"

Support.com, Inc. (NASDAQ: SPRT)

Long

Michael Czekaj
Mczekaj@me.com

Investment Recommendation:

Go long support.com (SPRT) with a 2.5-year,
probability-weighted price target of $3.86
(60.27% upside).

Company History:

Support.com, Inc. is a cloud-based services and
software provider of technology-based support
for a world that is becoming more connected.
The company is based in Redwood City, CA and
was actually founded in 1997 under the name
SupportSoft, Inc. The original company was an
enterprise software company that focused on
selling solutions to technical support organizations. In 2007, the company launched a service focused on
technical support for consumers. In June 2009, the company sold its enterprise business, changed its
name to support.com, and decided to focus purely on the consumer market. In December 2009,
support.com acquired virtually all of the assets of Xeriton Corporation, the parent company of Sammsoft,
for $8.5MM in cash. Through this acquisition, support.com obtained software products focused on
maintaining, optimizing and securing personal computers, thus solidifying its focus on the consumer
market.

Business Description:

Support.com strives to be the leader in cloud-based technology support, especially when it comes to
products related to the internet of things. The company seeks to deliver premier support programs and to
be the leading platform supplier for technology support organizations. Despite breaking down revenues
and cost of goods sold by the company's two core offerings (services and software/other), financial
statements are reported under one operating segment. Within the services offering, support.com has
programs that are based on the following core services: device set-up and enablement, device repair,
network services, home security and automation system on-boarding and enablement, small business and
onsite services, and online data backup with cloud data access. The company's service programs are
designed for both the consumer and small business markets (which the company defines as ten employees
or less).

Within the software/other segment, the company started licensing its Nexus Service Platform in
4Q12/1Q13. This is a cloud-based solution that enables a company to take remote control of a customers
connected device (PC, Mac, Android phone or tablet, Nest thermostat, etc.). From there, the technical
support analyst can use Nexus analytics and automated workflows to solve customer problems fast,
therefore boosting productivity. There are also modules within Nexus that allow companies to quickly
launch premium tech support programs to create new revenue streams, along with systems that check the
health of the connected devices. Additionally, the company sells software products designed for malware
protection and removal, PC maintenance and optimization, PC registry cleaning and repair, and
smartphone/tablet maintenance and optimization. The company decided in late 2013 to largely phase out
SLock rl ce 6/11/2014 $2.41
ul l uLed Shares (MM) 33
!"#$%& (") *!!+ ,-.
l us: uebL -
Less: Cash and equl val enLs (76)
/0&%#)#12% 3"45% *!!+ 67
32-Week 8ange
ul vl dend ?l el d 0.00
Avg. ual l y vol ume (MM) 0.49
ShorL l nLeresL 3.89
MarkeL Cap-Lo-neL Cash 2.03
Mul Ll pl es 2014L 2013L 2016L 2017L
Lv/Sal es 0.39 0.31 0.44 0.39
Lv/L8l 1uA nA nA nA nA
/L nA nA nA nA
/8 1.34 1.43 1.33 1.60
/S 1.42 1.24 1.08 0.94
$2.13-6.28
key SLaLs
CurrenL Capl Lal SLrucLure:
#

the end-user software side of the business and will focus on growing the SaaS business (Nexus) in the
future. In a nutshell, support.com allows both small businesses and consumers to outsource the technical
aspects of owning, using, and fixing internet connected devices.

Support.com sells its services primarily through partners, which include leading communication providers
(Comcast), retailers (Sam's Club and Office Depot), technology companies (DISH Networks, Symantec)
and others. Typically, these services are sold on a wholesale basis under the partner's brand on a per-
incident, per-subscription, or per-productive hour basis. Software is licensed directly to consumers and
through partners. The Nexus Service Platform is licensed to customers on a per-user per-month basis and
these customers receive the right to use the platform in their own technology support organization.
Again, target markets are consumers and small businesses, although the company has said in past
presentations that they have the ability to take on accounts with companies over 100 employees.

The majority of the company's employees work from home or deliver services from a remote location.
As of March 31, 2014 the company employed 1,489 people consisting of 155 corporate employees (10%)
and 1,334 work-from-home technicians (90%). This allows the company to keep lids on depreciation
expenses, as well as employee related expenses (they dont have to pay an employee as much if they are
working from home).

Industry Overview:

Support.com operates in highly competitive, but fragmented markets for both consumers and SMBs as
most of their comps are mom and pops shops that only have regional scale. However, they also compete
with companies like Citrix Systems, LogMeIn, and RightNow, which is an Oracle subsidiary.

According to Parks Associates research cited by the company in recent presentations, the consumer and
SMB technology support markets represent a combined $30B opportunity by 2016. Within that number,
the premium tech support business for SMBs is expected to grow from $11B in 2012 to over $19B in
2016. A newer growth opportunity relates to home automation and the connected home (think Nest
thermostat, Cree light bulbs, home security systems, etc.). Research and Markets forecasts the global
home automation system market to grow at a 55% CAGR from 2013-2018. As homes become more
connected, they will obviously need more support.

Investment Thesis:
1. Support.com stock has been beaten down over the last 6 months due to a large amount of uncertainty,
in my opinion. I think the uncertainty has to do mainly with the gross margin line. Recent deals
announced with Comcast are at significantly lower margins than in the past, evident in the 3Q/4Q13
GM vs. the 1Q14 GM. Although the Comcast Support bundle and Xfinity Home Support deals help
grow the top line, they come at lower margins, which obviously hurt profitability since Comcast
accounts for 50-60% of revenues. There also seemed to be some concern among analysts in past
earnings calls that these projects are not positive NPV opportunities and therefore the company is
wasting valuable resources in taking them on. I believe the company will be able to grow revenues
and GM from a baseline in 1Q14 as some of these new programs season and as SaaS becomes a
larger part of revenues.
2. Industry characteristics, which include a large and growing market and high fragmentation, provide
an interesting consolidation opportunity. As stated earlier, many competitors operate on a regional
basis and have limited resources. This gives the company the ability to expand further and faster
given their strong balance sheet.
$

3. Cheap valuation. Is it cheap enough though? Obviously this is a big assumption, but if you assume
profitability in the future then ~2x net cash is a pretty compelling margin of safety for a company that
is riding the secular trend of the growing predominance of internet connected devices.
Financial Projections and Valuation:

As implied earlier, there is a strong possibility that the company remains unprofitable for the next several
years. Lower margins on services derived from Comcast are the main culprit, but the SaaS business will
also see some near-term margin impact as the company invests in this opportunity for the long-term. I
would note that my revenue growth projections are on the lower side relative to the growth of the
industries the company serves. This is largely due to the lack of visibility from management and would
represent an upside risk to the stock if revenue grew faster than my projections. I also assume an average
gross margin of 25.17% over the forecast period (implies SaaS grows to be a larger portion of revenue).
If gross margins come in higher than currently expected, the company could reach profitability sooner
than I forecast (upside surprise).



Given the company's current lack of profitability, with the expectation that free cash flow will also remain
negative for the next few years, a multiple based valuation was applied to the company as I believe it is
more relevant than DCF or residual income models (for the time being). In particular, I chose to value the
company on a price-to-forward 2017 sales basis to obtain a YE2016 target price. I realize price-to-sales
approach is probably the last thing a value-based shop wants to see, but I believe it is the most prudent
way to value the company until there is more visibility around the overall margin profile of the business
after some of the newer revenue drivers (Comcast support bundle, Xfinity home support) mature.



For the record, support.com also currently trades at 1.34x book value and roughly 2x net cash, providing
a relatively high margin of safety assuming, of course, the company reaches profitability in the coming
years.

On a technical basis, the company also looks like a long-term buy as it is near multi-year lows.

!"#$ %&#'" )*&"' +&"', -./0! -./1! -./2! -./3! -./4! -./5!
6'7'89' 5. /.0 //5 /:2 /10 /3-
; <=>?#@ /1A..; /1A..; /0A..; /:A..; /-A..;
!*B CDE )1, )1, )0, )-, . :
!FG HI.A/: HI.A/: HI.A// HI.A.2 HI.A./ I.A.0
!*B CDE ; H1A3/; H1A..; H:A:.; H/A2.; .A/.; /A4.;
WorsL Case 8ase Case 8esL Case
Assumed Mul Ll pl e 0.3 1.3 2.3
x l?17L Sal es $104,312 $136,113 $176,332
LsLl maLed MarkeL Cap uec-16: $32,236 $204,170 $440,829
Shares CuLsLandl ng 33,313 33,313 33,313
Ia|r Va|ue Dec-16: 50.98 53.83 58.27
robabl l l Ly 30 30 20
0.29 $ 0.29 $ 1.91 $ 1.63 $
robab|||ty We|ghted Ia|r Va|ue Dec-16: 53.86
%

Investment Risks:
1. The company derives a significant proportion of revenues from a handful of key customers. 71% of
2013 revenue came from Comcast Corporation (53%) and Office Depot (18%). The absolute dollar
amount that Comcast is spending with the company continues to increase, but the company is at risk
if these payments slow. Management has said that Comcast will continue to be 50-60% of revenues
as recent as the company's FY2013 earnings call on February 12, 2014. As an example of this risk,
Staples was 15% of sales in 2011 and then decided to bring their virus service business in-house.
Staples fell to 10% of sales in 2012 and they were not a significant customer in 2013. Finally, the
company is at risk if any of these significant customers come under financial distress.
2. The company's current business model is built on establishing and maintaining relationships with
partners that sell support.com services. If the company fails to establish new partnerships or maintain
current partnerships, future revenue growth could be at risk.
3. The company operates in a highly competitive marketplace, which is rapidly changing. If the
company fails to deliver timely, enhanced products, customers could switch service providers or
develop similar technologies internally. The company is also at risk as younger generations grow up
with emerging technologies, which could reduce the odds of future support issues such as device
setup and enablement, device repair, home automation and enablement. They may also use things
like YouTube to troubleshoot problems instead of paying for support services. This could make
revenue growth less likely and harder to obtain in the future.
4. The company currently views reinvesting in the business as the best use of cash. If these investments
fail to materialize and drive profitable revenue growth, the company could fall under financial
distress.
5. Recent management changes (CEO in 2Q14, CFO in 3Q13) could fail to drive profitable growth in
the future.
6. Lack of visibility. The company never gives guidance more than a quarter out, which makes
forecasting even harder. When asked about how to think about the margin profile of the company
longer term, investor relations re-emphasized this point by saying they do not give out-quarter
guidance and to look at other analyst models to form relative opinions.
Catalysts:
1. 2Q14 Earnings on July 30, 2014
2. Full scale launch of Comcast's Xfinity Home (launch in summer 2014)
3. New partnership announcements, especially flagship accounts for licensing of SaaS products
4. Full scale launch of next generation Nexus Service Platform (currently in beta)
5. Further product launches related to the internet of things (internet connected refrigerators or ovens
from GE, for example), which could lead to more demand for tech support.
6. There always is the chance a company like support.com could be acquired given the company's
relatively low enterprise value, patent portfolio related to the Nexus Service Platform, and general
know-how regarding tech support for devices related to the internet of things. Possible suitors
include, but arent limited to, Salesforce.com (CRM), Microsoft (MSFT) or maybe even Google
(GOOG).