

Q2 2008 Earnings Call

July 31, 2008 4:30 pm ET

Executives

Anne-Marie Eileraas - General Counsel

Josh Pickus - CEO

Shelly Schaffer - CFO

Analysts

Jon Maietta - Needham & Company

Stephen Silk - Silk & Sons

Bill Swanson - Northland Securities

Shawn Boyd - Westcliff Capital Management

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 SupportSoft Earnings Call. My name is Marsha, and I will be your coordinator today's call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Anne-Marie Eileraas, General Counsel. Please proceed.

Anne-Marie Eileraas

Thank you, Marsha, and good afternoon. This is Anne-Marie Eileraas, General Counsel of SupportSoft. Joining me here in Redwood City are Josh Pickus, our Chief Executive Officer and Shelly Schaffer, our Chief Financial Officer.

Before we begin, I would like to remind everyone that our remarks today will include forward-looking statements about our 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 in the reports we filed with the SEC, all of which can be found through the Investor Relations page of our website.

I would also like to point out we will present certain non-GAAP information on this call. The reconciliation of GAAP to non-GAAP financial measures is included with today's press release and is available on our Investor Relations web page. The statements we will make in this conference call are based on information we know as of today and we assume no obligation to update any of those statements.

With that, I will turn it over to Shelly.

Shelly Schaffer

Thanks, Anne-Marie. I am going to cover financial highlights and then turn it over to Josh for color on the business as well as guidance. As a reminder, we implemented segment reporting in Q1 of 2008. Our Enterprise segment is an established business that we are operating to maintain profitability. While our Consumer segment is a new business, in which we are investing for growth.

Total Q2 revenue for the quarter was $11.6 million at the low end of our guidance range, while non-GAAP net loss per share was $0.06, significantly better than our guidance. The revenue performance is a composite of three things; a modest decrease in Enterprise revenue relative to Q1, a reduction in support.com revenue following our decision to shrink marketing expenditures there while concentrating on partner rollouts, and substantial growth in our partner revenue.

The EPS performance reflects the reduced support.com marketing spends as well as disciplined enterprise cost control. In the Enterprise segment, revenue of $10.7 million was down approximately $200,000 from Q1. We do not ascribe any significance to this delta. Approximately two-thirds of the license revenue in Q2 came from corporate customers using our software to support employee desktops, with the balance from digital service providers using our software to improve support for their customers and subscribers.

In our Consumer segment, revenue of $891,000 represents an increase of 27%, as compared to Q1. The majority of our Consumer revenue was driven by several of our partners, and we continue to expect that partnerships will deliver most of the Consumer revenue for this year.

From a spending perspective, Consumer cost of goods increased over the first quarter as a result of the addition of work from home agents, and the associated training and on boarding expenses. Sales and marketing was down approximately $700,000 from the first quarter as a result of reduced sales and marketing activities for support.com and other program spend as well as incentive bonuses.

R&D of $2.1 million was roughly flat sequentially, and finally G&A expenses were up slightly as compared to Q1 due to increased costs related to developing our global consumer infrastructure. Overall, second quarter non-GAAP profitability in our Enterprise segment improved relative to Q1.

Second quarter non-GAAP profitability in our Enterprise segment improved relative to Q1. We expect margins within Enterprise segment to fluctuate quarter-to-quarter based on discrete event, but we remain focused on maintaining profitability within the segment.

The second quarter loss in the Consumer segment was consistent with Q1, as revenue and cost both increased. As we look into Q3, we expect higher Consumer costs associated with the growing agent workforce, business development and account management activities and the build out of our global consumer infrastructure. While we expect Consumer revenue to grow sequentially, the cost and operating margin performance of the Consumer Group is likely to fluctuate significantly on a quarter-to-quarter basis.

At June 30th, we had 426 full-time employees and contractor, up from 308 at March 31, 2008. The increase is primarily due to the addition of our work from home agents. Finishing the statement of operations, interest income for the quarter was $721,000, down as expected from $1.4 million in the first quarter. As we look into Q3, due to the current interest rate environment and our focused on capital preservation, as well as liquidity, we expect a decrease in interest income in the range of 45% to 50% as compared to Q2.

Turning to the balance sheet. We ended the quarter with cash and marketable securities balance of $100.9 million, or $2.19 per share. During Q2, our overall cash position was reduced by approximately $6.5 million, which is below our guided range of $7 million to $9 million. The cash usage in the quarter reflects approximately $3.4 million use for operations, $2.9 million associated with the acquisition and integration of YourTechOnline.com, and $169,000 related to the incremental unrealized loss associated with our auction rate securities.

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