ServiceSource International
Annual Report 2017

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017or☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _______ to _______ Commission file number 001-35108 SERVICESOURCE INTERNATIONAL, INC.(Exact name of registrant as specified in its charter)Delaware 81-0578975(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 717 17th Street, 5th FloorDenver, Colorado 80202(Address of principal executive offices) (Zip Code)(720) 889-8500(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.0001 Par Value The NASDAQ Stock Market LLC(Title of each class) (Name of each exchange on which registered)Securities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934 duringthe preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§29.405 of this chapter) is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. ☒Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, oremerging growth company. See definition of “large accelerated filer, “accelerated filer”, “smaller reporting company” and "emerging growth company" inRule 12b-2 of the Exchange Act. (Check one):Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price atwhich the common stock was sold on June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, as reported on theNASDAQ Global Market, was $291,566,216. Shares of common stock held by each executive officer, director and holder of 5% or more of the outstandingcommon stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status does not reflect a determinationthat such persons are affiliates of the registrant for any other purpose.As of February 23, 2018, there were approximately 90,425,232 shares of the registrant’s common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive Proxy Statement for its 2018 Annual Meeting of Stockholders are incorporated by reference in Part III of this AnnualReport on Form 10-K. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal yearto which this report relates. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed tobe filed as part of this Form 10-K.Table of ContentsTABLE OF CONTENTS Page PART I Item 1.Business1Item 1A.Risk Factors7Item 1B.Unresolved Staff Comments19Item 2.Properties20Item 3.Legal Proceedings20Item 4.Mine Safety Disclosures20 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities21Item 6.Selected Financial Data23Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations25Item 7A.Quantitative and Qualitative Disclosures About Market Risk43Item 8.Financial Statements and Supplementary Data44Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure74Item 9A.Controls and Procedures74Item 9B.Other Information74 PART III Item 10.Directors, Executive Officers and Corporate Governance74Item 11.Executive Compensation74Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters74Item 13.Certain Relationships and Related Transactions, and Director Independence74Item 14.Principal Accounting Fees and Services74 PART IV Item 15.Exhibits and Financial Statement Schedules75Item 16.Form 10-K Summary75 iTable of ContentsFORWARD LOOKING STATEMENTSThis report includes estimates, projections, statements relating to our business plans, objectives and expected operating results that are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may appear throughout this report. These forward-looking statementsare generally identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,”“should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and variations of such words or similar expressions. Forward-looking statements arebased on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. We describe risksand uncertainties that could cause actual results and events to differ materially in “Risk Factors” (Part I, Item 1.A. of this Form 10-K), “Quantitative andQualitative Disclosures about Market Risk” (Part II, Item 7.A. of this Form 10-K) and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” (Part II, Item 7 of this Form 10-K). We undertake no obligation to update or revise publicly any forward-looking statements, whetherbecause of new information, future events, or otherwise.“ServiceSource,” “the Company,” “we,” “us,” or “our”, as used herein, refer to ServiceSource International, Inc. and its subsidiaries, unless the contextindicates otherwise.PART IITEM 1.BUSINESSOverviewServiceSource International, Inc. is a global leader in outsourced, performance-based customer success and revenue growth solutions. Through our people,processes and technology, we grow and retain revenue on behalf of our clients—some of the world’s leading business-to-business companies — in more than45 languages. Our solutions help our clients strengthen their customer relationships, drive improved customer adoption, expansion and retention andminimize churn. Our technology platform and best-practice business processes combined with our highly-trained, client-focused revenue deliveryprofessionals and data from nearly 20 years of operating experience enable us to provide our clients greater value for our customer success services thanattained by our clients' in-house customer success teams.Our net revenue was $239.1 million, $252.9 million and $252.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. Forsummarized financial information by geographic area, see "Notes to the Consolidated Financial Statements, Note 12 - Geographical Information."Our SolutionsWe leverage deep experience, analytical expertise, high-performance revenue delivery teams and unique technology to drive customer success, renewals, andinside sales through our solutions.Our client-focused revenue delivery professionals receive extensive training and expertise in our clients’ businesses and are deployed as an extension of ourclients’ brands. Through direct interaction with our clients' end users, our revenue delivery professionals follow a sales process tailored specifically toimprove end-customer retention, generate additional sales where needed, and meet our clients’ business objectives. Our solution is designed to optimizerecurring revenue, provide customer success and enablement services, and maximize inside sales capabilities across different business-to-business revenuemodels, distribution models and segments, including hardware, software, Software-as-a-Service, industrial systems, information and media, as well astechnology-enabled healthcare and life sciences. Our global revenue delivery centers, located in Bulgaria, Ireland, Japan, Malaysia, the Philippines,Singapore, the United Kingdom and the United States enable us to provide our solutions to our clients in 45 languages.Our solutions span the entire lifecycle of our clients’ customers, from landing new customers (we provide lead generation, inside sales, and outsourced salesoperations services), adoption (we provide customer onboarding and customer success management services), expansion (we provide cross-sell and upsell,warranty conversion, account-based marketing and channel recruitment and enablement) and renewals (we provide renewals management services, includingthe sale of maintenance and support service contracts for the products used by our clients’ end-users).•Outsourced Sales Operations. Our sales enablement and quoting solutions, powered by robotic process automation, or (RPA), advance our clients’renewal sales process with specialized resources handling the administrative work1Table of Contentsassociated with renewals and subscriptions. We apply a standardized, best-practice approach to sales enablement and quoting across theopportunities we manage through a dedicated, trained team completely focused on quoting, data entry and bookings processing combined with anin-depth understanding of our clients’ product SKUs, pricing and systems. In addition, we provide rigorous quality control through a dedicatedquote audit team and analytics dashboards to monitor accuracy, throughput and cycle times.•Customer Onboarding. Our revenue delivery teams proactively welcome our clients’ new customers and ensure the customers are established forongoing success. Using our best-practice processes developed over our nearly 20 year history, we confirm successful implementation of our clients’products or services and promote adoption and use, including thorough reviews of customer usage and initial contact; brief demonstrations andreviews of key product features; identification and, if needed, escalation of support or implementation issues; delivery of basic training and/orproduct education; and supporting change management initiatives.•Customer Success Management. Our revenue delivery teams continuously monitor the health of our clients’ customers; reinforce the unique valueand benefits of our clients’ products; and share customer feedback with our clients’ product and marketing teams. Our revenue delivery professionalsare specifically and continuously trained to articulate the value of our clients’ products and services to their customers, which drives improvedcustomer loyalty. In addition, we use our technology platform to provide predictive analytics to identify our clients’ at-risk customers as well as toprovide segmentation and analysis to assist in minimizing or avoiding churn.•Inside Sales, Lead Generation, and Cross-sell and Upsell Services. Our inside sales teams perform and are trained in accordance with highperforming sales team methodologies to enable efficient and effective lead generation and inside sales activities for our clients. Our revenue deliveryteams are specifically trained in the identification of cross-sell and upsell activities, including upgrading service/support level, uncoveringadditional assets/licenses, extending term length and product sales lead generation. We do this through expert data analysis, specifically designedaccount plans and partnerships with our clients’ sales teams.•Warranty Conversion. We proactively engage with our clients’ warranty customers with skilled revenue delivery teams who are trained to clearlyarticulate the benefits of an extended support and maintenance contract. In addition, we identify and engage customers who have lapsed warrantyagreements.•Renewals Management. We help our clients develop a finely-tuned renewals management and growth strategy. We begin by analyzing our clients’existing business data, systems and processes to accurately diagnose our clients’ renewal revenue challenges. The initial analysis is followed by ourproposal of a tailored solution of expert selling services, technology and processes to achieve our clients’ revenue growth and customer retentionobjectives. Our revenue delivery teams operate as an extension of our clients’ brand and sales team, support either direct or channel selling modelsand have worldwide sales experience.Our pay-for-performance model allows our clients to pay us either flat-rate or variable commissions based on the revenue we generate on their behalf. Fixed-fee arrangements often used in quick deployments to address discrete target areas of our clients’ needs or when a fixed fee best addresses our clients' businessmodel. We also generate revenue through our professional services teams, who assist our clients with data optimization.Our engagement with our clients begins in the pre-sales process and continues through their lifecycle.•Sales Performance Analysis. We typically begin engagements with our prospective clients by conducting in-depth interviews, analyzing theirhistorical performance and future opportunity and evaluating their recurring revenue business using proprietary analytical models. We also use ourbreadth of experience to benchmark and identify service renewal opportunities, and to calculate our ability to improve our clients' performancebased on our performance with similar types of businesses and revenue streams.•Business Case, Pricing and Contract Structuring. We use our reservoir of data and benchmarks to estimate the critical components of the businesscase and appropriate pricing model for prospective clients, whether for renewals, selling services, or lead generation. This intelligence isfundamental to our pay-for-performance business model.•Data Integration. We deploy our professional services teams to enable data integration at scale, combined with data enhancement, enablement,integration and optimization where needed.•Performance. Once a partnership is in place with one of our clients, we leverage our reporting platform and our data reservoir and performanceoptimization tools to enable, measure, analyze, benchmark and optimize the performance of our inside sales and revenue delivery teams.•Client Benchmarking and Continuous Improvement. Our extensive platform and the accumulation of nearly 20 years of experience serve as thefoundation for benchmarking our clients’ evolving recurring revenue and end customer2Table of Contentssuccess performance against industry peers and previous period performance. We generally conduct quarterly business review meetings and annualpartnership reviews with our clients to review performance, identify potential weaknesses in their processes and determine opportunities forimprovement and make recommendations that we believe will allow our clients and us to achieve higher levels of performance and efficiencies.•Developing and Delivering Applications. Our data reservoir fuels the opportunity data, sales methodologies, metrics and reporting dashboards thatwe engineer into our applications. Accordingly, we design our applications to leverage the transactional, analytical and industry data housed inPRISM, our technology platform.Our TechnologyOur Predictive Relationship Intelligence and Sales Management platform, or PRISM, is a combination of our proprietary tools, best-in-class industrysolutions, application integrations, a proprietary recurring revenue data model and proven release management and operational procedures. We use PRISMwithin our client engagements to enable higher productivity and efficiency from our revenue delivery and operations teams in order to drive better outcomesfor our clients. We specifically focus on process and productivity management, analytics that drive high-performing and effective sales teams, and customerretention and customer success insights.Customer Success Management TechnologiesWe deploy customer success management technologies to our customer success services teams on behalf of our clients in order to enable our agreed-uponeconomic outcomes. The applications are our own proprietary intellectual property, based on our years of history supporting recurring revenue managementand customer success management, combined with best-in-class third party technology. PRISM correlates product usage, billing and customer revenuemanagement data with success plans to proactively trigger intelligent workflow automations, helping our precision customer success and revenue deliveryprofessionals engage the right end customer with the right sales motion at the right time.Renewal and Channel Management TechnologiesWe deploy applications that are uniquely designed for our revenue delivery professionals who are specifically focused on managing renewals, warrantyconversions, install base out-of-warranty (IBOW) and channel engagements. These applications allow us to optimize the selling processes between revenuedelivery professionals engaging with our clients’ customers and operations services responsible for creating quotes and booking orders. These sellingprocesses, and our purpose-built applications that facilitate them, are also extended to channel partners to drive channel sales performance in scenarios whereour clients sell via one-tier or two-tier distribution. All of these applications are based on our proprietary data model to effectively capture and track keyrecurring revenue metrics that drive performance for our customer partnerships.Inside Sales TechnologiesUsing the native functionality of PRISM paired with ServiceSource’s unique capabilities enables our inside sales teams to support new selling opportunitiesby capturing and scoring leads, prioritizing engagements, and focusing on cross-sales for current customers.Productivity ToolsWe deploy productivity tools to our revenue delivery professionals that focus on performance management, knowledge management, communication andtraining. These tools allow managers to monitor and coach our selling teams to improve performance and efficiency and provide real-time communicationand client related news to our revenue delivery team members. These tools are available to our selling teams via a proprietary and customized landing page,and include the following features:•Communication. Team chat functionality for easy and immediate communication to managers and other team members; a softphone tie-in thatenables recording for training purposes as well as time and task tracking features; and customer contact look-up application.•Knowledge Management. Product knowledge to guide selling and accelerate new team member training/onboarding, including client social mediaand other client-related news feeds.•Productivity Tools. These features enable managers and team leaders to capture best practices and productivity metrics for training and sharingacross teams, as well as suggesting selling motions and task prioritization to enable targeted and efficient selling motions.3Table of Contents•Performance Management. All information from the productivity tools, including task tracking and time management, rolls up to the individualrepresentative and managers in both an individual and aggregated manner to allow for real-time tracking of performance relative to quarter goals.Each deployment of the productivity tools is customized to the particular client and region being serviced by the revenue delivery team member. To scalebest practices from our highest-performing team members, we also deploy workforce optimization software and desktop analytics. As we learn from our highperformers how to navigate complex client systems or manage sophisticated selling activities, we can easily share those practices with new hires, teammembers or incorporate them into our global learning methodologies. Lastly, much of this information integrates with PRISM, our reporting platform oftransactional, productivity and performance information to allow us to offer our clients benchmarking of our clients’ results against their industry peers.Our intellectual property consists primarily of software systems and business methodologies. We rely upon a combination of copyrights, trade secrets andtrademarks, in addition to contractual restrictions such as confidentiality agreements, to establish and protect our proprietary rights. We currently hold twelveU.S. patents, and additional applications for U.S. patents are currently pending.Key benefits of our solutions include:Financial Benefits•Increased revenue. Our solutions are designed to increase revenues for our clients. We actively monitor the success rates-including contract renewalrates, cross-sell and upsell rates, lead generation, or other services that we drive on behalf of our clients in each engagement. When we generatehigher renewal rates, we not only drive incremental client revenue for the associated period, but also have a compounding effect in increasing thebase number of contracts eligible for renewal in subsequent periods, which expands the opportunity to generate greater client revenue in futureperiods. As we expand our solution to include cross-sell and upsell, lead generation and other strategic customer success services, we believe thatour opportunity to generate client revenue in future periods through our renewal management services will also increase.•Improved retention and customer success. Our solutions drive end customer retention and revenue growth for some of the world’s leadingcompanies, leveraging nearly 20 years of expertise to continuously monitor end customer health, engage each end customer with the right play atthe right time and reinforce the unique value and benefits of each end customer’s product. The result is reduced end customer churn, increasedrevenue through up-sell and cross-sell, stronger end customer relationships and higher satisfaction.•Increased margin and profitability. We believe that the variable rate we charge for our solutions is lower than the fully-loaded fixed internal costsincurred by our clients managing renewals internally. As a result, each incremental dollar of recurring revenue generated by our solutions can drivegreater profitability for our clients.Operational Benefits•Greater business insight and analytics. The analytics engines in our technologies allow us to analyze each client’s renewals and churn rates againstsimilar transactions, identifying areas for improvement and enabling greater insight into their business. All transactions, regardless of outcome, arerecorded in PRISM. We leverage PRISM to provide benchmarking, end customer metrics, sales efficiency data and insight into successful andunsuccessful renewal efforts. The breadth of our data allows us to provide powerful analysis across regions, industries, channel partners and productsegments.•Greater visibility and forecasting tools. Our technologies deliver real-time analytics and visibility into our client’s recurring revenue performance,sales efficiency and forecasts. We measure recurring revenue performance across dozens of key performance indicators and provide real-time data toour clients through a clear and impactful web-based interface. Our clients rely on our applications to assist in forecasting their results and to measureprogress against their forecasts on a real-time basis.•Global consistency. We are able to maintain a globally consistent customer success and revenue growth selling process for our clients. Our revenuedelivery centers operate from a unified platform. Our technologies automate the application of best practices to recurring revenue renewals andcustomer success processes and provide all relevant constituencies with a consistent view of the data. This automation facilitates contract renewalsand provides reliable performance management and analytics.4Table of ContentsOur StrategyWe intend to continue our industry leadership by delivering solutions to support the challenges faced by our clients in managing their revenue lifecycle. Ourstrategy to execute this vision is:•Expand our client base. In order to expand our client base, we are offering rapid, smaller deployments to address our clients’ discrete needs or tosupport fast-growth enterprises.•Increase footprint with existing clients to drive greater revenue per client. Our goal is to manage a greater portion of each client’s recurring revenue.We have increasingly taken on the management of more than just one component of a client’s recurring revenue, such as a specific product, marketsegment or geographic region, or adding selling services such as cross-sell and upsell services, to an existing client’s renewal services. Because webaseline our clients’ performance prior to any engagement, we are able to quantify our results for the client, which frequently leads to increasedopportunities to expand our Opportunity Under Management for that client.•Continue to invest in our technologies. We believe that our ability to leverage our technology to drive increased productivity by our revenuedelivery professionals through more efficient and engaging training and productivity management, as well as our revenue analytics capabilities, iscritical to our value proposition. We will continue to invest in our automation processes and the innovation of PRISM, our technology platform, tolower our operating costs, increase the efficiency and success of our solutions and enhance our competitive differentiation.•Expand our investments in our people. Retention and enablement of our revenue delivery professionals is important to the success of our business.We have invested, and will continue to invest, in specific job-related next-generation training tailored to an individuals’ specific role. In addition,we will continue to support and roll out our continuous leadership training and learning management program, designed to identify high potentialleaders as well as motivate our workforce and provide avenues for success across our worldwide employee base. We believe these investments willnot only result in improved performance for our clients, but will also continue to set us apart from potential competitors and how our clients managecustomer success internally.Our ClientsWe target our solutions to business-to-business companies, within a range of industries including computer hardware, software, Software-as-a-Service,telecommunications, healthcare, life sciences, media and industrial systems. In 2017, we managed approximately $11.0 billion of Opportunity UnderManagement for our clients. Opportunity Under Management is an operational metric that represents our estimate of the value of all end customer servicecontracts that we have the opportunity to sell on behalf of our clients over a designated period of time. Opportunity Under Management is not a measure ofour expected revenue. As of December 31, 2017, we managed approximately 168 engagements across 54 clients.Our top ten clients accounted for approximately 66%, 66% and 57% of our revenue for the years ended December 31, 2017, 2016 and 2015, respectively.Three of our clients, Cisco, VMWare and Dell, represented 15%, 12% and 11% of our revenue, respectively, for the year ended December 31, 2017. For theyear ended December 31, 2016, Cisco, Dell and VMWare represented 14%, 11% and 11% of our revenue, respectively. No single client represented 10% ormore of our revenues in 2015.Our PeopleAs of December 31, 2017, we had 3,269 employees throughout the world: 1,114 employees in the U.S., 171 in Bulgaria, 256 in the Republic of Ireland, 70 inJapan, 528 in the Philippines, 732 in Malaysia, 161 in Singapore and 237 in the United Kingdom. We are not subject to collective bargaining agreementswith any of our employees.Sales and MarketingWe sell our solutions through our global sales organization. Our sales representatives are organized by geographic regions: North America and Latin America("NALA"); Europe, Middle East and Africa ("EMEA"); and Asia Pacific-Japan ("APJ"). In 2017, we generated 63% of our revenue in NALA, 26% in EMEAand 11% in APJ. See "Item.1A. Risk Factors" for a description of the risks associated with our foreign operations.We generate client leads, accelerate sales opportunities and build brand awareness through our marketing programs. Our marketing programs target sales,services, customer success, account management, technology and finance executives within the computer hardware, software, SaaS, telecommunications,healthcare, life sciences, media and industrial systems industries. Our marketing programs are organized by geography and industry segment to focus on theunique needs of clients within the specific target markets.5Table of ContentsWe participate in industry trade shows and host local and regional events around the world to stimulate industry dialog on revenue lifecycle managementand to promote our services. In addition, we actively seek to collaborate with other like-minded businesses where such collaboration can increase our marketpenetration or provide value to our customers.Research and DevelopmentWe focus our research and development efforts on enhancing our technologies as well as creating complementary new capabilities to add to our solutions.Our development strategy is to identify features, business intelligence, applications and other technology elements that are, or are expected to be, needed bysales professionals, customer success and account management professionals, clients, channel partners and end customers to optimize recurring revenueperformance and customer success. We are also continuing to invest in the development of our technologies to serve our clients’ needs and enable greateroperational efficiencies in our organization.Our research and development expenses were $5.7 million, $8.3 million and $16.5 million for the years ended December 31, 2017, 2016 and 2015,respectively. In addition, we capitalized certain expenditures related to the development and enhancement of internal-use software during 2017, 2016 and2015.CompetitionThe market for outsourced customer success and revenue growth solutions is evolving. Historically, companies have managed their service renewals throughinternal personnel and relied upon a variety of technologies including spreadsheets, internally developed software and customized versions of traditionalbusiness intelligence tools and end-customer relationship management or enterprise resource planning software from vendors such as Oracle Corporation,SAP AG, salesforce.com, inc. and NetSuite, Inc. Some companies have made further investments in this area using firms such as Accenture and McKinsey &Company for technology consulting and education services focused on service renewals. These internally-developed solutions represent the primaryalternative to our integrated approach of combining people, processes and technology to provide end-to-end optimized outsourced customer success andrevenue growth solutions.We believe we are the only company of scale operating at the intersection of three key customer-success vectors:•business process outsourcing/business process as a service (including offerings from vendors such as Accenture, Genpact and Concentrix);•business-to-business revenue enablement services (including offerings from vendors such as Omnicom, Publicis and Acxiom); and•data and analytics services (including offerings from vendors such as Lattice Engines, InsideSales.com and 6sense).We believe our unique market position and our differentiated business model allows us to maintain our market presence, and our global scale and ability toprovide our solutions in over 45 languages provides a competitive advantage over smaller companies entering the outsourced customer success space.We believe our principal competitive differentiators include:•recurring revenue and customer success industry expertise, best practices and benchmarks;•ability to increase recurring revenue and renewal rates;•global capabilities;•completeness of solution;•performance-based pricing of solutions;•ability to effectively represent client brands to end customers and channel partners;•quality of the business and client insight and its ability to generate revenue and customer success;•size of upfront investment; and•size and financial stability of operations.Although we currently have few direct competitors that offer integrated solutions at our scale, we expect competition and competitive pressure, from bothnew and existing competitors, to increase in the future.6Table of ContentsAdditional InformationAdditional information about us is available on our website at http://www.servicesource.com. The information on our website is not incorporated into thisannual report by reference and is not a part of this Form 10-K. We make available free of charge on our website our annual reports on Form 10-K, quarterlyreports on Form 10-Q and current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as amended, as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC.From time to time, we may use our website as a channel of distribution of material information about our company. Financial and other important informationregarding our business is routinely posted on and accessible at http://ir.servicesource.com.ITEM 1A.Risk FactorsInvesting in our common stock involves risk. Our operations and financial results are subject to various risks and uncertainties, including those describedbelow, that could adversely affect our business, financial condition, results of operations, cash flows and the trading price of our common stock. You shouldcarefully consider the risks described below and the other information in this Report on Form 10-K.Risks Related to Our Business and IndustryOur business and growth depend substantially on clients renewing their agreements with us and expanding their use of our solution for additionalavailable markets. Any decline in our client renewals, termination of ongoing engagements or failure to expand their relationships with us could harm ourfuture operating results.In order for us to improve our operating results and grow, it is important that our clients renew their agreements with us when the initial contract term expiresand that we expand our client relationships to add new market opportunities and the related revenue management opportunity. Our clients may elect not torenew their contracts with us after their initial terms have expired or may elect to otherwise terminate our services, and we cannot assure you that our clientswill renew service contracts with us at the same or higher level of service, if at all, or provide us with the opportunity to manage additional revenuemanagement opportunities. Although our renewal rates have been historically higher than those achieved by our clients prior to their using our solution,some clients have still elected not to renew their agreements with us. Our clients’ renewal rates may decline or fluctuate as a result of a number of factors,many of which are beyond our control, including their satisfaction or dissatisfaction with our solution and results, our pricing, mergers and acquisitionsaffecting our clients or their end customers, the effects of economic conditions or reductions in our clients’ or their end customers’ spending levels. If ourclients do not renew their agreements with us, renew on less favorable terms, terminate their services with us or fail to contract with us for additionalOpportunity Under Management, our revenue may decline and our operating results may be adversely affected.Our revenue will decline if there is a decrease in the overall demand for our clients’ products and services.A majority of our revenue is based on a pay-for-performance model, which means that we are paid a commission based on the service contracts we sell onbehalf of our clients. If a particular client’s products or services fail to appeal to its end customers, our revenue will decline for our work with that client. Inaddition, if end customer demand decreases for other reasons, such as negative news regarding our clients or their products, unfavorable economic conditions,shifts in strategy by our clients away from promoting the service contracts we sell in favor of selling their other products or services to their end customers, orif end customers experience financial constraints and terminate or fail to renew the service contracts we sell, we may experience a decrease in our revenue asthe demand for our clients’ service contracts declines. Similarly, if our clients come under economic pressure, they may be more likely to terminate theircontracts with us or seek to restructure those contracts, and for clients whose contracts are up for renewal, they may seek to renew those contracts on lessfavorable terms. If one of our clients is under economic pressure due to decreasing customer demand, negative news, or other issues that impact the demandfor their product or services, our business could suffer and we may experience a significant decrease in our revenue.7Table of ContentsIf our bookings rates fall short of our estimates, our client relationships will be at risk, our revenue will suffer and our ability to grow and achieve broadermarket acceptance of our solution could be harmed.Given our pay-for-performance pricing model, a majority of our revenue is directly tied to our bookings, or closure, rates. Bookings rates represent thepercentage of the Opportunity Under Management delivered to us by our clients that we renew, "close," or "book" on behalf of our clients. If the bookingsrate for a particular client is lower than anticipated, then our revenue for that client will also be lower than projected. If bookings rates fall short ofexpectations across a broad range of clients, or if they fall below expectations for a particularly large client, then the impact on our revenue and our overallbusiness will be significant. In the event bookings rates are lower than expected for a given client, our margins will suffer because we will have alreadyincurred a certain level of costs in both personnel and infrastructure to support the engagement. This risk is compounded by the fact that many of our clientrelationships can be terminated by the client if we fail to meet certain specified sales targets, including bookings rates, over a sustained period of time. Ifbookings rates fall to a level at which our revenue and client contracts are at risk, then our financial performance will decline and we will be severelycompromised in our ability to retain and attract new clients. Increasing our client base and achieving broader market acceptance of our solution depends, to alarge extent, on how effectively our solution increases our clients' service sales. As a result, poor performance with respect to our bookings rates, in additionto causing our revenue, margins and earnings to suffer, will likely damage our client relationships and overall reputation, and prevent us from effectivelydeveloping and maintaining awareness of our brand or achieving widespread acceptance of our solution, in which case we could fail to grow our business andour revenue, margins and earnings would suffer.We depend on a limited number of clients for a significant portion of our revenue, and the loss of business from one or more of our key clients couldadversely affect our results of operations.Our top ten clients accounted for 66% of our revenue for the year ended December 31, 2017, and three clients each represented over 10% of our revenueduring this period. A relatively small number of clients may continue to account for a significant portion of our revenue for the foreseeable future. The loss ofrevenue from any of our significant clients for any reason, including the failure to renew our contracts, termination of some or all of our services, a change ofrelationship with any of our key clients, or the acquisition of one of our significant clients, may cause a significant decrease in our revenue.If we cannot efficiently implement our offering for clients, we may be delayed in generating revenue, fail to generate revenue and/or incur significant costs.In general, our client engagements are complex and we must undertake lengthy and significant work to implement our offerings. Changes in our go-to-marketand technology strategies also will increase costs and create implementation risks for us. We generally incur sales and marketing expenses related to thecommissions owed to our sales representatives and make upfront investments in technology and personnel to support the engagements one to three monthsbefore we begin selling end customer contracts on behalf of our clients. Each client’s situation may be different, and unanticipated difficulties and delaysmay arise as a result of our failure, or that of our client, to meet implementation responsibilities. If the client implementation process is not executedsuccessfully or if execution is delayed, we could incur significant costs without yet generating revenue, and our relationships with some of our clients may beadversely impacted.8Table of ContentsThe market for our solution is relatively undeveloped and may not grow.The market for outsourced customer success and revenue growth solutions is still relatively undeveloped, has not yet achieved widespread acceptance andmay not grow quickly or at all. Our success depends to a substantial extent on the willingness of companies to engage a third party (such as us) to managetheir service revenues. Many companies have invested substantial personnel, infrastructure and financial resources in their own internal service revenueorganizations or in some cases have built or modified software applications to help manage renewals, and therefore may be reluctant to switch to a solutionsuch as ours. Companies may not engage us for other reasons, including a desire to maintain control over all aspects of their sales activities and end customerrelations, concerns about end customer reaction, a belief that they can sell their service revenues more cost-effectively using their internal sales organizations,perceptions about the expenses associated with changing to a new approach and the timing of expenses once they adopt a new approach, general reluctanceto adopt any new and different approach to old ways of doing business, or other considerations that may not always be evident. Particularly because ourmarket is relatively undeveloped, we must address our potential clients’ concerns and explain the benefits of our approach in order to convince them tochange the way that they manage their service revenues. If companies are not sufficiently convinced that we can address their concerns and that the benefitsof our solution are compelling, then the market for our solution may not develop as we anticipate and our business will not grow.If our new and/or enhanced technologies do not work as intended, our business could suffer.We have invested significant resources in research and development of technologies designed to enhance our managed services offerings. The developmentof new technologies or enhancements to existing technologies entails a number of risks that could adversely affect our business and operating results,including:•the risk of diverting the attention of our management and our employees from the day-to-day operations of the business;•insufficient revenue to offset increased expenses associated with research, development and operational activities; and•write-offs of the value of such technology investments as a result of unsuccessful implementation or otherwise.If any of our new or enhanced technologies do not work as intended, are not responsive to user preferences or industry or regulatory changes, are notappropriately timed with market opportunity, or do not enhance our managed service offerings, we may lose existing and potential clients or related revenueopportunities, in which case our results of operations may suffer.We conduct operations in a number of countries and are subject to risks of international operations.In 2017, approximately 37% of our revenue was related to operations located outside of the U.S. In addition, 66% of our employees are located in officesoutside of the U.S. We expect to continue our international growth, with international revenue accounting for an increased portion of total revenue in thefuture. Our international operations involve risks that differ from or are in addition to those faced by our U.S. operations. These risks include differentemployment laws and rules and related social and cultural factors; different regulatory and compliance requirements, including in the areas of privacy anddata protection, anti-bribery and anti-corruption, trade sanctions, marketing and sales and other barriers to conducting business; cultural and languagedifferences; diverse or less stable political, operating and economic environments and market fluctuations; and civil disturbances or other catastrophic eventsthat reduce business activity. If we are not able to efficiently adapt to or effectively manage our business in markets outside of the U.S., our business prospectsand operating results could be materially and adversely affected. Although we have business continuity plans in place for our operations, an extended periodof civil unrest that halts or significantly impedes operations could have a material adverse effect on our business.9Table of ContentsLaws or public perception may eliminate or restrict our ability to use revenue delivery centers not located in the United States, which could have a materialadverse impact on our business and results of operations.The issue of companies outsourcing services to organizations operating in other countries is a politically sensitive topic and has been under heightenedscrutiny in many countries, including the United States. We provide our outsourced customer success and revenue growth solutions in several non-U.S.locations, including the Philippines and Malaysia, and our growth strategy includes increasing reliance on these “offshore” revenue delivery centers. Manyorganizations and public figures in the United States have publicly expressed concern about a perceived association between offshore outsourcing providersand the loss of jobs in the United States, and the topic of offshore outsourcing has recently received a great deal of negative attention from the U.S. executivebranch. Because of negative public perception about offshore outsourcing, measures aimed at limiting or restricting offshore outsourcing by United Statescompanies are periodically considered in the U.S. Congress. Current or prospective clients may elect to perform such services themselves or may bediscouraged from transferring these services from onshore to offshore providers to avoid negative perceptions that may be associated with using an offshoreprovider. Any slowdown or reversal of existing industry trends towards offshore outsourcing, including due to the enactment of any legislation restrictingoffshore outsourcing by U.S. companies, would harm our ability to provide certain of our services to our clients at a competitive and cost-effective price pointand would have a material adverse effect on our business and results of operations.Our estimates of Opportunity Under Management and other metrics may prove inaccurate.We use various estimates in formulating our business plans and analyzing our potential and historical performance, including our estimate of OpportunityUnder Management. We base our estimates upon a number of assumptions that are inherently subject to significant business and economic uncertainties andcontingencies, many of which are beyond our control. Our estimates therefore may prove inaccurate.Opportunity Under Management is an operational metric that represents our estimate, over a designated period of time, of the value of all end customerservice contracts that we have the opportunity to sell on behalf of our clients. Opportunity Under Management is not a measure of our expected revenue. Weestimate the value of end customer contracts based on a combination of factors, including the value of end customer contracts made available to us by clientsin past periods; the minimum value of end customer contracts that our clients are required to give us the opportunity to sell pursuant to the terms of theircontracts with us; periodic internal business reviews of our expectations as to the value of end customer contracts that will be made available to us by clients;the value of contracts we manage under our Customer Success solution; the Bookings we deliver under our Inside Sales solution; the value of end customercontracts included in our pre-contract analysis conducted by our solution design team; and collaborative discussions with our clients assessing theirexpectations as to the value of service contracts that they make available to us for sale. Although the minimum value of end customer contracts that ourclients are required to give us represents a portion of our estimated Opportunity Under Management, a significant portion of the Opportunity UnderManagement is estimated based on the other factors described above.When estimating Opportunity Under Management and other similar metrics, we rely on our assumptions described above, which may prove incorrect. Theseassumptions are inherently subject to significant business and economic uncertainties and contingencies, many of which are beyond our control. Ourestimates therefore may prove inaccurate and the actual value of end customer contracts delivered to us in a given period may differ from our estimate ofOpportunity Under Management. The business and economic uncertainties and contingencies include:•the extent to which clients deliver a greater or lesser value of end customer contracts than may be required or otherwise expected;•changes in the pricing or terms of service contracts offered by our clients;•increases or decreases in the end customer base of our clients;•the extent to which the renewal rates we achieve on behalf of a client early in an engagement affect the amount of opportunity that the client makesavailable to us later in the engagement;•client cancellations of their contracts with us due to acquisitions or otherwise; and•changes in our clients’ businesses, sales organizations, sales processes or priorities, including changes in executive support for our partnership.In addition, Opportunity Under Management reflects our estimates over a designated period of time and should not be used to estimate our historical or futureopportunity for any particular quarter within that period. We experienced an increase in our Opportunity Under Management in 2017 as compared to 2016,and 2016 as compared to 2015. In addition, the increase in our 2017 Opportunity Under Management did not translate into revenue growth in 2017.10Table of ContentsIf our security measures are breached or fail, resulting in unauthorized access to client data, our solution may be perceived as insecure, the attractivenessof our solution to current or potential clients may be reduced and we may incur significant liabilities.Our solution involves the storage and transmission of the proprietary information and protected data that we receive from our clients. We rely on proprietaryand commercially available systems, software, tools and monitoring, as well as other processes, to provide security for processing, transmission and storage ofsuch information. If our security measures are breached or fail as a result of third-party action, employee negligence, error, malfeasance or otherwise,unauthorized access to client or end customer data may occur. Techniques used to obtain unauthorized access or to sabotage systems change frequently andgenerally are not recognized until launched against a target, and we may be unable to anticipate these techniques or implement adequate protectivemeasures. Our security measures may not be effective in preventing these types of activities, and the security measures of our third-party data centers andservice providers may not be adequate.Our client contracts generally provide that we will indemnify our clients for data privacy breaches caused by our act or omission. If a data privacy breachoccurs, we could face contractual damages, damages and fees arising from our indemnification obligations, penalties for violation of applicable laws orregulations, possible lawsuits by affected individuals and significant remediation costs and efforts to prevent future occurrences. Insurance may not be able tocover these costs in full, in particular if the damages are large. In addition, whether there is an actual or a perceived breach of our security, the marketperception of the effectiveness of our security measures could be harmed significantly and we could lose current or potential clients.We may be liable to our clients or third parties if we make errors in providing our solution or fail to properly safeguard our clients' confidentialinformation.The solution we offer is complex, and we make errors from time to time. These may include human errors made in the course of managing the sales process forour clients as we interact with their end customers, or errors arising from our technology solution as it interacts with our clients’ systems and the disparatedata contained on such systems. For example, our employees enter codes to classify their interactions with our clients’ end customers, and incorrect codeentry could result in our clients' end customer not receiving the service or solution they requested, which in turn could lead to customer dissatisfaction ortermination causing our client relationships to suffer and our revenue and our clients' revenue to decline. The costs incurred in correcting any material errorsmay be substantial. Any claims based on errors could subject us to exposure for damages, significant legal defense costs, adverse publicity and reputationalharm, regardless of the merits or eventual outcome of such claims.Changes in the legal and regulatory environment that affect our operations, including laws and regulations relating to the handling of personal data, datasecurity and cross-border data flows, may impede the adoption of our services, disrupt our business or result in increased costs, legal claims, or finesagainst us.We are subject to a wide variety of laws and regulations in the United States and the other jurisdictions in which we operate, and changes in the level ofgovernment regulation of our business have the potential to materially alter our business practices with resultant increases in costs and decreases inprofitability. Depending on the jurisdiction, those changes may come about through new legislation, the issuance of new regulations or changes in theinterpretation of existing laws and regulations by a court, regulatory body or governmental official. Sometimes those changes have both prospective andretroactive effect, which is particularly true when a change is made through reinterpretation of laws or regulations that have been in effect for some time.Our international operations and global client base relies increasingly on the movement of data across national boundaries. Legal requirements relating to thecollection, storage, handling and transfer of personal data continue to evolve, and additional regulation in those areas, some of it potentially difficult andcostly for us to accommodate, is frequently proposed and occasionally adopted. Laws in many countries and jurisdictions, particularly in the European Unionand Canada, govern the requirements related to how we store, transfer or otherwise process the private data provided to us by our clients. In addition, thecentralized nature of our information systems at the data and operations centers that we use requires the routine flow of data relating to our clients and theirrespective end customers across national borders, both with respect to the jurisdictions within which we have operations and the jurisdictions in which weprovide services to our clients. If this flow of data becomes subject to new or different restrictions, our ability to serve our clients and their respective endcustomers could be seriously impaired for an extended period of time.We also have entered into various model contracts and related contractual provisions to enable these data flows. For any jurisdictions in which thesemeasures are not recognized or otherwise not compliant with the laws of the countries in which we process data, or where more stringent data privacy laws areenacted irrespective of international treaty arrangements or other existing compliance mechanisms, we could face increased compliance expenses and facepenalties for violating such laws or be excluded from those markets altogether, in which case our operations could be materially damaged.11Table of ContentsIf we are unable to compete effectively, our business and operating results will be harmed.The market for outsourced customer success and revenue growth solutions is evolving and new competitors are emerging. Historically, internally developedsolutions have represented the primary alternative to our offerings. However, we also face direct competition from smaller companies that offer specializedrevenue management solutions as well as larger business process outsourcers that are moving into the revenue growth space. We believe that morecompetitors will emerge. Competitors may have greater name recognition, longer operating histories, well-established relationships with clients in ourmarkets and substantially greater financial, technical, personnel and other resources than we have, and even a potentially broader array of offerings. Potentialcompetitors of any size may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or endcustomer requirements. Even if our solution is more effective than competing solutions, potential clients might choose new entrants unless we can convincethem of the advantages of our integrated solution. We expect competition and competitive pressure, from both new and existing competitors, to increase inthe future.Consolidation in the technology sector could harm our business in the event that our clients are acquired and their contracts are canceled.Consolidation among technology companies in our target market has been robust in recent years, and this trend poses a risk for us. Acquisitions of our clientscould lead to cancellation of our contracts with those end customers by the acquiring companies and could reduce the number of our existing and potentialclients. For example, in January 2010, Oracle acquired our then-largest client, Sun Microsystems, as well as several of our smaller clients. Oracle elected toterminate our service contracts with each client because Oracle conducted its service revenue management internally. We have seen this trend continuethrough the years. If mergers and acquisitions take place within our customer base, some of the acquiring companies may terminate, renegotiate and/or electnot to renew our contracts with the companies they acquire, which would reduce our revenue. In addition, acquisitions in our customer base may adverselyimpact our revenue even if the contract is not terminated. The sales we make on behalf of our customers are processed through our customers’ billing andquoting platforms. If our customers are acquired or merge with another company and as a result, their billing platforms or the procedures for processing closedsales are changed or slowed down, we will be unable to close our sales and our closure rate, and therefore our revenue and our ability to keep our customers,could suffer.We enter into long-term, commission-based contracts with our clients, and our failure to correctly price these contracts may negatively affect ourprofitability.We enter into long-term contracts with our clients that are priced based on multiple factors determined in large part by the performance analysis we conductfor our clients. These factors include opportunity size, anticipated booking rates and expected commission rates at various levels of sales performance. Someof these factors require forward-looking assumptions that may prove incorrect. If our assumptions are inaccurate, or if we otherwise fail to correctly price ourclient contracts, particularly those with lengthy contract terms, then our revenue, profitability and overall business operations may suffer. Further, if we fail toanticipate any unexpected increase in our cost of providing services, including the costs for employees, office space or technology, we could be exposed torisks associated with cost overruns related to our required performance under our contracts, which could have a negative effect on our margins and earnings.Our business may be harmed if our clients rely upon our service revenue forecasts in their business and actual results are materially different.The contracts that we enter into with our clients provide for sharing of information with respect to forecasts and plans for the renewal of maintenance, supportand subscription agreements of our clients. Our clients may use this forecasted data for a variety of purposes related to their business. Our forecasts are basedupon the data our clients provide to us, and are inherently subject to significant business, economic and competitive uncertainties, many of which are beyondour control. In addition, these forecasted expectations are based upon historical trends and data that may not be true in subsequent periods. Any materialinaccuracies related to these forecasts could lead to claims on the part of our clients related to the accuracy of the forecasted data we provide to them, or theappropriateness of our methodology. Any liability that we incur or any harm to our brand that we suffer because of inaccuracies in the forecasted data weprovide to our clients could impact our ability to retain existing clients and harm our business.Changing global economic conditions and large scale economic shifts may impact our business.Our overall performance depends in part on worldwide economic conditions that impact the technology sector and other technology-enabled industries suchas healthcare, life sciences and industrial systems. For example, an economic downturn typically results in many businesses deferring technologyinvestments, including purchases of new software, hardware and other equipment, and purchases of additional or supplemental maintenance, support andsubscription services. To a certain12Table of Contentsextent, these businesses also slow the rate of renewals of maintenance, support and subscription services for their existing technology base. Any futuredownturn could cause business end customers to stop renewing their existing maintenance, support and subscription agreements or contracting for additionalmaintenance services as they look for ways to further cut expenses, in which case our business could suffer.Conversely, a significant upturn in global economic conditions could cause business purchasers to purchase new hardware, software and other technologyproducts, which we generally do not sell, instead of renewing or otherwise purchasing maintenance, support and subscription services for their existingproducts. A general shift toward new product sales could reduce our near term opportunities for these contracts, which could lead to a decline in our revenue.Our inability to expand our target markets could adversely impact our business and operating results.We derive substantially all of our revenue from clients in certain sectors in the technology and technology-enabled healthcare and life sciences industries,and an important part of our strategy is to expand our existing client base and win new clients in these industries. In addition, because of the service revenueopportunities that we believe exist beyond these industries, we intend to target new clients in additional industry vertical markets, such as heavy machineryand manufacturing. In connection with the expansion of our target markets, we may not have familiarity with such additional industry verticals, and ourexecution of such expansion could face risks where our experience base is less developed within a particular new vertical. We may encounter clients in thesepreviously untapped markets that have different pricing and other business sensitivities than we are used to managing. As a result of these and other factors,our efforts to expand our solution to additional industry vertical markets may not succeed, may divert management resources from our existing operationsand may require us to commit significant financial resources to unproven parts of our business, all of which may harm our financial performance.A substantial portion of our business consists of supporting our clients’ channel partners in the sale of service contracts. If those channel partners becomeunreceptive to our solution, our business could be harmed.Many of our clients, including some of our largest clients, sell service contracts through their channel partners and engage our solution to help those channelpartners become more effective at selling service contract renewals. In this context, the ultimate buyers of the service contracts are end customers of thosechannel partners, who then receive the actual services from our clients. In the event our clients’ channel partners become unreceptive to our involvement inthe renewals process, those channel partners could discourage our current or future clients from engaging our solution to support channel sales. This risk iscompounded by the fact that large channel partners may have relationships with more than one of our clients or prospects, in which case the negative reactionof one or more of those large channel partners could impact multiple client relationships. Accordingly, with respect to those clients and prospective clientswho sell service contracts through channel partners, any significant resistance to our solution by their channel partners could harm our ability to attract orretain clients, which would damage our overall business operations.We face long sales cycles to secure new client contracts, making it difficult to predict the timing of specific new client relationships.We face a variable selling cycle to secure new client agreements, typically spanning a number of months and requiring our effort to obtain and analyze ourprospect’s business through the service performance analysis, for which we are not paid. We recently have also experienced a lengthening of our sales cyclesreflecting the hiring of a number of new sales personnel in the past eighteen months who are new to selling our solution as well as slower decision making bya few end customers as well as other end customers considering renewals of large, multi-year contracts. This has adversely affected the conversion rates of newclient contracts. Moreover, even if we succeed in developing a relationship with a potential new client, the scope of the potential subscription or servicerevenue management engagement frequently changes over the course of the business discussions and, for a variety of reasons, our sales discussions may failto result in new client acquisitions. Consequently, we have only a limited ability to predict the timing and size of specific new client relationships.If we fail to balance our expenses with our revenue forecasts or experience significant fluctuations in our business, our results could be harmed and wemay need to raise additional capital.Due to our evolving business model, the uncertain size of our markets and the unpredictability of future general economic and financial market conditions,we expect to continue to require significant capital and may not be able to accurately forecast our revenue and operating needs. We require a significantamount of cash resources to operate our business. We plan our expense levels and investments based on estimates of future sales performance for our clientswith respect to their end customers, future revenue and future end customer acquisition. If our assumptions prove incorrect, we may not be able to adjust ourspending quickly enough to offset the resulting decline in growth and revenue. Consequently, we expect that our gross margins, operating margins and cashflows may fluctuate significantly on a quarterly basis, and we may need to raise additional capital in order to meet operating and capital expenditurerequirements. Any decline in our client renewals or termination of our ongoing13Table of Contentsengagements may result in higher than anticipated losses in the future and shorten the time before we would need to raise additional capital. If we issueequity securities in order to raise additional funds, substantial dilution to existing stockholders may occur. If we raise cash through additional indebtedness,we may be subject to additional contractual restrictions on our business.Because competition for our target employees is intense, we may be unable to attract and retain the highly skilled employees we need to support ourplanned growth.To continue to execute on our growth plan, we must attract and retain highly qualified sales representatives, engineers and other key employees in theinternational markets in which we have operations. Competition for these personnel is intense, especially for highly educated, qualified sales representativeswith multiple language skills. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiringand retaining highly skilled key employees with appropriate qualifications. If we fail to attract new sales representatives, engineers and other key employees,or fail to retain and motivate our most successful employees, our business and future growth prospects could be harmed.The length of time it takes our newly hired sales representatives to become productive could adversely impact our success rate, the execution of our overallbusiness plan and our costs.It can take twelve months or longer before our internal sales representatives are fully trained and productive in selling our solution to prospective clients.This long ramp period presents a number of operational challenges as the cost of recruiting, hiring and carrying new sales representatives cannot be offset bythe revenue such new sales representatives produce until after they complete their long ramp periods. Further, given the length of the ramp period, we oftencannot determine if a sales representative will succeed until he or she has been employed for a year or more. If we cannot reliably develop our salesrepresentatives to a productive level, or if we lose productive representatives in whom we have heavily invested, our future growth rates and revenue willsuffer.Our revenue and earnings are affected by foreign currency exchange rate fluctuations.In 2017, approximately 37% of our revenue was generated outside of the United States, as compared to 35% of our revenue in 2016. As a result of ourcontinued focus on international markets, we expect that revenue derived from international sources will continue to represent a significant portion of ourtotal revenue.A portion of the sales commissions earned from our international clients is paid in foreign currencies. As a result, fluctuations in the value of these foreigncurrencies may make our solution more expensive or cause resulting fluctuations in cost for international clients, which could harm our business. Wecurrently do not undertake hedging activities to manage these currency fluctuations. In addition, if the effective price of the contracts we sell to endcustomers were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for such contracts could fall, which in turn wouldreduce our revenue.The planned exit of the United Kingdom from the European Union could adversely affect our business.The upcoming departure of the United Kingdom from the European Union, known as Brexit, could have significant implications for our business. We have arevenue delivery center in Liverpool, United Kingdom, and Brexit has, and could continue to, create uncertainty in our employee base relating toimmigration and other cross-border matters. Brexit could lead to economic and legal uncertainty, including significant volatility in currency exchange rates,reduced customer demand for our services, and increasingly divergent laws and regulations as the United Kingdom determines which European Union laws toreplace or replicate. In addition, Brexit could cause a shift or increase in data privacy regulations for data transfers between the United Kingdom andEuropean Union. Any of these effects of Brexit, among others, could adversely affect our operations in the United Kingdom and our financial results.We may not succeed in expanding to additional international locations.Our growth strategy includes further expansion into international markets. Our international expansion, including opening new office locations, may requiresignificant additional financial resources and management attention, and could negatively affect our financial condition, cash flows and operating results. Inaddition, we may be exposed to associated risks and challenges, including:•the need to localize and adapt our solution for specific countries, including translation into foreign languages and associated expenses;•difficulties in staffing and managing foreign operations;14Table of Contents•different pricing environments, longer sales cycles and longer accounts receivable payment cycles and difficulties in collecting accounts receivable;•new and different sources of competition;•weaker protection for our intellectual property than in the United States and practical difficulties in enforcing our rights abroad;•laws and business practices favoring local competitors;•compliance obligations related to multiple, conflicting and changing foreign governmental laws and regulations, including employment, tax,privacy and data protection laws and regulations;•increased financial accounting and reporting burdens and complexities;•restrictions on the transfer of funds;•adverse tax consequences; and•unstable regional economic and political conditions.We may not succeed in creating additional international demand for our solution and we may not be able to effectively sell service agreements in theinternational markets we enter.Although we believe we currently have adequate internal control over financial reporting, we are required to evaluate our internal control over financialreporting under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence inour financial reports and have an adverse effect on our stock price.Under Section 404 of the Sarbanes-Oxley Act, we are required to furnish a report by our management on our internal control over financial reporting. Thereport contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year,including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any materialweaknesses in our internal control over financial reporting identified by management.We monitor and assess our internal control over financial reporting, and if our management identifies one or more material weaknesses in our internal controlover financial reporting and such weakness remains uncorrected at year-end, we will be unable to assert such internal control is effective at such time.Additionally, there can be no guaranty that our internal controls will prevent all errors or fraud, restatements, or other similar problems. If we are unable toassert that our internal control over financial reporting is effective at year-end (or if our independent registered public accounting firm is unable to express anopinion on the effectiveness of our internal control over financial reporting or concludes that we have a material weakness in our internal controls), we couldlose investor confidence in the accuracy and completeness of our financial reports, which would likely have an adverse effect on our business and stock price.Claims by others that we infringe or violate their intellectual property could force us to incur significant costs and require us to change the way we conductour business.Our services or solutions could infringe the intellectual property rights of others, impacting our ability to deploy our services or solutions with our clients.From time to time, we receive letters from other parties alleging, or inquiring about, possible breaches of their intellectual property rights. These claims couldrequire us to cease activities, incur expensive licensing costs, or engage in costly litigation, each of which could adversely affect our business and results ofoperations.In addition, we may incorporate open source software into our technology solution. The terms of many open source licenses have not been interpreted byUnited States or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions onour commercialization of any of our solutions that may include open source software. As a result, we will be required to analyze and monitor our use of opensource software closely. As a result of the use of open source software, we could be required to seek licenses from third parties in order to develop such futureproducts, re-engineer our products, discontinue sales of our solutions or release our software code under the terms of an open source license to the public.Given the nature of open source software, there is also a risk that third parties may assert copyright and other intellectual property infringement claims againstus based on any use of such open source software. These claims could result in significant expense to us, which could harm our business.15Table of ContentsInterruption of operations at our data centers and revenue delivery centers could have a materially adverse effect on our business.If we experience a temporary or permanent interruption in our operations at one or more of our data or revenue delivery centers, through natural disaster,casualty, operating malfunction, cyberattack, sabotage or other causes, we may be unable to provide the services we are contractually obligated to deliver.Failure to provide contracted services could result in contractual damages or clients’ termination or renegotiation of their contracts. Although we maintaindisaster recovery and business continuity plans and precautions designed to protect our company and our clients from events that could interrupt ourdelivery of services, there is no guarantee that such plans and precautions will be effective or that any interruption will not be prolonged. Any prolongedinterruption in our ability to provide services to our clients for whom our plans and precautions fail to adequately protect us could have a material adverseeffect on our business, results of operation and financial condition.We are dependent on the continued participation and level of service of our third-party platform provider. Any failure or disruption in this service couldmaterially and adversely affect our ability to manage our business effectively.We rely on salesforce.com to provide the platform supporting many of our technologies and Amazon Web Services ("AWS") to support a significant portionof our data storage. If salesforce.com or AWS stops supporting our technologies or if they fail to provide a platform that consistently and adequately supportsour solution, including as a result of errors or failures in their systems or events beyond their control, or refuse to provide this platform on terms acceptable tous or at all and we are not able to find suitable alternatives, our business may be materially and adversely affected.Additional government regulations may reduce the size of the market for our solution, harm demand for our solution and increase our costs of doingbusiness.Any changes in government regulations that impact our clients or their end customers could have a harmful effect on our business by reducing the size of ouraddressable market or otherwise increasing our costs. For example, with respect to our technology-enabled healthcare and life sciences clients, any change inU.S. Food and Drug Administration or foreign equivalent regulation of, or denial, withholding or withdrawal of approval of, our clients’ products could leadto a lack of demand for service revenue management with respect to such products. Other changes in government regulations, in areas such as privacy, exportcompliance or anti-bribery statutes, such as the U.S. Foreign Corrupt Practices Act, could require us to implement changes in our services or operations thatincrease our cost of doing business and thereby hurt our financial performance.We may be subject to state, local and foreign taxes that could harm our business.We operate revenue delivery centers in multiple locations. Some of the jurisdictions in which we operate, such as Ireland, give us the benefit of eitherrelatively low tax rates, tax holidays or government grants, in each case, that are dependent on how we operate or how many jobs we create and employees weretain. We plan on utilizing such tax incentives in the future, as opportunities are made available to us. Any failure on our part to operate in conformity withapplicable requirements to remain qualified for any such tax incentives or grants may result in an increase in our taxes. In addition, jurisdictions may chooseto increase rates at any time due to economic or other factors. Any such rate increases may harm our results of operations.We may lose sales or incur significant costs should various tax jurisdictions impose taxes on either a broader range of services or services that we haveperformed in the past. We may be subject to audits of the taxing authorities in the jurisdictions where we do business that would require us to incur costs inresponding to such audits. Imposition of such taxes on our services could result in substantial unplanned costs, would effectively increase the cost of suchservices to our clients and may adversely affect our ability to retain existing clients or to gain new clients in the areas in which such taxes are imposed.We may be exposed to various risks related to legal proceedings or claims that could adversely affect our operating results.From time to time, we may be party to lawsuits in the normal course of our business. Such litigation may include claims, suits, government investigations andother proceedings involving intellectual property rights, commercial, corporate and securities, labor and employment, wage and hour and other matters.Litigation in general can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficultto predict. Responding to lawsuits brought against us, or legal actions initiated by us, can often be expensive and time-consuming. Unfavorable outcomesfrom any claims and/or lawsuits could adversely affect our business, results of operations, or financial condition and we could incur substantial monetaryliability and/or be required to change our business practices. Our business and technology acquisition activity could also result in litigation in connectionwith such acquired companies.16Table of ContentsWe may incur material restructuring charges.We continually evaluate ways to reduce our operating expenses and adapt to changing industry and market conditions through new restructuringopportunities, including more effective utilization of our assets, workforce and operating facilities. We have recorded restructuring charges in the past and wemay incur material restructuring charges in the future. The risk that we incur material restructuring charges may be heightened during economic downturns orwith expanded global operations.We have incurred indebtedness in connection with our business and may in the future incur additional indebtedness that could limit cash flow availablefor our operations, limit our ability to borrow additional funds and, if we were unable to repay our debt when due, would have a material adverse effect onour business, results of operations, cash flows and financial condition.In August 2013, we issued $150.0 million aggregate principal amount of 1.50% convertible notes due August 1, 2018 (the “Notes”). The Notes will matureon August 1, 2018, unless earlier converted. Upon conversion, the Notes will be settled in cash, shares of our stock, or any combination thereof, at our option. In addition, we may incur additional indebtedness in connection with financing acquisitions, strategic transactions or for other purposes. We are subject tothe risks normally associated with debt obligations, including the risk that we will be unable to refinance our indebtedness, or that the terms of suchrefinancing will not be as favorable as the terms of our indebtedness.Our indebtedness could have a material adverse effect on our business, results of operations, cash flows and financial condition. For example, it could:•increase our vulnerability to general adverse economic and industry conditions; •reduce our ability to use cash to fund acquisitions, working capital and other general corporate purposes; •limit our flexibility in planning for, or reacting to, changes in our business; •restrict us from exploiting business opportunities; •dilute our existing stockholders if we elect to issue common stock instead of paying cash in the event the holders convert the 2018 Notes,or any other convertible securities issued in the future; and•limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, execution of our business strategy orother general corporate purposes.If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments or otherwise refinance the Notes or anyadditional debt that we incur, our business could suffer.Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported operatingresults.We prepare our financial statements to conform to generally accepted accounting principles in the United States. These accounting principles are subject tointerpretation by the Financial Accounting Standards Board, American Institute of Certified Public Accountants, the U.S. Securities and ExchangeCommission and various bodies formed to interpret and create appropriate accounting standards and guidelines. A change in those standards and guidelinescan have a significant effect on our reported results and may affect our reporting of transactions that were completed before a change is announced. Changesto those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, inMay 2014, the FASB issued an accounting standards update on a comprehensive new revenue recognition standard that will supersede the majority ofexisting revenue recognition guidance. We have concluded that the adoption of this new standard will not have a material impact on our ConsolidatedFinancial Statements. However, under the new standard, we will be required to use significant judgment and make estimates for all future revenue contracts,including identifying performance obligations in our contracts, estimating the amount of variable consideration to include in the transaction price, allocatingthe transaction price to each separate performance obligation, determining when performance obligations have been satisfied, identifying the costs to acquireand fulfill client contracts and determine the contract period and/or client life over which to expense these costs.The final revenue recognition standard is expected to take effect for us in 2018. See “Notes to Consolidated Financial Statements - Recently IssuedAccounting Pronouncements” for more detail.17Table of ContentsRisks Relating to Owning Our Common Stock and Capitalization MattersOur results may differ significantly from any guidance that we may issue.From time to time, we may release financial guidance or other forward-looking statements in our earnings releases, earnings conference calls or otherwise,regarding our future performance that represent our management’s estimates as of the date of release. If given, this guidance will be based on forecastsprepared by our management. These forecasts are not prepared with a view toward compliance with published accounting guidelines, and neither ourindependent registered public accounting firm nor any other independent expert or outside party compiles or examines the forecasts and, accordingly, nosuch person expresses any opinion or any other form of assurance with respect to such forecasts. The principal reason that we may release guidance is toprovide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections orreports published by any third persons. Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of any futureguidance furnished by us may not materialize or may vary significantly from actual future results.Concentration of ownership among our existing executive officers, directors and their affiliates may prevent new investors from influencing significantcorporate decisions.Our directors and executive officers and their affiliates beneficially own, in the aggregate, approximately 18.6% of our outstanding common stock as ofDecember 31, 2017. As a result, these stockholders will have substantial influence over all matters requiring stockholder approval, including the election ofdirectors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership couldlimit the ability of other stockholders to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring controlover us.Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.Our certificate of incorporation, bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging anacquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:•authorizing blank check preferred stock, which could be issued by our board of directors without stockholder approval, with voting, liquidation,dividend and other rights superior to our common stock;•classifying our board of directors, staggered into three classes, only one of which is elected at each annual meeting;•limiting the liability of, and providing indemnification to, our directors and officers;•limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;•requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidatesfor election to our board of directors;•controlling the procedures for the conduct and scheduling of stockholder meetings;•providing the board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduledspecial meetings;•limiting the determination of the number of directors on our board and the filling of vacancies or newly created seats on the board to our board ofdirectors then in office; and•providing that directors may be removed by stockholders only for cause.These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management. As a Delaware corporation, we arealso subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which limits the ability of stockholders owningin excess of 15% of our outstanding common stock to merge or combine with us.Any provision of our certificate of incorporation, by laws or Delaware law that has the effect of delaying or deterring a change in control could limit theopportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing topay for our common stock.18Table of ContentsIf securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change theirrecommendations regarding our stock, our stock price and trading volume could decline.The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. Ifany of these analysts cease coverage of us, the trading price and trading volume of our stock could be negatively impacted. If analysts downgrade our stockor publish unfavorable research about our business, our stock price would also likely decline.We are leveraged financially, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficientfunds to satisfy our future growth, business needs and development plans.We have substantial existing indebtedness. In August 2013, we issued $150.0 million aggregate principal amount of our convertible notes.The degree to which we are leveraged could have negative consequences, including, but not limited to, the following:•we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changingbusiness and economic conditions;•our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposesmay be limited;•a substantial portion of our cash flows from operations in the future may be required for the payment of the principal amount of our existingindebtedness when it becomes due; and•we may be required to make cash payments upon any conversion of the convertible notes, which would reduce our cash on hand.A failure to comply with the covenants and other provisions of our debt instruments could result in events of default under such instruments, which couldpermit acceleration of all of our outstanding convertible notes and credit facilities.Any required repurchase of the convertible notes as a result of a fundamental change or acceleration of the convertible notes would reduce our cash on handsuch that we would not have those funds available for use in our business. If we are at any time unable to generate sufficient cash flows from operations toservice our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek torefinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate suchterms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.Conversion of our convertible notes will dilute the ownership interest of existing stockholders and may depress the price of our common stock.The conversion of some or all of our convertible notes will dilute the ownership interests of then-existing stockholders to the extent we deliver shares uponconversion of any of the notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing marketprices of our common stock. In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notescould be used to satisfy short positions, or anticipated conversion of the notes into shares of our common stock could depress the price of our common stock.ITEM 1B.UNRESOLVED STAFF COMMENTSNone.19Table of ContentsITEM 2.PROPERTIESThe table below presents the location, size and principal function of our leased global facilities. We believe our facilities are adequate to meet businessoperation needs for the foreseeable future.Location Square Footage Region Type of FacilityNashville, TN, United States 120,685 NALA Revenue Delivery CenterDenver, CO, United States 71,319 NALA Revenue Delivery CenterSan Francisco, CA, United States 24,394 NALA Research and Development CenterManila, Philippines 68,151 APJ Revenue Delivery CenterKuala Lumpur, Malaysia 58,985 APJ Revenue Delivery CenterSingapore 17,626 APJ Revenue Delivery CenterYokohama, Japan 8,987 APJ Revenue Delivery CenterDublin, Republic of Ireland 38,060 EMEA Revenue Delivery CenterLiverpool, United Kingdom 22,575 EMEA Revenue Delivery CenterSofia, Bulgaria 31,510 EMEA Revenue Delivery CenterITEM 3.LEGAL PROCEEDINGSThe Company is subject to various legal proceedings and claims arising in the ordinary course of our business, including the cases discussed below. Although the results of litigation and claims cannot be predicted with certainty, the Company is currently not aware of any litigation or threats of litigationin which the final outcome could have a material adverse effect on our business, operating results, financial position, or cash flows. Regardless of theoutcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and otherfactors. The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordancewith accounting for contingencies. As of December 31, 2017, we accrued a $1.5 million reserve relating to our potential liability for currently pendingdisputes, presented in "Accrued Expenses" in our Consolidated Balance Sheets.On August 23, 2016, the United States District Court for the Middle District of Tennessee granted conditional class certification in a lawsuit originally filedon September 21, 2015 by three former senior sales representatives. The lawsuit, Sarah Patton, et al v. ServiceSource Delaware, Inc., asserts a claim under theFair Labor Standards Act alleging that certain sales account representatives and senior sales representatives in our Nashville location were not paid for allhours worked and were not properly paid for overtime hours worked. The complaint also asserts claims under Tennessee state law for breach of contract andunjust enrichment, however, the plaintiffs have not yet filed a motion to certify the state law breach of contract and unjust enrichment claims as a class action.The Company will continue to vigorously defend itself against these claims.ITEM 4.MINE SAFETY DISCLOSURESNot applicable.20Table of ContentsPART IIITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESMarket InformationOur common stock is traded on the NASDAQ Global Market under the symbol “SREV.” The following tables present the high and low prices of our commonstock as reported on the NASDAQ Global Market during the periods presented: Quarter Ended in 2017High LowFirst Quarter$6.05 $3.55Second Quarter$4.00 $2.82Third Quarter$4.00 $3.14Fourth Quarter$3.66 $2.61 Quarter Ended in 2016High LowFirst Quarter$4.62 $3.35Second Quarter$4.54 $3.52Third Quarter$5.31 $3.89Fourth Quarter$6.25 $4.40HoldersAs of February 23, 2018, there were 65 holders of record of our common stock. A substantially greater number of holders of our common stock are “streetname” or beneficial holders, whose shares are held by banks, brokers and other financial institutions.DividendsWe have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in theoperation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declaredividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, generalbusiness conditions and other factors that our board of directors may deem relevant.Stock Performance GraphThe following graph shows a comparison of cumulative total stockholder return for our common stock, the Morgan Stanley Technology Index and theNASDAQ Composite Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the NASDAQ CompositeIndex and the Morgan Stanley Technology Index assumes the reinvestment of dividends. We have never declared or paid cash dividends on our commonstock nor do we anticipate paying any such cash dividends in the foreseeable future. Stockholders' returns over the indicated period are based on historicaldata and should not be considered indicative of future stockholder returns. 21Table of Contents ServiceSource Morgan Stanley Technology Index NASDAQ Composite Index12/31/2012 $100.00 $100.00 $100.0012/31/2013 $143.25 $131.78 $138.3212/31/2014 $80.00 $147.98 $156.8512/31/2015 $78.80 $157.98 $165.8412/31/2016 $97.09 $177.47 $178.2812/31/2017 $52.82 $247.40 $228.6322Table of ContentsITEM 6.SELECTED FINANCIAL DATAThe following selected consolidated financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and our Consolidated Financial Statements and the related notes included in "Item 8. Financial Statements andSupplementary Data." For the Year Ended December 31, 2017 2016 2015 2014 2013 (in thousands, except per share amounts)Net revenue$239,127 $252,887 $252,203 $272,180 $272,482Cost of revenue(1)163,709 165,069 171,369 194,009 162,449Gross profit75,418 87,818 80,834 78,171 110,033Operating expenses: Sales and marketing(1)33,001 41,972 44,086 59,988 58,826Research and development(1)5,729 8,344 16,480 25,802 23,855General and administrative(1)53,087 52,995 46,299 47,808 44,913Restructuring and other (1)7,308 — 3,662 3,314 —Goodwill and other intangible asset impairment— — — 25,108 —Total operating expenses99,125 103,311 110,527 162,020 127,594Loss from operations(23,707) (15,493) (29,693) (83,849) (17,561)Interest expense and other, net(9,886) (8,704) (9,316) (11,008) (4,420)Impairment loss on cost basis equity investment— (4,500) — — —Gain on sale of cost basis equity investment2,100 — — — —Loss before income taxes(31,493) (28,697) (39,009) (94,857) (21,981)Provision for income tax benefit (expense)1,647 (3,429) (1,584) (482) (1,051)Net loss$(29,846) $(32,126) $(40,593) $(95,339) $(23,032) Net loss per common share: Basic and diluted$(0.33) $(0.37) $(0.48) $(1.15) $(0.29) Weighted-average common shares outstanding: Basic and diluted89,234 86,318 85,417 82,872 78,408 (1) Reported amounts include stock-based compensation expense as follows: For the Year Ended December 31, 2017 2016 2015 2014 2013 (in thousands)Cost of revenue$1,335 $1,484 $2,666 $3,995 $3,303Sales and marketing3,774 3,004 3,393 6,193 9,831Research and development149 586 1,299 2,800 2,414General and administrative8,425 5,678 6,029 7,911 8,072Restructuring and other352 — 2,579 — —Total stock-based compensation$14,035 $10,752 $15,966 $20,899 $23,620 23Table of Contents As of December 31, 2017 2016 2015 2014 2013 (in thousands)Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments$188,570 $185,573 $208,712 $215,382 $275,133Working capital(2)$72,538 $218,585 $236,431 $249,590 $315,185Total assets$295,372 $306,090 $317,564 $337,120 $396,561Other long-term liabilities$4,603 $6,495 $4,311 $4,660 $5,566Convertible notes, net$144,167 $134,775 $126,051 $118,004 $110,530Total stockholders' equity$112,109 $126,936 $147,975 $169,347 $238,935(2) Working capital is defined as current assets less current liabilities.24Table of ContentsITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with ourannual Consolidated Financial Statements and notes thereto appearing elsewhere in this annual report on Form 10-K.OverviewServiceSource International, Inc. is a global leader in outsourced, performance-based customer success and revenue growth solutions. Through our people,processes and technology, we grow and retain revenue on behalf of our clients—some of the world’s leading business-to-business companies — in more than45 languages. Our solutions help our clients strengthen their customer relationships, drive improved customer adoption, expansion and retention andminimize churn. Our technology platform and best-practice business processes combined with our highly-trained, client-focused revenue deliveryprofessionals and data from nearly 20 years of operating experience enable us to provide our clients greater value for our customer success services thanattained by our clients' in-house customer success teams.Our CEO manages and allocates resources on a company-wide basis as a single segment that is focused on service offerings which integrate data, processesand cloud technologies.Key Business MetricsIn assessing the performance of our business, we consider a variety of business metrics in addition to the financial metrics discussed below under “Basis ofPresentation.” These key metrics include Opportunity Under Management and number of engagements, both of which are operational metrics.Opportunity Under Management. For the year ended December 31, 2017, our Opportunity Under Management in our managed services business wasapproximately $11.0 billion. Opportunity Under Management is an operational metric that represents our estimate of the value of all end customer servicecontracts that we have the opportunity to sell on behalf of our clients over a designated period of time, the value of the customer engagements we manage onbehalf of our clients and the Bookings we deliver under our Inside Sales solution. Opportunity Under Management is not a measure of our expected revenueor backlog. Opportunity Under Management reflects our estimate over a designated period of time and should not be used to estimate our opportunity for anyparticular quarter within that period. Also, the value of end customer contracts actually delivered during a given period should not be expected to be realizedin full or to occur in even quarterly increments due to seasonality and other factors impacting our clients and their end customers.We estimate the value of our end customer contracts based on a combination of factors, including the value of end customer contracts made available to us byour clients in past periods, the minimum value of end customer contracts that our clients are required to give us the opportunity to sell pursuant to the termsof our contracts with them, periodic internal business reviews of our expectations as to the value of end customer contracts that will be made available to usby our clients, the value of end customer contracts included in the service performance analysis that we conduct with our clients during the sales process thevalue of the customer relationships we manage, the bookings we deliver under our Inside Sales solution, and collaborative discussions with our clientsassessing their expectations as to the value of service contracts that they make available to us for sale. Although the minimum value of end customercontracts that our clients are required to give us represents a portion of our estimated Opportunity Under Management, a significant portion of theOpportunity Under Management is estimated based on the other factors described above. As our experience with our business, our clients and their contractshas grown, we have continually refined the process, improved the assumptions and expanded the data related to our calculation of Opportunity UnderManagement. When estimating Opportunity Under Management, we rely on our assumptions described above, which may prove incorrect. Theseassumptions are inherently subject to significant business and economic uncertainties and contingencies, many of which are beyond our control. Ourestimates therefore may prove inaccurate, and the actual value of end customer contracts delivered to us in a given period to differ from our estimate ofOpportunity Under Management. These business and economic uncertainties and contingencies include:•the extent to which clients deliver a greater or lesser value of end customer contracts than may be required or otherwise expected;•changes in the pricing or terms of service contracts offered by our clients;•increases or decreases in the end customer base of our clients;25Table of Contents•the extent to which the renewal rates we achieve on behalf of a client early in an engagement affect the amount of opportunity that the client makesavailable to us later in the engagement;•client cancellations of their contracts with us; and•changes in our clients’ businesses, sales organizations, management, sales processes or priorities; as well as other factors discussed in "Item 1.A.entitled Risk Factors" of this annual report on Form 10-K.Our revenue also depends on our booking rates, commissions, and other fees. Our bookings represent the total amount of Opportunity Under Managementthat we renew on behalf of our clients or sell under our Inside Sales solution. Our commission rate is an agreed-upon percentage of the renewal value of endcustomer contracts or net new sales that we sell on behalf of our clients.Our booking rate is impacted principally by our ability to successfully renew contracts on behalf of our clients or sell net new bookings. Other factorsimpacting our booking rate include: the manner in which our clients price their service contracts for sale to their end customers; the stage of life-cycleassociated with the products and underlying technologies covered by the contracts offered to the end customer; the extent to which our clients or theircompetitors introduce new products or underlying technologies; the nature, size and age of the contracts; and the extent to which we have managed therenewals process or net new sales for similar products and underlying technologies in the past.In determining commission rates for an individual engagement, various factors, including our booking rate, as described above, are evaluated. These factorsinclude: historical, industry specific and client specific renewal rates for similar service contracts; the magnitude of the Opportunity Under Management in aparticular engagement; the number of end customers associated with these opportunities; and the opportunity to receive additional performance commissionswhen we exceed certain renewal levels. We endeavor to set our commission rates at levels commensurate with these factors and other factors that may berelevant to a particular engagement. Accordingly, our commission rates vary, often significantly, from engagement to engagement. In addition, we sometimesagree to lower commission rates for engagements with significant Opportunity Under Management.Number of Engagements. We track the number of engagements we have with our clients. We often have multiple engagements with a single client,particularly where we manage the sales of renewals relating to different product lines, technologies, types of contracts or geographies for the client and wherewe deliver multiple of our solutions. When the set of renewals we manage on behalf of a client is associated with a separate client contract or a distinctproduct set, type of end customer contract or geography and therefore requires us to assign a service sales team to manage the renewals, we designate the setof renewals and associated revenues and costs as a unique engagement. For example, we may have one engagement consisting of a service sales team sellingmaintenance contract renewals of a particular product for a client in the U.S. and another engagement consisting of a sales team selling warranty contractrenewals of a different product for the same client in Europe. These would count as two engagements. When we deliver multiple solutions with separate anddistinct teams, such as renewals and inside sales, we may manage these as separate engagements. We had 168, 154 and 191 engagements as of December 31,2017, 2016 and 2015, respectively.Factors Affecting our PerformanceSales Cycle. We sell our integrated solution through our sales organization. At the beginning of the sales process, our quota-carrying sales representativescontact prospective clients and educate them about our offerings. Educating prospective clients about the benefits of our solutions can take time, as many ofthese prospects have not historically relied upon integrated solutions like ours for service revenue management, nor have they typically put out a formalrequest for proposal or otherwise made a decision to focus on this area. As part of our sales process, our solutions design team performs a service performanceanalysis of our prospect’s service revenue. This includes an analysis of best practices, and benchmarks the prospect’s service revenue against industry peers.Through this process, which typically takes several weeks, we are able to assess the characteristics and size of the prospect’s service revenue, identifypotential areas of performance improvement, and formulate our proposal for managing the prospect’s service revenue. The length of our sales cycle for a newclient, inclusive of the service performance analysis process and measured from our first formal discussion with the client until execution of a new clientcontract, is typically longer than six months and has increased in recent periods.Implementation Cycle. After entering into an engagement with a new client, and to a lesser extent after adding an engagement with an existing client, weincur sales and marketing expenses related to the commissions owed to our sales personnel. These commissions are generally based on realized revenue thatthe contract delivers over time with a smaller portion based on the estimated total annual contract value. Commission amounts based on realized revenue areexpensed in the period the related revenue is recognized by the Company. Commission amounts based on the estimated total annual contract value areexpensed and payable upfront upon executing the applicable contract. Upon adoption of ASC 606 effective as of January 1, 2018, the commissions that arepaid based on realized revenue will remain as expense in the period the related revenue is recognized by26Table of Contentsthe Company, but the upfront commissions based on estimated total annual contract value will be capitalized as Contract acquisition costs and expensedratably over the expected life of the applicable contract or five years if the contract is between the Company and one of its long-standing clients. We alsomake upfront investments in technology and personnel to support the engagement. These upfront commissions and investments are typically incurred one tothree months before we begin generating sales and recognizing revenue. Accordingly, in a given quarter, an increase in new clients, and, to a lesser extent, anincrease in engagements with existing clients, or a significant increase in the contract value associated with such new clients and engagements, willnegatively impact our gross margin and operating margins until we begin to achieve anticipated sales levels associated with the new engagements, which istypically two to three quarters after we begin selling contracts on behalf of our clients.Although we expect new client engagements to contribute to our operating profitability over time, in the initial periods of a client relationship, the near termimpact on our profitability can be negatively impacted by slower-than anticipated growth in revenues for these engagements as well as the impact of theupfront costs we incur, the lower initial level of associated service sales team productivity and lack of mature data and technology integration with the client.As a result, an increase in the mix of new clients as a percentage of total clients may initially have a negative impact on our operating results. Similarly, adecline in the ratio of new clients to total clients may positively impact our near-term operating results.Contract Terms. A significant portion of our revenue comes from our pay-for-performance model. Under our pay-for-performance model, we earn commissionsbased on the value of service contracts we sell on behalf of our clients. In some cases, we earn additional performance-based commissions for exceeding pre-determined service renewal targets.Our new client contracts typically have an initial term between two and four years. Our contracts generally require our clients to deliver a minimum value ofqualifying service revenue contracts for us to renew on their behalf during a specified period. To the extent that our clients do not meet their minimumcontractual commitments over a specified period, they may be subject to fees for the shortfall. Our client contracts are cancelable on relatively short notice,subject in most cases to the payment of an early termination fee by the client. The amount of this fee is based on the length of the remaining term and value ofthe contract.We invoice our clients on a monthly basis based on commissions we earn during the prior month, and with respect to performance-based commissions, on aquarterly basis based on our overall performance during the prior quarter. Revenue is recognized in the period in which our services are performed or, in thecase of performance commissions, when the performance condition is achieved. Because the invoicing for our services generally coincides with orimmediately follows the sale of service contracts on behalf of our clients, we do not generate or report a significant deferred revenue balance. However, thecombination of factors including minimum contractual commitments, the performance improvement potential, our success in generating improved renewalrates for our clients, and our clients’ historical renewal rates may all affect our performance favorably or unfavorably.Merger and Acquisition Activity. Our clients, particularly those in the technology sector, participate in an active environment for mergers and acquisitions.Large technology companies have maintained active acquisition programs to increase the breadth and depth of their product and service offerings and smalland mid-sized companies have combined to better compete with large technology companies. A number of our clients have merged, purchased othercompanies or been acquired by other companies. We expect merger and acquisition activity to continue to occur in the future.The impact of these transactions on our business can vary. Acquisitions of other companies by our clients can provide us with the opportunity to pursueadditional business to the extent the acquired company is not already one of our clients. Similarly, when a client is acquired, we may be able to use ourrelationship with the acquired company to build a relationship with the acquirer. In some cases, we have been able to maintain our relationship with anacquired client even where the acquiring company handles its other service contract renewals through internal resources. In other cases, however, acquirershave elected to terminate or not renew our contract with the acquired company.Seasonality. We experience a seasonal variance in our revenue which is typically higher in the fourth quarter when many of our clients’ products come up forrenewal, and for the third quarter of the year which is typically lower as a result of lower or flat renewal volume corresponding to the timing of our customers’product sales particularly in the international regions. The impact of this seasonal fluctuation can be amplified if the economy as a whole is experiencingdisruption or uncertainty, leading to deferral of some renewal decisions.27Table of ContentsBasis of PresentationNet RevenueSubstantially all of our net revenue is attributable to commissions we earn from the sale of renewals of maintenance, support and subscription agreements onbehalf of our clients. We generally invoice our clients for our services in arrears on a monthly basis for sales commissions, and on a quarterly basis for certainperformance sales commissions; accordingly, we typically have no deferred revenue related to these services. We do not set the price, terms or scope ofservices in the service contracts with end customers and do not have any obligations related to the underlying service contracts between our clients and theirend customers.Historically, we earned revenue from the sale of subscriptions to our cloud based applications. To date, subscription revenue has been a small percentage oftotal revenue. We have terminated most of our subscription contracts and expect revenues generated from subscription revenue to be insignificant in 2018.Subscription fees are accounted for separately from commissions, and they are billed in advance over a monthly, quarterly or annual basis. Subscriptionrevenue is recognized ratably over the related subscription term.We have generated a significant portion of our revenue from a limited number of clients. Our top ten clients accounted for 66%, 66% and 57% of our netrevenue for the years ended December 31, 2017, 2016 and 2015, respectively.The loss of revenue from any of our top clients for any reason, including the failure to renew our contracts, termination of some or all of our services, a changeof relationship with any of our key clients or their acquisition, can cause a significant decrease in our revenue.Our business is geographically diversified. During 2017, 63% of our net revenue was earned in NALA, 26% in EMEA and 11% in APJ. Net revenue for aparticular geography generally reflects commissions earned from sales of service contracts managed from our revenue delivery centers in that geography.Predominantly all of the service contracts sold and managed by our revenue delivery centers relate to end customers located in the same geography. Inaddition, our Kuala Lumpur location is a revenue delivery center where we have centralized, for our worldwide operations, the key contract renewal processesthat do not require regional expertise, such as client data management and quoting.Cost of Revenue and Gross ProfitOur cost of revenue expenses include employee compensation, technology costs, including those related to the delivery of our cloud-based technologies, andallocated overhead costs. Compensation expense includes salary, bonus, benefits and stock-based compensation for our dedicated service sales teams. Ourallocated overhead includes costs for facilities, information technology and depreciation, including amortization of internal-use software associated with ourservice revenue technology platform and cloud applications. Allocated costs for facilities consist of rent, maintenance and compensation of personnel in ourfacilities departments. Our allocated costs for information technology include costs associated with third-party data centers where we maintain our dataservers, compensation of our information technology personnel and the cost of support and maintenance contracts associated with computer hardware andsoftware. To the extent our client base or business with existing client base expands, we may need to hire additional service sales personnel and invest ininfrastructure to support such growth. Our cost of revenue may fluctuate significantly and increase or decrease on an absolute basis and as a percentage ofrevenue in the near term, including for the reasons discussed under, “Factors Affecting Our Performance—Implementation Cycle.” In 2017, we saw cost ofrevenue decrease in absolute dollars primarily related to cost reduction measures implemented in the early part of 2017. We expect cost of revenues toincrease in 2018 related to higher costs incurred during the ramp of new business. Gross profit as a percent of revenue is expected to be flat for 2018.Operating ExpensesSales and Marketing. Sales and marketing expenses are a significant component of our operating costs and consist primarily of compensation expenses andsales commissions for our sales and marketing staff, allocated expenses and marketing programs and events. We sell our solutions through our global salesorganization, which is organized across three geographic regions: NALA, EMEA and APJ. Our commission plans provide that payment of commissions to oursales representatives is contingent on their continued employment, and we recognize expense over a period that is generally between the contract signingdate and twelve to fourteen months following the execution of the applicable contract. When commissions are paid upon contract signing and are notcontingent on future payments and continued employment, we consider that portion of the commission to be earned and therefore expensed at contractsigning. We currently expect sales and marketing expenses to increase in 2018 over 2017 due to increased headcount and related employee expenses.28Table of ContentsResearch and Development. Research and development expenses consist primarily of employee compensation expense, allocated costs and the cost of third-party service providers. We focus our research and development efforts on developing new products and applications related to our technology platform. Wecapitalize certain expenditures related to the development and enhancement of internal-use software related to our technology platform. We expect researchand development spending to increase in 2018 compared to 2017 due to incremental costs of moving our clients to a single technology platform.General and Administrative. General and administrative expenses consist primarily of employee compensation expense for our executive, human resources,finance and legal functions and related expenses for professional fees for accounting, tax and legal services, as well as allocated expenses, which consists ofdepreciation, amortization of internally developed software, facilities and technology costs. We expect our general and administrative expenses to increase in2018 due to increases in facility costs and investment in additional information technology.Restructuring and Other. Restructuring and other expenses consist primarily of employees’ severance payments, related employee benefits, stockcompensation related to the accelerated vesting of certain equity awards, related legal fees, asset impairment charges and charges related to leases and othercontract termination costs. The Company expects to incur additional restructuring charges in the first half of 2018 related to the relocation anddecommissioning of our current San Francisco office space. Future cash outlays related to restructuring activities are expected to total approximately $1.8million. These amounts are reported in “Accounts payable, Accrued compensation and benefits and Accrued expenses” in our Consolidated Balance Sheet asof December 31, 2017.Interest Expense and Other, Net, and Impairment of Cost Basis Equity InvestmentInterest expense. Interest expense consists of interest expense associated with our convertible debt, imputed interest from capital lease payments, accretion ofdebt discount and amortization of debt issuance costs. We recognize accretion of debt discount and amortization of interest costs using the effective interestrate method. We expect our interest expense to generally decrease in 2018 due to the maturity of our $150.0 million convertible notes in August 2018.Other, Net. Other, net consists primarily of foreign exchange gains and losses and interest income earned on our cash, cash equivalents and marketablesecurities. We expect other, net to vary depending on the movement in foreign currency exchange rates and the related impact on our foreign exchange gain(loss) and the return of interest on our investments.Provision for Income Tax Benefit (Expense)We account for income taxes using an asset and liability method, which requires the recognition of taxes payable or refundable for the current year anddeferred tax assets and liabilities for the expected future tax consequences of temporary differences that currently exist between the tax basis and the financialreporting basis of our taxable subsidiaries’ assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected toreverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date. Themeasurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to berealized.We evaluate our ability to realize the tax benefits associated with deferred tax assets on a jurisdictional basis. This evaluation utilizes the frameworkcontained in ASC 740, Income Taxes, wherein management analyzes all positive and negative evidence available at the balance sheet date to determinewhether all or some portion of our deferred tax assets will not be realized. Under this guidance, a valuation allowance must be established for deferred taxassets when it is more likely than not (a probability level of more than 50 percent) that they will not be realized. In assessing the realization of our deferredtax assets, we consider all available evidence, both positive and negative, and place significant emphasis on guidance contained in ASC 740, which statesthat “a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.”We account for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions takenor expected to be taken in a tax return. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additionaltaxes will be due. We record an income tax liability, if any, for the difference between the benefit recognized and measured and the tax position taken orexpected to be taken on our tax returns. To the extent that the assessment of such tax positions change, the change in estimate is recorded in the period inwhich the determination is made. The reserves are adjusted in light of changing facts and circumstances, such as the outcome of a tax audit. The provision forincome taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.29Table of ContentsResults of OperationsThe following table sets forth our operating results as a percentage of net revenue: For the Year Ended December 31, 2017 2016 2015Net revenue100 % 100 % 100 %Cost of revenue68 % 65 % 68 %Gross profit32 % 35 % 32 %Operating expenses: Sales and marketing14 % 17 % 17 %Research and development2 % 3 % 7 %General and administrative22 % 21 % 18 %Restructuring and other3 % — % 1 %Total operating expenses41 % 41 % 43 %Loss from operations(9)% (6)% (11)%Year Ended December 31, 2017 Compared to December 31, 2016Net Revenue, Cost of Revenue, and Gross Profit For the Year Ended December 31, 2017 2016 Amount % of Net Revenue Amount % of Net Revenue $ Change % Change (in thousands) (in thousands) (in thousands) Net revenue$239,127 100% $252,887 100% $(13,760) (5)%Cost of revenue163,709 68% 165,069 65% (1,360) (1)%Gross profit$75,418 32% $87,818 35% $(12,400) (14)%Net revenue decreased by $13.8 million, or 5%, for the year ended December 31, 2017 compared to the same period in 2016, due to contractions and lowerproduction with certain existing clients and the bankruptcy of one of our top 10 clients, partially offset by production related to expansion of business withour existing client base and new business in 2017.Cost of revenue decreased $1.4 million, or 1%, for the year ended December 31, 2017 compared to the same period in 2016, primarily due to the following:•$2.8 million decrease in employee costs related to operational improvements in our business that resulted in a reduction in headcount and increasedproductivity from our revenue generating employees, and shifting headcount to lower cost locations, all of which are part of our continuous effortsto better align employee costs with revenue;•$2.0 million decrease in temporary labor and consulting costs;•$1.7 million decrease in information technology costs; and•$0.8 million decrease in recruitment services; partially offset by•$3.5 million increase in depreciation and amortization expense; and•$2.6 million increase in net overhead allocations from other departments.Gross profit decreased $12.4 million, or 14%, for the year ended December 31, 2017 compared to the same period in 2016, which is in line with the decreasein revenue.30Table of ContentsOperating Expenses For the Year Ended December 31, 2017 2016 Amount % of NetRevenue Amount % of NetRevenue $ Change % Change (in thousands) (in thousands) (in thousands) Operating expenses: Sales and marketing$33,001 14% $41,972 17% $(8,971) (21)%Research and development5,729 2% 8,344 3% (2,615) (31)%General and administrative53,087 22% 52,995 21% 92 — %Restructuring and other7,308 3% — —% 7,308 100 %Total operating expenses$99,125 41% $103,311 41% $(4,186) (4)% Stock-based compensation included in operating expenses: Amount Amount $ Change (in thousands) (in thousands) (in thousands) Sales and marketing$3,774 $3,004 $770 Research and development149 586 (437) General and administrative8,425 5,678 2,747 Restructuring and other352 — 352 Total stock-based compensation$12,700 $9,268 $3,432 Sales and MarketingSales and marketing expense decreased $9.0 million, or 21%, for the year ended December 31, 2017 compared to the same period in 2016, primarily due tothe following:•$6.2 million decrease in employee compensation costs due to lower headcount resulting from our efforts to better align our cost structure;•$1.7 million decrease in travel costs;•$0.3 million decrease in net overhead allocations from other departments;•$0.2 million decrease in in temporary labor and consulting costs; and•$0.3 million decrease in information technology costs, recruitment services and marketing costs.Research and DevelopmentResearch and development expense decreased $2.6 million, or 31%, for the year ended December 31, 2017 compared to the same period in 2016, primarilydue to our efforts to reduce research and development spend as follows:•$2.0 million decrease in employee related costs associated with a decrease in headcount; and•$0.4 million decrease in in temporary labor and consulting costs.Internal-use software development capitalization decreased $0.5 million for the year ended December 31, 2017 compared to the same period in 2016,primarily due to the migration from our Renew OnDemand platform to PRISM. We expect to continue to invest in our technology platforms to support ourservices offering and thus capitalizing internal-use software costs in the future. However, the amount capitalized will depend on the future level ofexpenditures on our technology platforms.31Table of ContentsGeneral and AdministrativeGeneral and administrative expense increased $0.1 million, or 0%, for the year ended December 31, 2017 compared to the same period in 2016, primarily dueto the following:•$3.0 million increase in depreciation and amortization expense;•$1.3 million increase in information technology spend;•$1.2 million increase in recruitment services; and•$1.1 million increase in employee compensation costs related to performance-based restricted stock awards issued during 2016 and 2017, offset bydecreases due to shifting headcount to lower cost locations. These net increases were partially offset by•$2.2 million net reduction in overhead allocations to other departments;•$1.6 million decrease in temporary labor and consulting costs;•$1.5 million decrease due to a non-recurring legal reserve recorded during 2016;•$0.9 million decrease in travel costs; and•$0.5 million decrease in rent and facilities costs.Restructuring and OtherRestructuring and other expense increased $7.3 million, or 100%, for the year ended December 31, 2017 compared to the same period in 2016 due to oureffort to better align our cost structure with current revenue levels during 2017.Interest Expense and Other, Net, Impairment Loss on Cost Basis Equity Investment, and Gain on Sale of Cost Basis Equity Investment For the Year Ended December 31, 2017 2016 Amount % of Net Revenue Amount % of Net Revenue $ Change % Change (in thousands) (in thousands) (in thousands) Interest expense$(11,683) (5)% $(11,030) (4)% $653 6 %Other, net$1,797 1 % $2,326 1 % $(529) (23)%Impairment loss on cost basis equityinvestment$— — % $(4,500) (2)% $4,500 (100)%Gain on sale on cost basis equityinvestment$2,100 1 % $— — % $2,100 100 %Interest expense increased $0.7 million, or 6%, for the year ended December 31, 2017 compared to the same period in 2016 due to the accretion of the debtdiscount related to our convertible notes issued in August 2013.Other, net decreased $0.5 million, or 23%, for the year ended December 31, 2017 compared to the same period in 2016 primarily due to foreign currencyfluctuations.During the year ended December 31, 2016, we fully impaired our 2013 cost basis equity investment due to an unfavorable declining financial performance,growth trends and future liquidity needs of the investment and recorded a $4.5 million impairment. During the year ended December 31, 2017, we sold ourequity investment that we fully impaired in 2016 for proceeds of $2.1 million and recorded the proceeds as a gain.32Table of ContentsIncome Tax Provision For the Year Ended December 31, 2017 2016 Amount % of NetRevenue Amount % of NetRevenue $ Change % Change (in thousands) (in thousands) (in thousands) Provision for income tax benefit (expense)$1,647 1% $(3,429) (1)% $5,076 ** Not considered meaningful.For the year ended December 31, 2017, we recorded a tax benefit of $1.6 million. This primarily represents a $2.0 million income tax benefit related to theremeasurement of our indefinite-lived intangible deferred tax liability and release of our valuation allowance for certain net operating loss provisions asenacted under the Tax Cuts and Jobs Act (H.R.1) during December 2017. Historically, we recorded a deferred income tax expense for indefinite liveddeferred tax liabilities, as the Company did not have any indefinite lived deferred tax assets. H.R.1 changed the carryover period for federal net operatinglosses to indefinite, allowing us to utilize future indefinite lived deferred tax assets in the scheduling of valuation allowance. Our net U.S. deferred taxliability decreased from $2.2 million as of December 31, 2016 to $0.2 million as of December 31, 2017. We also recorded $0.4 million of federal, foreign andstate income tax expense. No benefit was otherwise provided for losses incurred in U.S. and Singapore because these losses are offset by a valuationallowance.For the year ended December 31, 2016, we recorded a charge to income tax expense of $3.4 million. This amount primarily represents foreign income taxes of$1.1 million and $1.8 million of valuation allowance that reflects the portion of certain state deferred tax assets that are not more-likely-than-not to berealized. No benefit was otherwise provided for losses incurred in U.S. and Singapore because these losses are offset by a full valuation allowance.Years Ended December 31, 2016 Compared to December 31, 2015Net Revenue, Cost of Revenue and Gross Profit For the Year Ended December 31, 2016 2015 Amount % of Net Revenue Amount % of Net Revenue $ Change % Change (in thousands) (in thousands) (in thousands) Net revenue$252,887 100% $252,203 100% $684 — %Cost of revenue165,069 65% 171,369 68% (6,300) (4)%Gross profit$87,818 35% $80,834 32% $6,984 9 %Net revenue increased $0.7 million, or 0%, for the year ended December 31, 2016 compared to the same period in 2015, primarily due to the expansion ofbusiness with our existing client base and new business with our existing clients and new clients.Cost of revenue decreased $6.3 million, or 4%, for the year ended December 31, 2016 compared to the same period in 2015, primarily due to the following:•$8.5 million decrease in employee costs related to operational improvements in our business that resulted in a reduction in headcount and increasedproductivity from our revenue generating employees, and shifting headcount to lower cost locations, all of which are part of our continuous effortsto better align employee costs with revenue; and•$4.1 million decrease in temporary labor and consulting costs; partially offset by•$3.8 million increase in net overhead allocations from other departments;•$1.8 million increase in depreciation and amortization expense; and•$0.9 million increase in information technology costs.Gross profit increased $7.0 million, or 9%, for the year ended December 31, 2016 compared to the same period in 2015, which is in line with our moderateincrease in revenue and the significant reduction in employee related costs.33Table of ContentsOperating Expenses For the Year Ended December 31, 2016 2015 Amount % of NetRevenue Amount % of NetRevenue $ Change % Change (in thousands) (in thousands) (in thousands) Operating expenses: Sales and marketing$41,972 17% $44,086 17% $(2,114) (5)%Research and development8,344 3% 16,480 7% (8,136) (49)%General and administrative52,995 21% 46,299 18% 6,696 14 %Restructuring and other— —% 3,662 1% (3,662) (100)%Total operating expenses$103,311 41% $110,527 43% $(7,216) (7)% Stock-based compensation included in operating expenses: Amount Amount $ Change (in thousands) (in thousands) (in thousands) Sales and marketing$3,004 $3,393 $(389) Research and development586 1,299 (713) General and administrative5,678 6,029 (351) Restructuring and other— 2,579 (2,579) Total stock-based compensation$9,268 $13,300 $(4,032) Sales and MarketingSales and marketing expense decreased $2.1 million, or 5%, for the year ended December 31, 2016 compared to the same period in 2015, primarily due to thefollowing:•$1.6 million decrease in employee compensation costs due to lower headcount resulting from our efforts to better align our cost structure;•$0.9 million decrease in marketing programs; and•$0.2 million decrease in depreciation and amortization expense; partially offset by•$0.8 million increase in travel costs.Research and DevelopmentResearch and development expense decreased $8.1 million, or 49%, for the year ended December 31, 2016 compared to the same period in 2015, primarilydue our efforts to reduce research and development spend:•$4.6 million decrease in employee compensation costs;•$2.9 million decrease in temporary labor; and•$0.3 million decrease in information technology costs.General and AdministrativeGeneral and administrative expense increased $6.7 million, or 14%, for the year ended December 31, 2016 compared to the same period in 2015, primarilydue to the following:•$3.2 million increase in employee compensation costs related to higher headcount;•$2.1 million increase in facilities costs;•$1.0 million increase in depreciation and amortization expense;•$0.9 million increase in temporary labor and professional fees;•$0.9 million increase in technology spend; and34Table of Contents•$2.2 million increase in travel costs, marketing programs and other; partially offset by•$3.6 million net reduction in overhead allocations to other departments.Restructuring and OtherThere were no restructuring and other costs for the year ended December 31, 2016 due to the Company completing restructuring efforts during 2015.Interest Expense and Other, Net and Impairment Loss on Cost Basis Equity Investment For the Year Ended December 31, 2016 2015 Amount % of Net Revenue Amount % of Net Revenue $ Change % Change (in thousands) (in thousands) (in thousands) Interest expense$(11,030) (4)% $(10,393) (4)% $637 6%Other, net$2,326 1 % $1,077 0 % $1,249 116%Impairment loss on cost basis equityinvestment$(4,500) (2)% $— 0 % $(4,500) 100%Interest expense increased $0.6 million, or 6%, for the year ended December 31, 2016 compared to the same period in 2015, due to the accretion of debtdiscount related to our convertible notes issued in August 2013.Other, net decreased $1.2 million, or 116%, for the year ended December 31, 2016 compared to the same period in 2015, primarily due to lower foreigncurrency gains as the U.S. dollar strengthened against the Euro and other foreign currencies where we have operations.During the year ended December 31, 2016, we fully impaired our 2013 cost basis equity investment due to an unfavorable declining financial performance,growth trends and future liquidity needs of the investment and recorded a $4.5 million impairment.Income Tax Provision For the Year Ended December 31, 2016 2015 Amount % of NetRevenue Amount % of NetRevenue $ Change % Change (in thousands) (in thousands) (in thousands) Provision for income tax benefit (expense)$(3,429) (1)% $(1,584) (1)% $(1,845) ** Not considered meaningful.For the year ended December 31, 2016, we recorded a charge to income tax expense of approximately $3.4 million. This amount primarily represents foreignincome taxes of $1.1 million and $1.8 million of valuation allowance that reflects the portion of certain state deferred tax assets that are not more-likely-than-not to be realized. No benefit was otherwise provided for losses incurred in U.S. and Singapore, because these losses are offset by a full valuation allowance.For the year ended December 31, 2015, a charge to income tax expense of $1.6 million was recorded. This includes the impact of state income tax lawchanges that were recorded during the second quarter ended June 30, 2015 and affects the manner in which the Company apportions revenue to the state ofTennessee. The remaining portion of our tax expense relates to anticipated taxes in jurisdictions where we have profitable operations, including certain U.S.states, offset by benefits available from state tax credits. No benefit was otherwise provided for losses incurred in the U.S. and Singapore because these lossesare offset by a full valuation allowance. In November 2015, the Philippine Economic Zone Authority granted a four-year tax holiday to the Company'sPhilippine affiliate, commencing with its fiscal year, beginning January 1, 2016.35Table of ContentsLiquidity and Capital ResourcesOur primary operating cash requirements include the payment of compensation and related costs and costs for our facilities and information technologyinfrastructure. Historically, we have financed our operations from cash provided by our operating activities, proceeds from common stock offerings and cashproceeds from the exercise of stock options and our employee stock purchase plan. We believe our existing cash and cash equivalents and short-terminvestments will be sufficient to meet our working capital and capital expenditure needs over the next twelve months.As of December 31, 2017, we had cash, cash equivalents and short-term investments of $188.6 million, which primarily consisted of demand deposits, moneymarket mutual funds, corporate bonds and U.S. government obligations held by well-capitalized financial institutions. Included in cash, cash equivalents andshort-term investments was cash and cash equivalents of $7.4 million held by our foreign subsidiaries used to satisfy their operating requirements. TheCompany considers its undistributed earnings of ServiceSource Europe Ltd. & ServiceSource International Singapore Pte. Ltd. permanently reinvested inforeign operations and has not provided for U.S. income taxes on such earnings. As of December 31, 2017, the Company had no unremitted earnings from itsforeign subsidiaries.In August 2013, we issued $150.0 million aggregate principal amount of 1.50% convertible notes due August 1, 2018 (the "Notes") and concurrently enteredinto convertible notes hedges and separate warrant transactions. The Notes mature on August 1, 2018, unless converted earlier. Upon conversion, the Noteswill be settled in cash, shares of our stock, or any combination thereof, at our option. The Notes were not subject to conversion or repurchase as ofDecember 31, 2017 and are classified as a current liability on our Consolidated Balance Sheet. We believe we have sufficient cash and liquid short-terminvestments to repay the Notes upon maturity.Share Repurchase ProgramIn August 2015, our Board of Directors authorized a stock repurchase program with a maximum authorization to repurchase up to $30.0 million of ourcommon stock. The program expired in August 2017. During the year ended December 31, 2017, no shares were repurchased.Letter of Credit and Restricted CashIn connection with one of our leased facilities, the Company is required to maintain a $1.2 million letter of credit. The letter of credit is secured by $1.2million of cash in a money market account, which is classified as an "Other assets" in our Consolidated Balance Sheets.Cash FlowsThe following table presents a summary of our cash flows: For the Year Ended December 31, 2017 2016 2015 (in thousands)Net cash provided by operating activities$19,797 $4,452 $3,597Net cash used in investing activities$(14,815) $(28,914) $(25,194)Net cash provided by financing activities$216 $937 $3,347Net increase/(decrease) in cash and cash equivalents, net of the effect of exchange rateson cash and cash equivalents$3,697 $(24,642) $(18,048)36Table of ContentsOur total depreciation and amortization expense was comprised of the following: For the Year Ended December 31, 2017 2016 2015 (in thousands)Scout intangible asset amortization$1,512 $1,512 $1,512Internally developed software amortization13,298 7,634 5,025Property and equipment depreciation7,778 7,019 7,199Depreciation and amortization22,588 16,165 13,736Adjustments and other— (113) —Total depreciation and amortization$22,588 $16,052 $13,736Operating ActivitiesFor the year ended December 31, 2017, net cash provided by operating activities was $19.8 million. Our net loss was $29.8 million, which was impacted bynon-cash charges of $22.6 million for depreciation and amortization, $9.4 million of amortization of debt discount and issuance costs, $13.7 million of stock-based compensation, $2.1 million related to proceeds received from the sale of our cost basis equity investment and $3.1 million for restructuring and othercosts. Cash provided by operations from changes in our working capital include a $9.1 million decrease in accounts receivable, net, a $2.5 million increase inaccounts payable and a $1.7 million decrease in prepaid expenses and other current assets, offset by cash used in operations from a $5.5 million decrease inaccrued expenses and other liabilities and a $2.9 million decrease in deferred revenue.Net cash provided by operating activities was $4.5 million for the year ended December 31, 2016. Our net loss was $32.1 million, which was impacted bynon-cash charges of $16.1 million for depreciation and amortization, $8.7 million of amortization of debt discount and issuance costs, $10.8 million of stock-based compensation and $4.5 million related to an impairment of our cost basis equity investment. Cash provided by operations from changes in our workingcapital include a $0.9 million increase in accounts payable, a $2.1 million increase in accrued expenses and other liabilities offset by cash used in operationsfrom a $7.2 million increase in accounts receivable, net, a $1.6 million decrease in deferred revenue and a $0.7 million increase in prepaid expenses and othercurrent assets.Net cash provided by operating activities was $3.6 million for the year ended December 31, 2015. Our net loss was $40.6 million, which was impacted bynon-cash charges of $13.7 million for depreciation and amortization, $8.0 million of amortization of debt discount and issuance costs, $13.4 million of stock-based compensation and $2.6 million for restructuring and other. Cash provided by operations from changes in our working capital include a $12.0 milliondecrease in accounts receivable, net, a $2.7 million increase in accrued compensation and benefits, offset by cash used in operations from a $1.8 millionincrease in prepaid expenses and other current assets, a $4.5 million decrease in accrued expenses and other liabilities, a $1.2 million decrease in deferredrevenue and a $1.6 million decrease in accounts payable.Investing ActivitiesNet cash used in investing activities decreased $14.1 million to $14.8 million during the year ended December 31, 2017 compared to $28.9 million duringthe same period in 2016, primarily due to the following activities:•$9.2 million decrease in cash outflows related to the acquisition of property and equipment, which includes $0.5 million of decreased internallydeveloped software costs;•$45.5 million decrease in cash outflows related to the purchase of short-term investments; and•$2.1 million increase in cash inflows related to the proceeds from sale of our cost basis equity investment; partially offset by•$42.7 million decrease in cash inflows from the sale and maturity of short-term investments.Net cash used in investing activities increased $3.7 million to $28.9 million during the year ended December 31, 2016 compared to $25.2 million during thesame period in 2015, primarily due to the following activities:•$14.4 million increase in cash outflows related to the acquisition of property and equipment, which includes $5.9 million of increased internallydeveloped software costs; and37Table of Contents•$6.7 million increase in cash outflows related to the purchase of short-term investments; partially offset by•$16.1 million increase in cash inflows from the sale and maturity of short-term investments; and•$1.2 million increase due to a change in restricted cash in 2015 related to the San Francisco office lease.Financing ActivitiesNet cash provided by financing activities decreased $0.7 million to $0.2 million during the year ended December 31, 2017 compared to $0.9 million duringthe same period in 2016, primarily due to the following activities:•$9.8 million decrease in cash inflows due to proceeds of approximately $10.9 million from the exercise of stock options and the employer purchaseplan during 2016 compared to proceeds of approximately $1.1 million from the exercise of stock options and the employer purchase plan during2017; partially offset by•$8.9 million increase due to the repurchase of approximately 2.3 million shares of our common stock at a weighted-average price of $3.94 per shareduring 2016 and no corresponding activity during 2017.Net cash provided by financing activities decreased $2.4 million to $0.9 million during the year ended December 31, 2016 compared to $3.3 million duringthe same period in 2015, primarily due to the following activities:•$7.7 million increase in cash outflows due to the repurchase of approximately 2.3 million shares of our common stock at a weighted-average price of$3.94 per share during 2016 compared to the repurchase of approximately 0.3 million shares of our common stock at a weighted-average price of$4.11 per share during 2015; partially offset by•$5.2 million increase in cash inflows due to proceeds of approximately $10.9 million from the exercise of stock options and the employer purchaseplan during 2016 compared to proceeds of approximately $5.7 million from the exercise of stock options and the employer purchase plan during2015.Off-Balance Sheet ArrangementsAs of December 31, 2017 and 2016, we did not have any relationships with other entities or financial partnerships such as entities often referred to asstructured finance or special-purpose entities, which have been established for facilitating off-balance sheet arrangements or other contractually narrow orlimited purposes.Contractual Obligations and CommitmentsOur contractual obligations and commitments primarily consist of obligations under operating lease agreements for office space and computer equipment,convertible notes, purchase commitments and unrecognized tax benefits during our normal course of business.As of December 31, 2017, the future minimum payments under our leases and convertible notes were as follows (in thousands): Payments Due Total Less than 1 year 1-3 years 4-5 years More than 5 yearsObligations under capital leases$129 $73 $56 $— $—Operating lease obligations41,751(1) 11,354 25,781 4,616 —Convertible Notes150,000 150,000 — — — $191,880 $161,427 $25,837 $4,616 $—(1) In January 2018, the Company entered into a sublease with a third-party for our San Francisco office space for the remaining term of the lease. The futureminimum payments through November 30, 2022 under the original lease total approximately $9.3 million and future sublease rental income totalsapproximately $8.9 million over the same period.The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding, which specify significantterms, including payment terms, related services and the approximate timing of the transaction. Obligations under contracts that we can cancel without asignificant penalty are not included in the table above.Also excluded from the table above is the income tax liability we recorded for the difference between the benefit recognized and measured and the taxposition taken or expected to be taken on our tax returns (“unrecognized tax benefits”). As of December 31, 2017, our liability for unrecognized tax benefitswas immaterial. Reasonably reliable estimates of the amounts and periods of related future payments cannot be made at this time.38Table of ContentsOther Purchase CommitmentsThe Company had $14.1 million in non-cancelable purchase commitments with our suppliers as of December 31, 2017.Critical Accounting Policies and EstimatesGeneralThe preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to usejudgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts andcircumstances relating to various transactions had been different or different assumptions were made, it is possible that different accounting policies wouldhave been applied, resulting in different financial results or a different presentation of our financial statements. Our discussion and analysis of financialcondition and results of operations is based on our Consolidated Financial Statements, which have been prepared in accordance with GAAP. Estimates,judgments and assumptions are based on historical experiences that we believe to be reasonable under the circumstances. From time to time, we re-evaluatethose estimates and assumptions.The Company’s significant accounting policies are described in “Notes to the Consolidated Financial Statements, Note 2 - Summary of SignificantAccounting Policies.” These policies were followed in preparing the Consolidated Financial Statements as of and for the year ended December 31, 2017 andare consistent with the year ended December 31, 2016. The Company has identified the following as critical accounting policies. These accounting policies have the most significant impact on our financialcondition and results of operations and require management’s most difficult, subjective and/or complex estimates. Revenue RecognitionOur revenue is derived primarily from selling services. Other revenues include professional services and subscription services to Renew OnDemand, whichwas phased out in 2017.Revenue is recognized when all of the following criteria have been met:•Persuasive evidence of an arrangement exists. Client contracts are generally used to determine the existence of an arrangement.•Delivery has occurred. The service has been or is being provided to the client.•Our fee is fixed or determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transactionand whether the selling price is subject to refund or adjustment.•The collectability of our fee is reasonably assured. We assess collectability based primarily on the creditworthiness of the client as determinedby credit checks and analysis, as well as the client’s payment history. Selling ServicesRevenue from selling services consists of fees earned from the sales of services contracts on behalf of our clients or assisting our clients in their sales process.Our contract obligations include administering and managing the sales and/or renewal process for our client’s service contracts, providing adequately trainedstaff, reporting and holding periodic business reviews with our clients. Under our contracts, clients are obligated to provide us with a detailed listing of salesprospects, access to their databases or management systems and sales and marketing materials. Our fees are generally calculated as a fixed percentage of theoverall sales value associated with the successful renewal of service contracts sold on behalf of our clients. In addition, some of our client contracts includeperformance-based fees determined by the achievement of specified performance metrics. Our selling service contracts typically entitle us to additional feesand adjustments resulting from instances where our clients fail to provide us with a specified minimum value of contract renewals or they fail to providecontract renewal data within the time frames specified in our contract. We also receive termination fees in the event a client cancels a contract without causeprior to its terminations date. Our selling service contracts can also be canceled by our clients without a termination fee if we fail to achieve certainperformance levels.Our fees from selling services are recognized on a net basis since we act as an agent on behalf of our clients. We do not perform the underlying maintenanceservices; determine pricing, terms or scope of services to our client’s end customers. Performance incentive fees and early termination fees are recorded in theperiod when the performance criteria have been met.39Table of ContentsSubscriptions and Professional ServicesSubscription revenue is comprised of subscriptions fees to access our Renew OnDemand application which was phased out in 2017, and professional servicesis generated from implementation and project based services. Subscription revenue is recognized ratably over the contract term, commencing when our cloudapplications are made available to our clients. Our subscription service arrangements are generally non-cancelable and do not contain refund-type provisions.Professional services are deemed delivered and revenue recognized upon the successful completion of implementation projects or when project milestoneshave been achieved and accepted by the client.Multiple-Deliverable ArrangementsWe have entered into a limited number of multiple element arrangements wherein our clients utilize a combination of selling services, subscriptions to ourcloud applications and professional services. We separate deliverables at the inception of the arrangement as if each deliverable has stand-alone value to ourclient. Arrangement consideration is allocated based on the relative best estimate of selling prices of each deliverable. However, substantially all fees earnedfrom our selling services are contingent in nature as the commissions we earn are based on our performance against the specific terms of each contract.Therefore, contingent fees from selling services are excluded from the allocation of relative best selling prices at inception of our multiple elementarrangements.According to the accounting guidance prescribed in Accounting Standards Codification (ASC) 605, Revenue Recognition, selling prices for each deliverableis determined based on the selling price hierarchy of vendor-specific objective evidence (VSOE), third-party evidence (TPE) and best estimated selling price(BESP). We have not been able to establish VSOE for our deliverables due to the customer-specific nature of our products and services. Also, we have notbeen able to reliably determine the stand-alone selling prices of competitor’s products and services, and as a result, we cannot rely on TPE for ourdeliverables. Therefore, we utilize estimates of BESP to determine the selling prices of our deliverables. BESP is determined through consultation withmanagement, taking into consideration our marketing and pricing strategies. As these strategies evolve, we may modify our pricing practices in the future,which could result in changes in the estimates used to estimate BESP which could change the allocation of revenue for our multiple element arrangements.Stock-Based CompensationWe measure and recognize compensation expense for share-based payment awards to our employees and directors, including employee stock options andrestricted stock units, based on the grant-date fair values of the awards.We estimate the fair value of stock options granted using the Black-Scholes option-pricing model which relies on estimates and assumptions we make relatedto the length of time an employee will retain vested stock options before exercising them, the historical volatility of our common stock price and the numberof options that will be forfeited prior to vesting.Stock-based compensation expense for our restricted stock units and performance based restricted stock awards is determined using the fair value of ourcommon stock on the date of grant, and the expense is recognized on a straight-line basis over the vesting period. Performance based restricted stock awardscompensation expense is only recorded if it is probable that the performance conditions will be met.Valuation analysis of goodwill and intangible assetsWe evaluate goodwill and indefinite-lived intangible assets for possible impairment at least annually or whenever events or changes in circumstancesindicate that the carrying amount of such assets may not be recoverable.We use a three-step process to assess the realizability of goodwill. The first step is a qualitative assessment for each reporting unit that analyzes indicators,including, but not limited to macro-economic conditions such as deterioration in the entity's operating environment or industry or market considerations;entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that areporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. > 50% chance) the fair value of a reporting unit is less than itscarrying amount, the two-step quantitative impairment test will be required. Otherwise, no further testing is required.If the two-step quantitative assessment is required, we calculate the fair value of each reporting unit based on future cash flows. If the carrying value of eachreporting unit is in excess of its fair value, we allocate the fair value to its assets and liabilities. If the carrying amount of the asset exceeds its estimated fairvalue, an impairment loss is recorded.40Table of ContentsOur analysis is based on a single company-wide reporting unit, which is consistent with our single segment discussed in “Notes to Consolidated FinancialStatements, Note 12 - Geographic Information.”Significant management judgments are required in order to assess goodwill and intangible asset impairment, including the following:•identification of comparable companies to benchmark under the market approach giving due consideration to the following factors:◦financial condition and operating performance of the reporting unit being evaluated relative to companies operating in the same or similarbusiness;◦economic, environmental and political factors faced by such companies;•impact of goodwill impairment recognized in prior years;•susceptibility of our reporting unit to fair value fluctuations;•reporting unit revenue, gross profit and operating expense growth rates;•financial forecasts;•discount rate to apply to estimated cash flows;•terminal values;•reasonable gross profit levels;•estimated control premium a willing buyer is likely to pay, including consideration of the following:◦the most similar transactions in relevant industries and determined the average premium indicated by the transactions deemed to be mostsimilar to a hypothetical transaction involving our reporting units;◦weighted average and median control premiums offered in relevant industries;◦industry specific control premiums; and◦specific transaction control premiums.•significant events or changes in circumstances including the following:◦significant negative industry or economic trends;◦significant decline in our stock price for a sustained period;◦our market capitalization relative to net book value;◦significant changes in the manner of our use of the acquired assets;◦significant changes in the strategy for our overall business; and◦our assessment of growth and profitability in each reporting unit over the coming years.Income TaxesWe account for income taxes using an asset and liability method, which requires the recognition of taxes payable or refundable for the current year anddeferred tax assets and liabilities for the expected future tax consequences of temporary differences that currently exist between the tax basis and the financialreporting basis of our taxable subsidiaries’ assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected toreverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date. Themeasurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to berealized.41Table of ContentsWe regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negativeevidence related to the likelihood of realization of the deferred tax assets on a jurisdictional basis to determine, based on the weight of available evidence,whether it is more likely than not that some or all of the deferred tax assets will not be realized. Examples of positive and negative evidence include futuregrowth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prioryears, if carryback is permitted under the law and prudent and feasible tax planning strategies. In the event we were to determine that we would not be able torealize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in theperiod in which we make such a determination, or goodwill would be adjusted at our final determination of the valuation allowance related to an acquisitionwithin the measurement period. If we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse theapplicable portion of the previously provided valuation allowance as an adjustment to earnings at such time.We account for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions takenor expected to be taken in a tax return. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additionaltaxes will be due. We record an income tax liability, if any, for the difference between the benefit recognized and measured and the tax position taken orexpected to be taken on our tax returns. We recognize interest accrued and penalties related to unrecognized tax benefits in the income tax provision. To theextent that the assessment of such tax positions change, the change in estimate is recorded in the period in which the determination is made. The reserves areadjusted in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of reserveprovisions and changes to reserves that are considered appropriate.42Table of ContentsRecent Accounting PronouncementsSee Notes to the Consolidated Financial Statements “Note 2. Summary of Significant Accounting Policies” in Item 8. Financial Statements andSupplementary Data for a full description of recent accounting pronouncements including the expected dates of adoption and the anticipated impact to ourConsolidated Financial Statements.ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKForeign Currency RiskOur results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro,British Pound, Singapore Dollar, Philippine Peso, Bulgarian Lev and Malaysian Ringgit. To date, we have not entered into any foreign currency hedgingcontracts, but may consider entering into such contracts in the future. We believe our operating activities act as a natural hedge for a substantial portion ofour foreign currency exposure because we typically collect revenue and incur costs in the currency in the location in which we provide our solution from ourrevenue delivery centers. As our international operations grow, we will continue to reassess our approach to managing our risk relating to fluctuations incurrency rates.We performed a sensitivity analysis of our foreign currency exposure at December 31, 2017 to assess the potential impact of fluctuations in exchange rates forall foreign denominated assets and liabilities. A 10% appreciation or depreciation for all currencies against the U.S. dollar at December 31, 2017 would nothave had a material impact on our results of operations or our cash flows.Interest Rate RiskAs of December 31, 2017, we had cash and cash equivalents of $51.4 million and short-term investments of $137.2 million, which primarily consisted ofcorporate bonds, agency securities, asset-backed securities and U.S. treasury securities. The carrying amount of our cash equivalents reasonably approximatesfair value due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment ofliquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments areexposed to market risk due to fluctuations in interest rates, which may affect our interest income and the fair market value of our investments. Due to theshort-term nature of our investment portfolio, however, we do not believe an immediate 10% increase or decrease in interest rates would have a material effecton the fair market value of our portfolio. We therefore do not expect our operating results or cash flows to be materially affected by a sudden change inmarket interest rates. We do not believe our cash equivalents have significant risk of default or illiquidity. While we believe our cash equivalents do notcontain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. Inaddition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. Wecannot be assured that we will not experience losses on these depositsAs of December 31, 2017, we had $150.0 million aggregate principal amount of convertible senior notes outstanding and capital lease obligations of $0.1million, all of which are fixed rate instruments. Therefore, our results of operations are not subject to fluctuations in interest rates.Inflation RiskWe do not believe that inflation has had a material effect on our business, financial condition or results of operations. Nonetheless, if our costs were tobecome subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to doso could harm our business, financial condition and results of operations.43Table of ContentsITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAServiceSource International, Inc.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Reports of Independent Registered Public Accounting Firms45Consolidated Balance Sheets at December 31, 2017 and 201647Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 201548Consolidated Statements of Comprehensive Loss for the years ended December 31, 2017, 2016 and 201549Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 201550Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 201551Notes to Consolidated Financial Statements5244Table of ContentsReport of Independent Registered Public Accounting FirmTo the Stockholders and the Board of Directors of ServiceSource International, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of ServiceSource International, Inc. (the Company) as of December 31, 2017 and2016, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the two years in the period endedDecember 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financialstatements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations andits cash flows for each of the two years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), theCompany's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 2, 2018 expressed an unqualifiedopinion thereon.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’sfinancial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to theCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and thePCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performingprocedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond tothose risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits alsoincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of thefinancial statements. We believe that our audits provide a reasonable basis for our opinion./s/ Ernst & Young LLPWe have served as the Company’s auditor since 2016.Denver, ColoradoMarch 2, 201845Table of Contents Report of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders of ServiceSource International, Inc.In our opinion, the consolidated statements of operations, of comprehensive loss, of stockholders’ equity and of cash flows for the year endedDecember 31, 2015 present fairly, in all material respects, the results of operations and cash flows of ServiceSource International, Inc. and its subsidiaries forthe year ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. These financial statementsare the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. Weconducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that ouraudit provide a reasonable basis for our opinion./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaMarch 8, 2016, except for the effects of the revisions, the change in composition of reportable segment and the manner in which the Companyaccounts for debt issuance costs discussed in Note 2 (not presented herein) to the consolidated financial statements appearing under Item 8 of the Company’s2016 annual report on Form 10-K, as to which the date is March 6, 2017.46Table of ContentsServiceSource International, Inc.Consolidated Balance Sheets(in thousands, except per share amounts) December 31,2017 2016Assets Current assets: Cash and cash equivalents$51,389 $47,692Short-term investments137,181 137,881Accounts receivable, net56,516 63,289Prepaid expenses and other6,112 7,607Total current assets251,198 256,469 Property and equipment, net34,119 38,180Deferred income taxes, net of current portion70 64Goodwill and intangible assets, net6,419 7,932Other assets3,566 3,445Total assets$295,372 $306,090 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable$4,574 $1,916Accrued taxes651 1,388Accrued compensation and benefits19,257 21,579Convertible notes, net144,167 —Deferred revenue1,282 4,152Accrued expenses6,625 5,891Other current liabilities2,104 2,958Total current liabilities178,660 37,884 Convertible notes, net— 134,775Other long-term liabilities4,603 6,495Total liabilities183,263 179,154 Commitments and contingencies (Note 8) Stockholders’ equity: Preferred stock, $0.001 par value; 20,000 shares authorized and none issued and outstanding— —Common stock; $0.0001 par value; 1,000,000 shares authorized; 90,380 shares issued and 90,259 shares outstandingas of December 31, 2017; 88,304 shares issued and 88,183 shares outstanding as of December 31, 20168 8Treasury stock(441) (441)Additional paid-in capital359,347 344,521Accumulated deficit(246,207) (216,361)Accumulated other comprehensive loss(598) (791)Total stockholders’ equity112,109 126,936Total liabilities and stockholders’ equity$295,372 $306,090The accompanying notes are an integral part of these Consolidated Financial Statements.47Table of ContentsServiceSource International, Inc.Consolidated Statements of Operations(in thousands, except per share amounts) For the Year Ended December 31, 2017 2016 2015Net revenue$239,127 $252,887 $252,203Cost of revenue163,709 165,069 171,369Gross profit75,418 87,818 80,834Operating expenses: Sales and marketing33,001 41,972 44,086Research and development5,729 8,344 16,480General and administrative53,087 52,995 46,299Restructuring and other7,308 — 3,662Total operating expenses99,125 103,311 110,527Loss from operations(23,707) (15,493) (29,693)Interest expense and other, net(9,886) (8,704) (9,316)Impairment loss on cost basis equity investment— (4,500) —Gain on sale of cost basis equity investment2,100 — —Loss before income taxes(31,493) (28,697) (39,009)Provision for income tax benefit (expense)1,647 (3,429) (1,584)Net loss$(29,846) $(32,126) $(40,593)Net loss per common share: Basic and diluted$(0.33) $(0.37) $(0.48)Weighted-average common shares outstanding: Basic and diluted89,234 86,318 85,417The accompanying notes are an integral part of these Consolidated Financial Statements.48Table of ContentsServiceSource International, Inc.Consolidated Statements of Comprehensive Loss(in thousands) For the Year Ended December 31, 2017 2016 2015Net loss$(29,846) $(32,126) $(40,593)Other comprehensive income (loss), net of tax: Foreign currency translation adjustments710 (1,236) 12Unrealized gain (loss) on short-term investments(517) 18 (698)Other comprehensive income (loss), net of tax193 (1,218) (686)Comprehensive loss, net of tax$(29,653) $(33,344) $(41,279)The accompanying notes are an integral part of these Consolidated Financial Statements.49Table of ContentsServiceSource International, Inc.Consolidated Statements of Stockholders' Equity(in thousands) Common Stock Treasury Shares/Stock AdditionalPaid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveIncome (Loss) Total Shares Amount Shares Amount Balance at December 31, 201483,928 $8 (121) $(441) $312,017 $(143,348) $1,113 $169,349Proceeds from the exercise of stock options andemployee stock purchase plan1,505 — — — 5,761 — — 5,761Issuance of common stock, restricted stock units1,755 — — — — — — —Net cash paid for payroll taxes on restricted stockunit releases— — — — (974) — — (974)Share repurchases(295) — — — (1,212) — — (1,212)Stock-based compensation— — — — 13,751 — — 13,751Acceleration of stock-based compensationexpense due to restructuring— — — — 2,579 — — 2,579Net loss— — — — — (40,593) — (40,593)Other comprehensive loss— — — — — — (686) (686)Balance at December 31, 201586,893 $8 (121) $(441) $331,922 $(183,941) $427 $147,975Cumulative effect of stock compensation standardadoption— — — — 294 (294) ———Proceeds from the exercise of stock options andemployee stock purchase plan2,434 — — — 10,866 — — 10,866Issuance of common stock, restricted stock units1,240 — — — — — — —Net cash paid for payroll taxes on restricted stockunit releases— — — — (947) — — (947)Share repurchases(2,263) — — — (8,921) — — (8,921)Stock-based compensation— — — — 11,307 — — 11,307Acceleration of stock-based compensationexpense due to restructuring— — — — — — — —Net loss— — — — — (32,126) — (32,126)Other comprehensive loss— — — — — — (1,218) (1,218)Balance at December 31, 201688,304 $8 (121) $(441) $344,521 $(216,361) $(791) $126,936Proceeds from the exercise of stock options andemployee stock purchase plan321 — — — 1,062 — — 1,062Issuance of common stock, restricted stock units1,755 — — — — — — —Net cash paid for payroll taxes on restricted stockunit releases— — — — (775) — — (775)Stock-based compensation— — — — 14,187 — — 14,187Acceleration of stock-based compensationexpense due to restructuring— — — — 352 — — 352Net loss— — — — — (29,846) — (29,846)Other comprehensive income— — — — — — 193 193Balance at December 31, 201790,380 $8 (121) $(441) $359,347 $(246,207) $(598) $112,109The accompanying notes are an integral part of these Consolidated Financial Statements.50Table of ContentsServiceSource International, Inc.Consolidated Statements of Cash Flows(in thousands) For the Year Ended December 31, 2017 2016 2015Cash flows from operating activities: Net loss$(29,846) $(32,126) $(40,593)Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization22,588 16,052 13,736Amortization of debt discount and issuance costs9,392 8,724 8,048Amortization of premium on short-term investments(12) 1,091 (101)Deferred income taxes(1,999) 1,924 969Stock-based compensation13,683 10,752 13,387Restructuring and other3,063 — 2,579Impairment loss on cost basis equity investment— 4,500 —Gain on sale of cost basis equity investment(2,100) — —Other184 — —Changes in operating assets and liabilities: Accounts receivable, net9,060 (7,156) 12,002Deferred revenue(2,872) (1,589) (1,204)Prepaid expenses and other1,670 (673) (1,825)Accounts payable2,487 872 (1,562)Accrued taxes(762) 269 (539)Accrued compensation and benefits(2,940) (119) 2,706Accrued expenses(972) 1,182 (3,940)Other liabilities(827) 749 (66)Net cash provided by operating activities19,797 4,452 3,597Cash flows from investing activities: Acquisition of property and equipment(17,110) (26,337) (11,975)Restricted cash— — (1,244)Proceeds from sale of cost basis equity investment2,100 — —Purchases of short-term investments(56,626) (102,130) (95,421)Sales of short-term investments53,315 98,028 82,351Maturities of short-term investments3,506 1,525 1,095Net cash used in investing activities(14,815) (28,914) (25,194)Cash flows from financing activities: Repayment on capital lease obligations(71) (131) (170)Repurchase of common stock— (8,921) (1,212)Proceeds from issuance of common stock1,062 10,866 5,703Minimum tax withholding on restricted stock unit releases(775) (877) (974)Net cash provided by financing activities216 937 3,347Net increase (decrease) in cash and cash equivalents5,198 (23,525) (18,250)Effect of exchange rate changes on cash and cash equivalents(1,501) (1,117) 202Cash and cash equivalents, beginning of period47,692 72,334 90,382Cash and cash equivalents, end of period$51,389 $47,692 $72,334Supplemental disclosures of cash flow information Cash paid for interest$2,255 $2,260 $2,286Income taxes paid, net$1,400 $1,544 $854Supplemental disclosure of non-cash activities: Acquisition of property and equipment accrued in accounts payable and accrued expenses$108 $98 $111The accompanying notes are an integral part of these Consolidated Financial Statements.51Table of ContentsServiceSource International, Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. The CompanyServiceSource International, Inc. is a global leader in outsourced, performance-based customer success and revenue growth solutions. Through our people,processes and technology, we grow and retain revenue on behalf of our clients-some of the world’s leading business-to-business companies - in more than 45languages. Our solutions help our clients strengthen their customer relationships, drive improved customer adoption, expansion and retention and minimizechurn. Our technology platform and best-practice business processes combined with our highly-trained, client-focused revenue delivery professionals anddata from nearly 20 years of operating experience enable us to provide our clients greater value for our customer success services than attained by our clients'in-house customer success teams.“ServiceSource,” “the Company,” “we,” “us,” or “our”, as used herein, refer to ServiceSource International, Inc. and its subsidiaries, unless the contextindicates otherwise.The Company’s pay-for-performance model allows its clients to pay for the services through either flat-rate or variable commissions based on the revenuegenerated by the Company on their behalf. Fixed-fee arrangements are typically used in quick deployments to address discrete target areas of our clients’needs. The Company also earns revenue through its professional services teams, who assist clients with data optimization. The Company’s corporateheadquarters is located in Denver, Colorado. The Company has additional U.S. offices in California and Tennessee, and international offices in Bulgaria,Ireland, Japan, Malaysia, Philippines, Singapore and the United Kingdom.2. Summary of Significant Accounting PoliciesBasis of ConsolidationThe accompanying Consolidated Financial Statements include the accounts of ServiceSource and its wholly-owned subsidiaries. All intercompany balancesand transactions have been eliminated in consolidation.Use of EstimatesThe preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the date of the Consolidated Financial Statements and the reported amount of net revenue and expenses during the reporting period.The Company’s significant accounting judgments and estimates include, but are not limited to: revenue recognition, the valuation and recognition of stock-based compensation, the recognition and measurement of current and deferred income tax assets and liabilities and uncertain tax positions, and the provisionfor bad debts.The Company bases its estimates and judgments on historical experience and on various assumptions that it believes are reasonable under the circumstances.However, future events are subject to change and estimates and judgments routinely require adjustment. Actual results may differ from these estimates, andthese differences may be material.Significant Risks and UncertaintiesThe Company is subject to certain risks and uncertainties that could have a material and adverse effect on its future financial position or results of operations.The Company’s clients are primarily high technology companies and a downturn in these industries, changes in clients’ sales strategies, or widespread shiftaway from end customers purchasing maintenance and support contracts could have an adverse impact on the Company’s consolidated results of operationsand financial condition.Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, short-terminvestments, accounts receivable and the Note Hedges. See "Note 7 – Debt" for additional information. The Company is also exposed to a variety of marketrisks, including the effects of changes in foreign currency exchange rates and interest rates.Cash is maintained in demand deposit accounts at U.S., European and Asian financial institutions that management believes are credit worthy. Deposits inthese institutions may exceed the amount of insurance provided on these deposits.52Table of ContentsAccounts receivable are derived from services performed for clients located primarily in the U.S., Europe and Asia. The Company attempts to mitigate thecredit risk in its trade receivables through its ongoing credit evaluation process and historical collection experience. The Company maintains an allowancefor doubtful accounts based upon the expected collectability of its accounts receivable, which takes into consideration an analysis of historical bad debts andother available information.Two customers represented 17%, and 15% of accounts receivable as of December 31, 2017. Three customers represented 15%, 14% and 12%, of accountsreceivable as of December 31, 2016.Fair Value of Financial InstrumentsThe Company accounts for certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at the measurement date. The fair value guidance establishes a hierarchy that prioritizes theinputs to valuation techniques used to measure fair value. An asset or liability’s level is based upon the lowest level of input that is significant to the fairvalue measurement. The guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:Level 1: Quoted prices in active markets for identical assets or liabilities;Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;Level 3: Inputs that are generally unobservable and typically reflect management's estimates or assumptions that market participants would use in pricingthe asset or liability.The carrying amount of financial instruments including cash, restricted cash recorded in other assets, accounts receivable, accounts payable, accrued taxes,accrued expenses and other accrued liabilities approximate carrying value due to their short-term maturities. See "Note 4 – Fair value of FinancialInstruments" for additional information on the convertible note.Foreign Currency Translation and RemeasurementAssets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translatedto U.S. dollars at exchange rates at the balance sheet date. Net revenue and expenses are translated at monthly average exchange rates. The Companyaccumulates net translation adjustments in equity as a component of accumulated other comprehensive income (loss). For non-U.S. subsidiaries whosefunctional currency is the U.S. dollar, transactions that are denominated in foreign currencies have been remeasured in U.S. dollars, and any resulting gainsand losses are reported in "Interest expense and other, net" in the Consolidated Statements of Operations. For the years ended December 31, 2017, 2016, and2015, we recorded foreign currency transaction (gains) losses of approximately $1.1 million, $0.5 million and ($0.9) million, respectively.Accounts Receivable and Allowance for Doubtful AccountsAccounts receivable are stated at their carrying values net of an allowance for doubtful accounts. The Company evaluates the ongoing collectability of itsaccounts receivable based on a number of factors such as the credit quality of its clients, the age of accounts receivable balances, collections experience,current economic conditions and other factors that may affect a client’s ability to pay. In circumstances where the Company is aware of a specific client’sinability to meet its financial obligations to the Company, a specific allowance for doubtful accounts is estimated and recorded, which reduces therecognized receivable to the estimated amount that management believes will ultimately be collected. Account balances are charged off against theallowance when it is probable that the receivable will not be recovered.The following table presents changes in the allowance for doubtful accounts (in thousands): For the Year Ended December 31, 2017 2016 2015Balance, beginning of year$— $137 $37Charged to expense— 392 137Recoveries— (529) (37)Balance, end of year$— $— $13753Table of ContentsProperty and EquipmentThe Company records property and equipment at cost, less accumulated depreciation and amortization. Depreciation is recorded using the straight-linemethod over the estimated useful lives for owned assets as follows: seven years for office furniture and equipment, three to five years for network equipment,two to three years for computer hardware and three to seven years for software. Leasehold improvements are amortized on a straight-line basis over the lesserof the related lease term or the estimated useful life of the related assets, ranging from three to fifteen years.When assets are disposed, the cost and related accumulated depreciation and amortization are removed from their respective accounts and any gain or loss onsale or disposal is reported in "General and administrative expense" in the Consolidated Statement of Operations.Lease Asset Retirement ObligationsThe fair value of a liability for an asset retirement obligation (“ARO”) is recognized in the period in which it is incurred. The Company’s AROs associatedwith leasehold improvements at our international office locations, which, at the end of a lease, are contractually obligated to be removed. Our AROs wereapproximately $1.0 million and $1.2 million as of December 31, 2017 and 2016, respectively. Accretion expense was insignificant for the years endedDecember 31, 2017, 2016 and 2015. Capitalized Internal-Use SoftwareExpenditures related to software developed or obtained for internal use are capitalized and amortized over a period of two to five years on a straight-linebasis. The Company capitalizes direct external costs associated with developing or obtaining internal-use software. In addition, the Company also capitalizescertain payroll and payroll-related costs for employees or professional fees for consultants who are directly associated with the development of suchapplications. Costs associated with preliminary project stage activities, training, maintenance and all other post-implementation stage activities are expensedas incurred and are recorded in "Research and development" in the Consolidated Statements of Operations. Capitalized costs related to internal-use softwareunder development are treated as construction-in-progress until the program, feature or functionality is ready for its intended use, at which time amortizationcommences.GoodwillWe evaluate goodwill and indefinite-lived intangible assets for possible impairment at least annually or whenever events or changes in circumstancesindicate that the carrying amount of such assets may not be recoverable. The Company does not have intangible assets with indefinite useful lives other thangoodwill.To assess if goodwill is impaired a qualitative assessment, referred to as the simplified method, is first performed to determine whether further quantitativeimpairment testing is necessary. This qualitative analysis evaluates factors including, but not limited to, macro-economic conditions such as deterioration inthe entity's operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, orloss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolutebasis or relative to peers. If, as a result of the qualitative assessment, the Company considers it more-likely-than-not that the fair value of a reporting unit isless than its carrying amount, then a two-step quantitative impairment test is performed. The first step requires comparing the fair value of the reporting unitto its net book value, including goodwill. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second stepof the process, which is performed only if a potential impairment exists, involves determining the difference between the fair value of the reporting unit's netassets other than goodwill and the fair value of the reporting unit. If this difference is less than the net book value of goodwill, an impairment is recorded.Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reportingunits, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments are required to estimate the fairvalue of reporting units which includes estimating future cash flows and determining appropriate discount rates, growth rates and other assumptions. Changesin these estimates and assumptions could materially affect the determination of fair value for each reporting unit which could trigger impairment.If a two-step quantitative impairment test is required, the fair value of each reporting unit is determined based upon the income approach. Under the incomeapproach, the Company estimates the fair value of the reporting unit based upon the present value of estimated future cash flows. Cash flow projections aredetermined by management to be commensurate with the risk inherent in our current business model. Key assumptions used to estimate the fair value of thereporting unit includes the discount rate, compounded annual revenue growth rates, operating expense assumptions and terminal value capitalization rate.The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-54Table of Contentsspecific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected cash flows. The discount rate and terminal valuecapitalization rate are derived from the use of market data which are Level 3 inputs within the fair value hierarchy.No impairment was recorded for the years ended December 31, 2017, 2016, and 2015.The carrying value of goodwill for the years ended December 31, 2017 and 2016 was $6.3 million.Impairment of Long-Lived Assets Including Intangible AssetsThe Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate the carrying amount of the long-lived asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows theassets are expected to generate. If the long-lived asset is impaired, an impairment is recognized for the amount by which the carrying value of the assetexceeds its fair value. No impairment was recorded for the years ended December 31, 2017, 2016, and 2015.Acquired intangible assets are amortized over their useful lives on a straight-line basis which represents the pattern in which the Company derives benefitfrom the asset.Cost Basis Equity InvestmentIn 2013, the Company made an equity investment in a private company for $4.5 million, which represented less than 5% of the outstanding equity of thatcompany. Based on unfavorable growth trends and declining financial performance of this private company, the Company determined that its investment wasfully impaired and recorded a $4.5 million impairment during the year ended December 31, 2016. The impairment is included in "Impairment loss on costbasis equity investment" in the Consolidated Statement of Operations. During 2017, the Company sold this investment for $2.1 million in cash and recordedthe proceeds as a gain in "Gain on sale of cost basis equity investment" in our Consolidated Statements of Operations.Operating LeasesThe Company’s operating lease agreements for office facilities include provisions for certain rent holidays, tenant incentives and escalations in the base priceof the rent payment. The Company records rent holidays and rent escalations on a straight-line basis over the lease term and records the difference betweenexpense and cash payments as deferred rent. Tenant incentives are recorded as deferred rent and amortized on a straight-line basis over the lease term.Deferred rent is included in "Other current liabilities and Other long-term liabilities" in the Consolidated Balance Sheets.Deferred Debt Issuance CostsThe Company defers debt issuance costs, which consist of the debt discount on the convertible notes and issuances costs related to the Notes. Discounts anddebt issuance costs are included in the carrying value of the convertible notes and amortized to “Interest expense and other, net” in our ConsolidatedStatement of Operations over the remaining life of the convertible notes. See "Note 7 - Debt" for additional information.Comprehensive LossWe report comprehensive loss in our Consolidated Statements of Comprehensive Loss. Amounts reported in “Accumulated other comprehensive loss” consistof foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency and unrealized gains and losses onavailable-for-sale securities.Revenue RecognitionThe Company’s revenue is derived primarily from recurring revenue management. Other revenues include subscriptions to the Company’s cloud applicationsand professional services.Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability isreasonably assured from clients and no significant obligations remain unfulfilled by the Company.55Table of ContentsRecurring Revenue ManagementRevenue from recurring revenue management consists of fees earned from the sales of services contracts on behalf of the Company’s customers, which arereferred to as clients, or assisting in their sales process. The Company’s contract obligations include administering and managing the sales and/or renewalprocesses for client contracts; providing adequately trained staff; reporting; and holding periodic business reviews with clients. Client obligations includeproviding a detailed listing of sales prospects, access to their databases or systems and sales or marketing materials. Fees are generally based on a fixedpercentage of the overall sales value associated with the service contracts. Some client contracts include performance-based fees determined by theachievement of specified performance metrics. Recurring revenue management contracts entitle the Company to additional fees and adjustments which areinvoked in various circumstances including a client’s failure to provide the Company with a specified minimum value of sales prospects, untimely deliveryof client sales prospect data or other obligations inhibiting the Company’s ability to perform its obligations. In addition, many client contracts contain earlytermination fees.Recurring revenue management services are deemed delivered when clients accept purchased orders from their sales prospects (the end customer) and nosignificant post-delivery obligations remain for the Company. Fees from recurring revenue management services are recognized on a net basis since theCompany acts as an agent on behalf of its clients. The Company does not provide the services being renewed by the end customers, nor does it determinepricing, terms or scope of services to the end customers. Performance incentive fees and early termination fees are recorded in the period when either theperformance criteria have been met or a triggering event has occurred. SubscriptionsSubscription revenue is comprised of subscriptions fees to access the Company’s cloud based applications. Subscription revenue is recognized ratably overthe contract term, generally over a period of one to three years, commencing when the cloud applications are made available. The Company's subscriptionservice arrangements are generally non-cancelable and do not contain refund-type provisions.Professional ServicesProfessional services revenue is generated from implementation services. Professional services are deemed delivered upon the successful completion ofimplementation projects or when project milestones have been achieved and accepted by the client.Multiple Element ArrangementsThe Company enters into multiple element arrangements when clients utilize a combination of recurring revenue management services, subscriptions andprofessional services. Deliverables are separated at the inception of the arrangement if each deliverable has stand-alone value to the client. The Companybelieves that it has stand-alone value for professional services. Arrangement consideration is allocated based on the relative best selling prices of eachdeliverable. However, most fees earned from recurring revenue management services are contingent in nature as the fees earned by the Company are based onperformance against the specific terms of each contract. Therefore, contingent fees from recurring revenue management services are excluded from theallocation of relative best selling prices at inception of multiple element arrangements.Selling prices for each deliverable is determined based on the selling price hierarchy of vendor-specific objective evidence ("VSOE"), third-party evidence("TPE") and best estimated selling price ("BESP"). Generally, the Company has not been able to establish VSOE for its deliverables as the items have not beensold separately. The Company has not been able to reliably determine the stand-alone selling prices of competitors’ products and services, and thereforecannot rely on TPE for its deliverables. Therefore, the Company utilizes BESP to determine the selling prices of its deliverables. The objective of BESP is todetermine the price at which the Company would price a product or service if it were sold on a stand-alone basis. BESP is generally used for offerings that arenot typically sold separately or for new offerings. BESP is determined by considering multiple factors including, but not limited to, pricing practices, marketconditions, competitive landscape, internal costs, geographies and gross margin. The determination of BESP is made through consultation with and formalapproval with management, taking into consideration the Company’s marketing strategy. As these marketing strategies evolve, the Company may modify itspricing practices in the future, which could result in changes to selling prices.Once arrangement consideration is allocated to the various deliverables in a multiple element arrangement, revenue is recognized when all other revenuerecognition criteria has been achieved.56Table of ContentsAdvertising CostsAdvertising costs are expensed as incurred and are reported in "Sales and marketing expenses" in the Consolidated Statements of Operations. Advertisingexpense for the years ended December 31, 2017, 2016 and 2015 was approximately $0.2 million, $0.1 million, and $0.1 million, respectively.Income TaxesThe Company accounts for income taxes using an asset and liability method, which requires the recognition of taxes payable or refundable for the currentyear and deferred tax assets and liabilities for the expected future tax consequences of temporary differences that currently exist between the tax basis and thefinancial reporting basis of our taxable subsidiaries’ assets and liabilities using the enacted tax rates in effect for the year in which the differences areexpected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes theenactment date. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are notexpected to be realized.The Company files U.S. federal and state and foreign income tax returns in jurisdictions with varying statutes of limitations. In the normal course of businessthe Company is subject to examination by taxing authorities throughout the world. These audits include questioning the timing and amount of deductions,the allocation of income among various tax jurisdictions and compliance with federal, state, local and foreign tax laws. The Company accounts forunrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected tobe taken in a tax return. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additionaltaxes will be due. The Company records an income tax liability, if any, for the difference between the benefit recognized and measured and the tax positiontaken or expected to be taken on our tax returns. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the incometax provision.Stock-Based CompensationThe Company issues share-based awards to employees and directors. Awards are measured at fair value on the grant date and amortized to compensationexpense over the service period during which the awards fully vest. Such expense is included in in our Consolidated Statements of Operations, see "Note 9 -Share Repurchase Program and Stock-Based Compensation" for additional information. Forfeitures are recognized as incurred. Options issued are valuedusing the Black-Scholes option-pricing model, which relies on assumptions we make related to the expected term of the options, volatility, dividend yieldand risk-free interest rate.Net Income (Loss) Per Common ShareBasic net income (loss) per share is computed by dividing income available to common shareholders by the weighted-average number of shares of commonstock outstanding during the period. Diluted net income (loss) per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that wouldhave been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, shares to bepurchased under the Company’s employee stock purchase plan and unvested restricted stock units (“RSUs”). The dilutive effect of potentially dilutivesecurities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in the fair marketvalue of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.Potential shares of common stock that are not included in the determination of diluted net loss per share because they are anti-dilutive consist of stockoptions, non-vested restricted stock and shares to be purchased under our Employee Stock Purchase Plan. The Company excluded from diluted earnings pershare the weighted-average common share equivalents related to 7.1 million, 7.7 million and 9.5 million shares for the years ended December 31, 2017, 2016and 2015, respectively, because their effect would be anti-dilutive.57Table of ContentsNew Accounting Standards Issued but not yet Adopted Revenue RecognitionIn May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update No. 2014-09, “Revenue from Contracts withCustomers” (“ASU 2014-09”) which amended the existing FASB Accounting Standards Codification. Under the new standard, revenue is recognized when acustomer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive inexchange for those goods or services. The standard also specifies that the incremental costs of obtaining a contract with a customer and the costs of fulfillinga contract with a customer (if those costs are not within the scope of another Topic or Sub-Topic) would be deferred and recognized over the appropriateperiod of contract performance if they are expected to be recovered. In addition, the standard requires disclosure of the nature, amount, timing anduncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each priorreporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the dateof initial application (modified retrospective method, also known as the cumulative catch-up transition method). The Company will adopt the standard effective January 1, 2018 utilizing the modified retrospective method. The Company has completed its analysis of thisstandard and the adoption of this guidance will not have a material impact on our Consolidated Financial Statements or our internal controls over financialreporting.LeasesIn February 2016, the FASB issued an ASU that modifies existing accounting standards for lease accounting. The new standard requires a lessee to record alease asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating.This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of thelease. Leases in which the Company is the lessee will generally be accounted for as operating leases and we will record a lease asset and a lease liability. Theguidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted for fiscal years beginning after December 15, 2018.The standard requires a modified retrospective transition approach for all capital and operating leases existing at, or entered into after, the beginning of theearliest comparative period presented in the financial statements, with an option to use certain transition relief. The Company expects to adopt this standardeffective January 1, 2019, and is in the process of assessing the impact of this standard.Restricted CashIn November 2016, the FASB issued an ASU that requires companies to combine restricted cash and restricted cash equivalents with cash and cashequivalents when reconciling the beginning and end of period total amounts on the statement of cash flows. The guidance is effective for fiscal yearsbeginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company will adopt the standardeffective January 1, 2018 utilizing the retrospective transition method. The adoption of this guidance will not have a significant impact on our ConsolidatedFinancial Statements.Comprehensive IncomeIn February 2018, the FASB issued an ASU that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded taxeffects resulting from the Tax Cuts and Jobs Act. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods withinthose fiscal years with early adoption permitted. The guidance should be applied either in the period of adoption or retrospectively to each period in whichthe effect of the change in federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We are currently evaluating this guidance.58Table of Contents3. Intangible AssetsIntangible assets consisted of the following (in thousands): Gross Carrying Amount Accumulated Amortization NetBalance as of December 31, 2015$6,050 $(2,940) $3,110Amortization expense— (1,512) (1,512)Balance as of December 31, 20166,050 (4,452) 1,598Amortization expense— (1,512) (1,512)Balance as of December 31, 2017$6,050 $(5,964) $86Amortization expense for intangibles assets was approximately $1.5 million for each of the years ended December 31, 2017, 2016 and 2015, respectively.The remaining net book value of $0.1 million will be amortized during the first quarter of 2018.4. Fair Value of Financial InstrumentsCash, Cash Equivalents and Short-Term InvestmentsCash equivalents consist of highly liquid fixed-income investments with original maturities of three months or less at the time of purchase. Short-terminvestments consist of readily marketable securities with a remaining maturity of more than three months from time of purchase. The Company classifies itscash equivalents and short-term investments as “available for sale,” as these investments are free of trading restrictions and are available for use in theCompany's daily operations. These marketable securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as accumulatedother comprehensive loss and included as a separate component of stockholders’ equity. Gains and losses are recognized when realized. When the Companydetermines that an other-than-temporary decline in fair value occurred, the amount of the decline that is related to a credit loss is recognized in earnings.Gains and losses are determined using the specific identification method. The Company’s realized gains and losses in the years ended December 31, 2017and 2016 were insignificant. There were no transfers between levels during the years ended December 31, 2017 and 2016.The following tables present the Company's cash and cash equivalents and short-term investments by significant investment category (in thousands)measured at fair value on a recurring basis:For the Year Ended December 31, 2017: Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair ValueLevel 1: Cash$48,712 $— $— $48,712Cash equivalents: Money market mutual funds2,677 — — 2,677Total cash and cash equivalents51,389 — — 51,389Level 2: Short-term investments: Corporate bonds55,763 1 (346) 55,418U.S. agency securities34,640 — (410) 34,230Asset-backed securities21,739 — (127) 21,612U.S. Treasury securities26,292 — (371) 25,921Total short-term investments138,434 1 (1,254) 137,181Cash, cash equivalents and short-term investments$189,823 $1 $(1,254) $188,570 59Table of ContentsFor the Year Ended December 31, 2016: Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair ValueLevel 1: Cash$47,060 $— $— $47,060Cash equivalents: Money market mutual funds632 — — 632Total cash and cash equivalents47,692 — — 47,692Level 2: Short-term investments: Corporate bonds54,827 19 (188) 54,658U.S. agency securities34,658 — (281) 34,377Asset-backed securities26,431 25 (23) 26,433U.S. Treasury securities22,701 — (288) 22,413Total short-term investments138,617 44 (780) 137,881Cash, cash equivalents and short-term investments$186,309 $44 $(780) $185,573The following table presents the amortized cost and estimated fair value of money market mutual funds and short-term fixed income securities classified asshort-term investments based on stated maturities as of December 31, 2017 (in thousands): AmortizedCost EstimatedFair ValueLess than 1 year$14,315 $14,295Due in 1 to 3 years126,796 125,563Total$141,111 $139,858The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. The Company typicallyinvests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy generally requiresinvestments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for eachindividual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such asthe length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes inmarket interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of theinvestment’s cost basis. As of December 31, 2017, the Company does not consider any of its investments to be other-than-temporarily impaired.The Company had restricted cash of $1.2 million in "Other assets" in the Consolidated Balance Sheets as of December 31, 2017 and 2016. The restricted cashis classified within Level 1.The convertible notes issued by the Company in August 2013 are included in the Consolidated Balance Sheets at their original issuance value, net ofunamortized discount and issuance costs, and are not marked to market each period. The approximate fair value of the convertible notes was approximately$145.9 million and $143.8 million as of December 31, 2017 and 2016, respectively. The fair value of the convertible notes was determined using quotedmarket prices for similar securities and are considered Level 2 inputs due to limited trading activity.The Company did not have any other financial instruments or debt measured at fair value as of December 31, 2017 and 2016, respectively.60Table of Contents5. Property and Equipment, NetProperty and equipment, net were comprised of the following (in thousands): For the Year Ended December 31, 2017 2016Computers and equipment$22,186 $19,930Software72,147 59,453Leasehold improvements19,574 18,092Furniture and fixtures11,606 10,947Property and equipment125,513 108,422Less: accumulated depreciation and amortization(91,394) (70,242)Property and equipment, net$34,119 $38,180Depreciation and amortization expense, which includes amortization expense related to capital leases, was approximately $21.1 million, $16.1 million and$13.7 million, respectively, during the years ended December 31, 2017, 2016 and 2015.The Company capitalized costs of approximately $12.6 million, $13.1 million and $7.2 million during the years ended December 31, 2017, 2016 and 2015,respectively, related to internal-use software. As of December 31, 2017 and 2016, the carrying value of capitalized costs related to internal-use software, netof accumulated amortization, was $16.5 million and $17.2 million, respectively. Amortization expense related to internal-use software was approximately$13.3 million, $7.6 million and $5.0 million during the years ended December 31, 2017, 2016 and 2015, respectively.6. Other Current LiabilitiesOther current liabilities were comprised of the following (in thousands): For the Year Ended December 31, 2017 2016Accrued interest – convertible notes$938 $938Deferred rent748 1,359ESPP withholding418 661Total$2,104 $2,9587. DebtSenior Convertible NotesIn August 2013, the Company issued senior convertible notes (the "Notes") in exchange for gross proceeds of $150.0 million. The Notes mature on August 1,2018 and are recorded as a current liability in "Convertible notes" in our Consolidated Balance Sheet as of December 31, 2017.The Notes are governed by an Indenture, dated August 13, 2013 (the "Indenture"), between the Company and Wells Fargo Bank, National Association, astrustee. The notes bear interest at a rate of 1.50% per year payable semi-annually in arrears on February 1 and August 1, beginning February 1, 2014.The Notes are convertible at an initial conversion rate of 61.6770 shares of common stock per $1,000 principal amount of Notes, which represents an initialconversion price of approximately $16.21 per share of common stock, subject to anti-dilution adjustments upon certain specified events, as defined in theIndenture. Upon conversion, the Notes will be settled in cash, shares of the Company’s common stock, or any combination thereof, at the Company’s option.The Notes were not subject to conversion or repurchase as of December 31, 2017. However, holders of the Notes may convert their Notes at any time on orafter February 1, 2018, until the close of business on the second schedule trading day immediately preceding the maturity date, regardless of the foregoingcircumstances.61Table of ContentsTo account for the Notes at issuance, the Company separated the Notes into debt and equity components pursuant to the accounting standards for convertibledebt instruments that may be fully or partially settled in cash upon conversion. The fair value of debt component was estimated using an interest rate fornonconvertible debt, with terms similar to the Notes, excluding the conversion feature. The carrying amount of the liability component was calculated bymeasuring the fair value of a similar liability that does not have an associated convertible feature. The excess of the principal amount of the Notes over thefair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount is accreted tointerest expense over the term of the Notes using the interest method. The amount recorded to additional paid-in capital is not to be remeasured as long as itcontinues to meet the conditions of equity classification. Upon issuance of the $150.0 million of Notes, the Company recorded $111.5 million to debt and$38.5 million to additional paid-in capital.The net carrying amount of the liability component of the Notes consists of the following (in thousands): For the Year Ended December 31, 2017 2016Principal amount$150,000 $150,000Unamortized debt discount(5,336) (13,928)Unamortized debt issuance costs(497) (1,297)Net carrying amount$144,167 $134,775Estimated future amortization of deferred issuance costs is approximately $5.8 million for the year ended December 31, 2018.The following table presents interest expense recognized related to the Notes (in thousands): For the Year Ended December 31, 2017 2016 2015Contractual interest expense at 1.5% per annum$2,250 $2,250 $2,250Amortization of debt issuance costs800 743 686Accretion of debt discount8,592 7,981 7,362Total$11,642 $10,974 $10,298Note HedgesConcurrent with the issuance of the Notes, the Company entered into note hedges ("Note Hedges") with certain bank counterparties, with respect to itscommon stock. The Company paid $31.4 million for the Note Hedges. The Note Hedges cover approximately 9.25 million shares of the Company's commonstock at a strike price of $16.21 per share. The Note Hedges will expire upon the maturity of the Notes. The Note Hedges are intended to reduce the potentialdilution to the Company's common stock upon conversion of the Notes and/or offset the cash payment in excess of the principal amount of the Notes theCompany is required to make in the event that the market value per share of the Company's common stock at the time of exercise is greater than theconversion price of the Notes.WarrantsSeparately, the Company entered into warrant transactions, whereby it sold warrants to the same bank counterparties as the Note Hedges to acquireapproximately 9.25 million shares of the Company's common stock at an initial strike price of $21.02 per share ("Warrants"), subject to anti-dilutionadjustments. The Company received proceeds of approximately $21.8 million from the sale of the Warrants. If the fair value per share of the Company'scommon stock exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on earnings per share, unless the Company elects, subject tocertain conditions, to settle the Warrants in cash.The amounts paid and received for the Note Hedges and the Warrants have been recorded in additional paid-in capital. The fair value of the Note Hedges andthe Warrants are not remeasured through earnings each reporting period.62Table of ContentsLetter of CreditOn February 3, 2015, the Company issued a $1.2 million letter of credit in connection with a lease for a new San Francisco office facility. The letter of creditis secured by $1.2 million of cash in a money market account which is classified as restricted cash in "Other assets" in the Consolidated Balance Sheets.8. Commitments and ContingenciesOperating LeasesThe Company leases its office space and certain equipment under non-cancelable operating lease agreements with various expiration dates throughDecember 2022. Rent expense during the years ended December 31, 2017, 2016 and 2015 was approximately $10.6 million, $11.3 million and $9.4 million,respectively. The Company recognizes rent expense on a straight-line basis over the lease period and accrues for rent expense incurred but not paid.Future annual minimum lease payments under non-cancelable operating leases as of December 31, 2017 were as follows (in thousands): Fiscal Year 2018$11,35420199,60020208,36220217,81920224,616Thereafter—Total$41,751In January 2018, the Company entered into a sublease with a third-party for the Company's San Francisco office space for the remaining term of the lease. Thefuture minimum payments through November 30, 2022 under the original lease total approximately $9.3 million and future sublease rental income totalsapproximately $8.9 million over the same period.Other Purchase CommitmentsThe Company had $14.1 million in non-cancelable purchase commitments with our suppliers as of December 31, 2017.LitigationThe Company is subject to various legal proceedings and claims arising in the ordinary course of our business, including the cases discussed below. Although the results of litigation and claims cannot be predicted with certainty, the Company is currently not aware of any litigation or threats of litigationin which the final outcome could have a material adverse effect on our business, operating results, financial position, or cash flows. Regardless of theoutcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and otherfactors. The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordancewith accounting for contingencies. As of December 31, 2017 and 2016, the Company accrued a $1.5 million reserve relating to our potential liability forcurrently pending disputes, reflected in "Accrued expenses" in the Consolidated Balance Sheets.On August 23, 2016, the United States District Court for the Middle District of Tennessee granted conditional class certification in a lawsuit originally filedon September 21, 2015 by three former senior sales representatives. The lawsuit, Sarah Patton, et al v. ServiceSource Delaware, Inc., asserts a claim under theFair Labor Standards Act alleging that certain sales account representatives and senior sales representatives in our Nashville location were not paid for allhours worked and were not properly paid for overtime hours worked. The complaint also asserts claims under Tennessee state law for breach of contract andunjust enrichment, however, the plaintiffs have not yet filed a motion to certify the state law breach of contract and unjust enrichment claims as a class action.The Company will continue to vigorously defend itself against these claims.63Table of Contents9. Share Repurchase Program, Stock-Based Compensation and ESPPShare Repurchase ProgramIn August 2015, our Board of Directors authorized a stock repurchase program (the "program") to repurchase up to $30.0 million of our common stock. Theprogram expired August 2017. During the year ended December 31, 2016, the Company repurchased 2.3 million shares of common stock at a weighted-average price of $3.94 per share for an aggregate purchase price of $8.9 million. No shares were repurchased under this program during the year endedDecember 31, 2017.Equity PlansThe Company maintains the 2011 Equity Incentive Plan (the “2011 Plan”) and the 2011 Employee Stock Purchase Plan. The Company’s Board of Directors,by delegation to its compensation committee, administers the 2011 Plan and has authority to determine the directors, officers, employees and consultants towhom options, restricted stock units or restricted stock awards may be granted, the option price or restricted stock purchase price, the timing of when eachshare is exercisable and the duration of the exercise period and the nature of any restrictions or vesting periods applicable to an option or restricted stockgrantAt the end of each fiscal year, the share reserve under the 2011 Plan automatically increases, to the lessor of an amount equal to 4% of the outstanding sharesas of the end of that fiscal year or 3,840,000 shares. As of December 31, 2017, there were approximately 12.4 million shares available for grant under the 2011Plan. On January 1, 2018, 3.6 million additional shares were reserved under the 2011 Equity Incentive Plan pursuant to the automatic increase.Stock options are recorded at fair value on the date of grant date using the Black-Scholes option-pricing model and generally vest ratably over a four-yearperiod. Vested options may be exercised up to ten years from the grant date, as defined in the 2011 Plan. Vested but unexercised options expire 90 days aftertermination of employment with the Company. Compensation expense is amortized on a straight-line basis over the service period during which the right toexercise such options fully vests.Restricted stock units are recorded at fair value on the date of grant and amortized on a straight-line basis over the service period during which the stockvests. Restricted stock units generally vest ratably over four years with vesting contingent upon employment of the Company.2017 PSU AwardsDuring the second quarter of 2017, the Company granted performance-based restricted stock unit awards under the Company’s 2011 Equity Incentive Plan tocertain key executives (the “2017 PSU Awards”). For each 2017 PSU Award, a number of restricted stock units became eligible to vest based on the levels ofachievement of the performance-based conditions, and those restricted stock units that became eligible to vest will vest 50% on the first anniversary of thegrant date and 50% on the second anniversary of the grant date, except as otherwise provided under certain termination and change-in-control provisions ineach award agreement. The aggregate target number of restricted stock units subject to the 2017 PSU Awards was 1.0 million, with an aggregate grant datefair value of $3.7 million.The performance-based conditions are based upon the Company’s revenue and adjusted EBITDA performance in fiscal year 2017 against the target goals forsuch metrics under the Company’s 2017 corporate incentive plan (in each case, “Performance Achievement”), which will each be determined on the date theCompany files its Annual Report on Form 10-K for fiscal year 2017. The target number of restricted stock units for each 2017 PSU Award will be dividedequally between the two performance metrics. For each performance metric, the number of restricted stock units that become eligible to vest will be: (i) if theapplicable Performance Achievement is less than 90% of the target revenue goal or less than 69% of the target EBITDA goal, no restricted stock units forsuch performance metric, (ii) if the applicable Performance Achievement is equal to 90% of the target revenue goal or 69% of the target EBITDA goal, 50% ofthe target number of restricted stock units for such performance metric, (iii) if the applicable Performance Achievement is equal to 100% of the target revenueand EBITDA goals, 100% of the target number of restricted stock units for such performance metric, or (iv) if the applicable Performance Achievement is atleast 107% of the target revenue goal or 146% of the target EBITDA goal, 150% of the target number of restricted stock units for such performancemetric. For each performance metric, if the applicable Performance Achievement falls between any of the thresholds (ii), (iii), and (iv) specified in theprevious sentence, the number of restricted stock units that become eligible to vest for such performance metric will be determined via linear interpolation.Under the time-based vesting condition, 50% of the restricted stock units that have become eligible to vest will vest on the first anniversary of the grant date,and 50% of the restricted stock units that have become eligible to vest will vest on the second anniversary of the grant date, except as otherwise providedunder certain termination and change-in-control provisions in each award agreement governing a 2017 PSU Award. Such provisions will determine thenumber of restricted stock units that64Table of Contentsbecome eligible to vest and when and how many restricted stock units will actually vest in connection with the specified terminations of employment andchanges in-control.2016 PSU AwardsDuring the third quarter of 2016, the Company granted performance-based restricted stock unit awards under the Company’s 2011 Equity Incentive Plan tocertain key executives (the “2016 PSU Awards”). The 2016 PSU Awards contain similar performance and vesting conditions as the 2017 PSU Awards. Theaggregate target number of restricted stock units subject to the 2016 PSU Awards was 1.0 million with an aggregate grant date fair value of $5.1 million.Upon the filing of the Company’s 2016 form 10-K on March 6, 2017, an additional 0.2 million shares with a grant date fair value of $1.2 million becameeligible to vest under the 2016 PSU Awards. The 2016 PSU Awards are expensed over the two-year vesting term using the accelerated attribution method.Fair Value of Stock Options and Restricted UnitsThe estimated fair value of stock options and restricted stock units granted during the years ended December 31, 2017, 2016 and 2015, was approximately$11.5 million, $13.3 million, and $18.6 million, respectively. The fair value of each grant of options during 2017, 2016 and 2015 was determined by the Company using the methods and assumptions discussed below.The Company stratifies its population of outstanding share options into two relatively homogeneous groups to estimate the expected term of options grants.Each of these inputs is subjective and generally requires significant judgment to determine.Expected Term—The expected term represents the period that the Company’s share-based awards are expected to be outstanding. The Company calculatedthe expected term of share options using four data points: options exercised, options expired, options forfeited and options outstanding. The weighted-average of the four data points were used to calculate the expected term.Expected Volatility—The expected volatility is based on the historical stock volatility of the Company's own common shares.Risk-Free Interest Rate—The risk-free interest rate was based on the implied yield on U.S. Treasury zero-coupon issues for each option grant date withmaturities approximately equal to the option’s contractual term.Expected Dividend Yield—The Company has not paid dividends on its common shares nor does it expect to pay dividends in the foreseeable future.The weighted average Black-Scholes option-pricing model assumptions were as follows: For the Year Ended December 31, 2017 2016 2015Expected term (in years)5.0 5.0 5.0Expected volatility59% 58% 34%Risk-free interest rate1.87% 1.23% 1.64%Expected dividend yield0.00% 0.00% 0.00%Employee Stock Purchase PlanThe Company’s 2011 Employee Stock Purchase Plan (the “ESPP”) is intended to qualify under Section 423 of the Internal Revenue Code of 1986. Under theESPP, employees are eligible to purchase common stock through payroll deductions of up to 10% of their eligible compensation, subject to any planlimitations. The purchase price of the shares on each purchase date is equal to 85% of the lower of the fair market value of the Company’s common stock onthe first and last trading days of each six-month offering period.The Company estimates the fair value of purchase rights under the ESPP using the Black-Scholes option-pricing model and the straight-line attributionapproach. The following weighted-average assumptions were as follows:65Table of Contents For the Year Ended December 31, 2017 2016 2015Expected term (in years)0.5 -1.0 0.5 -1.0 0.5 -1.0Expected volatility29%-66% 38%-52% 25%-35%Risk-free interest rate0.65%-1.21% 0.42%-0.56% 0.07%-0.37%Expected dividend yield0.00% 0.00% 0.00%The expected term represents the period of time from the beginning of the offering period to the purchase date. The Company uses its historical volatility fora period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate the Company uses in the Black-Scholesoption valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has never declared orpaid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in thevaluation model.The ESPP provides that additional shares are reserved annually on the first day of each fiscal year in an amount equal to the lesser of (i) 1.5 million shares,(ii) one percent of the outstanding shares of common stock on the last day of the immediately preceding fiscal year, or (iii) an amount determined by theboard of directors and/or the compensation committee of the board of directors. As of December 31, 2017, 2.1 million shares had been issued under the ESPPand 3.7 million shares were available for future issuance. On January 1, 2018, 0.9 million additional shares were reserved under the 2011 ESPP.Stock Awards Issued to EmployeesThe following table presents total options outstanding, granted, exercised, expired or forfeited, as well as total options exercisable (shares and aggregateintrinsic value in thousands): Shares Weighted-AverageOption Price PerShare Weighted-AverageFair Value ofOptions GrantedDuring the Year Weighted-AverageRemainingContractual Life(Years) Intrinsic ValueIssued and outstanding as of December 31, 201410,070 $5.08 Granted4,206 $4.45 $1.45 Options exercised(1,126) $4.13 $1,312Expired and/or Forfeited(2,534) $5.65 Issued and outstanding as of December 31, 201510,616 $4.79 Granted709 $4.11 $2.05 Options exercised(2,111) $4.62 $1,455Expired and/or Forfeited(1,719) $5.43 Issued and outstanding as of December 31, 20167,495 $4.63 Granted173 $3.63 $1.86 Options exercised(14) $4.86 $8Expired and/or Forfeited(1,143) $5.31 Issued and outstanding as of December 31, 20176,511 $4.48 6.54 $6,571Options exercisable as of December 31, 20174,619 $4.61 6.13 $4,889The total estimated fair value of options vested during the years ended December 31, 2017, 2016, and 2015 was $2.5 million, $3.7 million and $2.7 million,respectively.66Table of ContentsThe following table summarizes additional information concerning our vested restricted stock units and performance stock units (shares in thousands): Shares Weighted-Average Grant Date FairValueUnvested as of December 31, 20164,236 $4.77Granted3,458 $3.58Vested(1)(1,963) $4.89Forfeited(704) $4.30Unvested as of December 31, 20175,027 $3.98(1)1,755 shares of common stock were issued for restricted stock units vested and the remaining 208 shares were withheld for taxes.The total estimated fair value of restricted stock units and PSU awards vested during the years ended December 31, 2017, 2016 and 2015 was $7.3 million,$6.2 million and $8.5 million.The following table presents stock-based compensation expense as allocated within the Company’s Consolidated Statements of Operations (in thousands): For the Year Ended December 31, 2017 2016 2015Stock-based compensation included in operating expenses: Cost of revenue$1,335 $1,484 $2,666Sales and marketing3,774 3,004 3,393Research and development149 586 1,299General and administrative8,425 5,678 6,029Restructuring and other352 — 2,579Total stock-based compensation$14,035 $10,752 $15,966The above table does not include approximately $0.5 million, $0.6 million and $0.4 million of capitalized stock-based compensation related to internal-usesoftware for the years ended December 31, 2017, 2016 and 2015, respectively.As of December 31, 2017, there was approximately $15.9 million of unrecognized compensation expense related to non-vested share-based compensationarrangements granted under the 2011 Plan, which is expected to be recognized over a weighted-average period of 1.96 years.10. Employee Benefit PlanThe Company maintains a 401(k) defined contribution plan that covers domestic employees who have attained 21 years of age and provide at least 20 hoursof service per week. This plan allows U.S. employees to contribute up to 90% of their pre-tax salary into investments at the discretion of the employee, up tomaximum annual contribution limits established by the U.S. Department of Treasury. During the years ended December 31, 2017, 2016 and 2015, theCompany matched up to 50% of an employee's contributions up to an annual limit of $2,000. Matching contributions by the Company are fully vested uponcompletion of the first year of employment. Employer matching contributions, which may be discontinued at the Company’s discretion, were approximately$1.5 million, $1.7 million and $2.1 million, during 2017, 2016 and 2015, respectively.11. Income TaxesLoss from continuing operations before provision for income taxes for the Company’s domestic and international operations was as follows (in thousands): 67Table of Contents For the Year Ended December 31, 2017 2016 2015U.S.$(28,463) $(32,499) $(40,720)International(3,030) 3,802 1,711Loss before provision for income taxes$(31,493) $(28,697) $(39,009)The income tax provision consisted of the following (in thousands): For the Year Ended December 31, 2017 2016 2015Current: Federal$94 $279 $—Foreign46 1,112 632State and local212 89 (32)Total current income tax provision352 1,480 600Deferred: Federal(1,645) 129 160Foreign(5) (54) 52State and local(349) 1,874 772Total deferred income tax provision (benefit)(1,999) 1,949 984Income tax provision (benefit)$(1,647) $3,429 $1,584The following table provides a reconciliation of income taxes provided at the federal statutory rate of 35% to the income tax provision (in thousands): For the Year Ended December 31, 2017 2016 2015U.S. income tax at federal statutory rate$(11,012) $(10,046) $(13,388)State income taxes, net of federal benefit(650) (170) 342Section 956 inclusion— 2,976 —Foreign tax rate differential(21) (882) (85)Share-based compensation1,748 5,038 —Permanent differences926 383 254Tax cuts and jobs act37,042 — —Tax credits(5) (111) (405)Federal rate change— (1,954) —Return to provision(407) 1,068 —Adjustments to opening deferreds— 2,009 —Valuation allowance(29,334) 4,458 14,529Other, net66 660 337Income tax provision (benefit)$(1,647) $3,429 $1,584In November 2015, the Philippine Economic Zone Authority granted a four year tax holiday to the Company's Philippine affiliate, commencing with itsfiscal year beginning January 1, 2016. The earnings per share benefit in 2017, 2016, and 2015 was not material.In December 2013, Malaysia granted a ten year tax holiday to the Company’s Malaysia affiliate, commencing with its fiscal year beginning January 1, 2014.This resulted in a tax benefit in fiscal 2013 of approximately $0.2 million from the elimination of the Malaysia subsidiary’s deferred tax liabilities. Theearnings per share benefit in 2017, 2016 and 2015 was not material. 68Table of ContentsThe following table provides the effect of temporary differences that created deferred income taxes as of December 31, 2017 and 2016. Deferred tax assets andliabilities represent the future effects on income taxes resulting from temporary differences and carryforwards at the end of the respective periods (inthousands): For the Year Ended December 31, 2017 2016Deferred tax assets: Accrued liabilities$3,847 $3,540Share-based compensation expense3,904 4,961Net operating loss carryforwards65,958 92,087Tax credits6,860 5,676Amortization of tax intangibles2,842 5,957Investments— 1,774Other, net355 351Total deferred tax assets83,766 114,346Deferred tax liabilities: Property and equipment(811) (3,607)Convertible debt costs(263) (1,041)Total deferred tax liabilities(1,074) (4,648)Net deferred tax assets82,692 109,698Less: Valuation allowance(82,923) (111,935)Net deferred tax liabilities$(231) $(2,237)As of December 31, 2017 and 2016, management assessed the realizability of deferred tax assets and evaluated the need for a valuation allowance for deferredtax assets on a jurisdictional basis. This evaluation utilizes the framework contained in ASC 740, Income Taxes, wherein management analyzes all positiveand negative evidence available at the balance sheet date to determine whether all or some portion of the Company's deferred tax assets will not be realized.Under this guidance, a valuation allowance must be established for deferred tax assets when it is more-likely-than-not (a probability level of more than 50percent) that the asset will not be realized. In assessing the realization of the Company's deferred tax assets, management considers all available evidence,both positive and negative.In concluding on the evaluation, management placed significant emphasis on guidance in ASC 740, which states that “a cumulative loss in recent years is asignificant piece of negative evidence that is difficult to overcome.” Based upon available evidence, it was concluded on a more-likely-than-not basis that alldeferred tax assets were not realizable as of December 31, 2017. Accordingly, a valuation allowance of $82.9 million has been recorded to offset this deferredtax asset. The change in valuation allowance for the years ended December 31, 2017 and 2016 was a decrease of $29.0 million and an increase of $24.3million, respectively.Management also concluded on a more-likely-than-not basis that its Singapore deferred tax assets were not realizable, using the analysis prescribed in ASC740. Other factors were considered but provided neither positive nor negative objectively-verifiable evidence as to the realization of our deferred tax assets.The remaining deferred tax assets as of December 31, 2017 relate to jurisdictions in which the Company has net adjusted historical pretax profits andsufficient forecast profitability to assure future realization of such deferred tax assets.The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requirescompanies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certainforeign sourced earnings. In accordance with Staff Accounting Bulletin 118, we have not completed our accounting for the tax effects of enactment of theAct; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-timetransition tax. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accountingunder ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which we were able todetermine a reasonable estimate, we recognized a provisional benefit of $2.1 million, which is included as a component of income tax expense fromcontinuing operations. In all cases, we will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates mayalso be affected as we gain a more thorough understanding of the tax law.69Table of ContentsWe remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%.However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances orpotentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was $37.0million, which was offset by a decrease in our valuation allowance of $39.1 million. We recognized a $2.1 million tax benefit related to remeasurement ofindefinite-lived deferred tax liabilities and the release of valuation allowance associated with tax reform changes in net operating loss carryforwards. Futurenet operating losses generated will have an indefinite carryover as opposed to a 20-year carryover. Therefore, we expect the reversal of our deferred tax assetsto result in indefinite lived deferreds (future net operating losses) which can be used as an offset in our valuation allowance calculations.The non-recurring transition tax is based on the total post-1986 earnings and profits ("E&P") previously deferred from U.S. income taxes. In aggregate, theCompany has a deficit in post-1986 E&P from its foreign subsidiaries resulting in no transition tax liability. The Company considers its undistributedearnings of ServiceSource Europe, Ltd & ServiceSource International Singapore Pte. Ltd permanently reinvested in foreign operations and has not providedfor U.S. income taxes on such earnings. As of December 31, 2017, the Company's had no unremitted earnings from its foreign subsidiaries.As of December 31, 2017, the Company had net operating loss carryforwards of approximately $249.6 million for federal income tax purposes andapproximately $416.5 million for state income tax purposes. These losses are available to reduce taxable income and expire at various dates beginning in2024 for federal income tax purposes and 2021 for state income tax purposes. The Company also has foreign net operating loss carryforwards ofapproximately $10.4 million which are indefinitely available to reduce taxable income and do not expire.As of December 31, 2017, the Company had $2.5 million of U.S. federal research and development credits which expire beginning in 2031, and $3.7 millionof California research and development credits which do not expire. The Company also has $0.5 million of California Enterprise Zone Credits which expirebeginning in 2023 if not utilized, and $1.6 million of other state tax credits which expire beginning in 2024 if not utilized. Utilization of the Company’s net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership changelimitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration or elimination of thenet operating loss and tax credit carryforwards before utilization. Management believes that the limitation will not limit utilization of the carryforwards priorto their expiration.The Company acquired U.S. federal net operating loss carryforwards of Scout Analytics, Inc. upon the acquisition of that entity in January 2014, subject tothe ownership change limitations. Acquired U.S. federal net operating losses from Scout total approximately $30.2 million net of amounts unavailable due toownership change limitations, which is included in the total U.S. federal net operating loss above.The Company files U.S. federal and state and foreign income tax returns in jurisdictions with varying statutes of limitations. In the normal course of businessthe Company is subject to examination by taxing authorities throughout the world. These audits could include examining the timing and amount ofdeductions, the allocation of income among various tax jurisdictions and compliance with federal, state, local and foreign tax laws. Our 2005 through 2016tax years generally remain subject to examination by federal, state and foreign tax authorities.The Company has implemented the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes. A reconciliation of the beginning and endingamount of unrecognized tax benefits is as follows (in thousands): For the Year Ended December 31, 2017 2016 2015Beginning balance$926 $937 $948Additions based on tax positions related to the current year1 24 62Reductions for tax positions of prior years5 (35) (73)Ending balance$932 $926 $937As of December 31, 2017, the Company had a liability for unrecognized tax benefits of $0.9 million, none of which, if recognized, would affect theCompany’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the year ended December 31,2017, the interest and penalties recognized were insignificant. During the years ended December 31,70Table of Contents2016 and 2015, the Company recognized and accrued an insignificant amount of interest or penalties related to unrecognized tax benefits.12. Geographical InformationThe Company’s business is geographically diverse. During 2017, 63% of net revenue was earned in North America and Latin America (“NALA”), 26% inEurope, Middle East and Africa (“EMEA”) and 11% in Asia Pacific-Japan (“APJ”). Net revenue for a particular geography generally reflects commissionsearned from sales of service contracts managed from revenue delivery centers in that geography and subscription sales and professional services to deploy theCompany's solutions. Predominantly all of the service contracts sold and managed by the revenue delivery centers relate to end customers located in the samegeography. All of NALA net revenue represents revenue generated in the U.S.The CEO manages and allocates resources on a company-wide basis as a single segment that is focused on service offerings which integrate data, processesand cloud technologies.Net revenue by geographic region, is summarized as follows (in thousands): For the Year Ended December 31, 2017 2016 2015Net revenue NALA$151,015 $163,371 $166,511EMEA60,941 62,479 59,708APJ27,171 27,037 25,984Total net revenue$239,127 $252,887 $252,203During the year ended December 31, 2017, the Company's top ten clients accounted for 66% of our net revenue. Three of our clients, Cisco, VMWare, andDell, represented 15%, 12% and 11% of our revenue, respectively, for the year ended December 31, 2017.The majority of the Company’s assets as of December 31, 2017 and 2016 were attributable to its U.S. operations. Property and equipment information isbased on the physical location of the assets. The following table presents the long-lived assets, consisting of property and equipment, by geographic location(in thousands): For the Year Ended December 31, 2017 2016NALA $24,520 $28,916EMEA 2,189 2,297APJ 7,410 6,967Total property and equipment, net $34,119 $38,18071Table of Contents13. Restructuring and OtherIn May 2017, the Company announced a restructuring effort to better align its cost structure with current business and market conditions, including aheadcount reduction and the reduction of office space in four locations. The restructuring plan is accounted for in accordance with ASC 420, Exit or DisposalCost Obligations. The Company recognized restructuring and other charges of approximately $7.3 million during the year ended December 31, 2017.Severance and other employee costs include stock compensation related to the accelerated vesting of certain equity awards, severance payments, relatedemployee benefits and employee-related legal fees. Lease and other contract termination costs include charges related to lease consolidation andabandonment of spaces no longer utilized and the cancellation of certain contracts with outside vendors. Asset impairments include charges related toleasehold improvements and furniture in spaces vacated or no longer in use. The Company expects to incur additional restructuring charges in the first half of2018 related to the relocation and decommissioning of our current San Francisco office space. Future cash outlays related to restructuring activities areexpected to total approximately $1.8 million. These amounts are reported in “Accounts payable, Accrued compensation and benefits and Accrued expenses"in our Consolidated Balance Sheet as of December 31, 2017.Restructuring and other reserve activities are summarized as follows (in thousands): Severance andOther EmployeeCosts Lease and OtherContractTerminationCosts Asset Impairments TotalRestructuring and other liability as of December 31, 2016$— $— $— $—Restructuring and other charges3,483 2,939 886 7,308Cash paid(3,060) (1,185) — (4,245)Non-cash impairment charges— — (886) (886)Acceleration of stock-based compensation expense in additional paid-incapital(352) — — (352)Restructuring and other liability as of December 31, 2017$71 $1,754 $— $1,82514. Selected Quarterly Financial Data (Unaudited)The following table presents data derived from our unaudited quarterly Condensed Consolidated Statement of Operations data for each quarter during theyears ended December 31, 2017 and 2016. Quarterly amounts may not total to annual amounts due to rounding. For the Quarter Ended Dec. 31, 2017 Sep. 30, 2017 Jun. 30, 2017 Mar. 31, 2017 Dec. 31, 2016 Sep. 30, 2016 Jun. 30, 2016 Mar. 31,2016 (in thousands, except per share amounts)Net revenue$66,024 $58,132 $58,262 $56,708 $68,654 $62,514 $61,969 $59,750Gross profit$24,044 $17,329 $18,745 $15,299 $26,152 $21,725 $21,625 $18,316Income (loss) from operations$531 $(4,636) $(10,338) $(9,264) $(2,168) $(3,712) $(3,269) $(6,344)Loss before income taxes$(1,800) $(5,375) $(12,984) $(11,334) $(7,572) $(8,303) $(4,969) $(7,853)Net income (loss)$74 $(5,195) $(13,101) $(11,624) $(8,496) $(9,271) $(5,218) $(9,141)Net loss per common share: Basic and diluted$0.00 $(0.06) $(0.15) $(0.13) $(0.10) $(0.11) $(0.06) $(0.11)72Table of Contents15. Subsequent EventsGAAP requires an entity to disclose events that occur after the balance sheet date but before financial statements are issued or are available to be issued(“subsequent events”) as well as the date through which an entity has evaluated subsequent events. There are two types of subsequent events. The first typeconsists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimatesinherent in the process of preparing financial statements, (“recognized subsequent events”). The second type consists of events that provide evidence aboutconditions that did not exist at the date of the balance sheet but arose subsequent to that date (“nonrecognized subsequent events”). No significantrecognized or nonrecognized subsequent events were noted other than those mentioned in “Note 8 - Commitments and Contingencies.”73Table of ContentsITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. ITEM 9A.CONTROLS AND PROCEDURESEvaluation of disclosure controls and proceduresUnder the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted anevaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K.In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls andprocedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits ofpossible controls and procedures relative to their costs.Based on management’s evaluation, our chief executive officer and chief financial officer concluded that as of December 31, 2017 our disclosure controlsand procedures are designed to, and are effective to, provide at a reasonable assurance level that the information we are required to disclose in reports that wefile or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and ExchangeCommission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer andchief financial officer, as appropriate, to allow timely decisions regarding required disclosures.Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financialofficer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the guidelinesestablished in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Ernst and Young LLP, an independentregistered public accounting firm, as stated in its report which is included herein.Changes in Internal Control over Financial ReportingThere was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2017 that has materially affected, oris reasonably likely to materially affect, our internal control over financial reporting.Inherent Limitations on Effectiveness of ControlsOur management, including our chief executive officer and chief financial officer, do not expect that our disclosure controls or our internal control overfinancial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation ofcontrols can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherentlimitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake.Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of thecontrols. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate becauseof changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not be detected.Report of Independent Registered Public Accounting FirmTo the Stockholders and Board of Directors of ServiceSource International, Inc.Opinion on Internal Control over Financial ReportingWe have audited ServiceSource International, Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSOcriteria). In our opinion, ServiceSource International, Inc. (the Company) maintained, in all material respects, effective internal control over financialreporting as of December 31, 2017, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedbalance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, stockholders'equity and cash flows for each of the two years in the period ended December 31, 2017, and the related notes and our report dated March 2, 2018 expressedan unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ Ernst & Young LLPDenver, ColoradoMarch 2, 2018 ITEM 9B.OTHER INFORMATIONNone.PART IIIITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEInformation regarding our directors is incorporated by reference from the information contained under the caption “Election of Directors” in our ProxyStatement for our 2018 Annual Meeting of Stockholders (the “2018 Proxy Statement”). Information regarding our current executive officers is incorporatedby reference from information contained under the caption “Executive Officers” in our 2018 Proxy Statement. Information regarding Section 16 reportingcompliance is incorporated by reference from information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our2018 Proxy Statement. Information regarding the Audit Committee of our Board of Directors and information regarding an Audit Committee financial expertis incorporated by reference from information contained under the caption “Board Committees” in our 2018 Proxy Statement. Information regarding our codeof ethics is incorporated by reference from information contained under the caption “Code of Business Conduct and Ethics” in our 2018 Proxy Statement.Information regarding our implementation of procedures for stockholder nominations to our Board of Directors is incorporated by reference from informationcontained under the caption “Process for Recommending Candidates to the Board of Directors” in our 2018 Proxy Statement.We intend to disclose any amendment to our code of ethics, or waiver from, certain provisions of our code of ethics as applicable for our directors andexecutive officers, including our principal executive officer, principal financial and accounting officer, chief accounting officer, and controller, or personsperforming similar functions, by posting such information on our website at http://www.servicesource.com.ITEM 11.EXECUTIVE COMPENSATIONThe information required by this item is incorporated by reference from the information contained under the captions “Compensation Discussion andAnalysis” and “Executive Compensation” in our 2018 Proxy Statement.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSOther than information regarding securities authorized for issuance under equity compensation plans, which is set forth in the Notes to the ConsolidatedFinancial Statements above, the information required by this item is incorporated by reference from the information contained under the caption “SecurityOwnership” in our 2018 Proxy Statement.ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item is incorporated by reference from the information contained under the captions “Related Person Transactions andSection 16(a) Beneficial Ownership Reporting Compliance” and “Director Independence” in our 2018 Proxy Statement.ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item is incorporated by reference from the information contained under the caption “Principal Accountant Fees andServices” in our 2018 Proxy Statement.74Table of ContentsPART IVITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) (1) Financial StatementsConsolidated Financial Statements filed as part of this report are listed under Part II, Item 8, pages [47] through [51] of this Form 10-K.(2) Financial Statement SchedulesNo schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of theschedule, or because the information required is included in the Consolidated Financial Statements or the notes thereto.(3) ExhibitsSee Item 15(b) below. Each management contract and compensatory plan or arrangement required to be filed has been identified.(b) ExhibitsThe exhibits listed on the accompanying Exhibit Index immediately following the signature page are filed as part of, or are incorporated byreference into, this Annual Report on Form 10-K.(c) Financial Statement SchedulesReference is made to Item 15(a)(2) above.ITEM 16.FORM 10-K SUMMARYNone.75Table of ContentsIndex to Exhibits Incorporated by Reference HereinExhibitNumber Exhibit Description Filed and FurnishedHerewith Exhibit Form/File No. Filing Date3.1 Certificate of Incorporation of the Company filed March 24,2011 3.1 Form 8-K(No. 001-35108) April 1,20113.2 Amended and Restated Bylaws of the Company datedMarch 28, 2016 3.2 Form 8-K(No. 001-35108) March 31, 20164.1 Registration and Information Rights Agreement dated as ofDecember 8, 2006, between the Registrant and GA SSHolding LLC, SSLLC Holdings, Inc., Housatonic MicroFund SBIC, LP and Housatonic Equity Investors SBIC, LP 4.1 Form S-1/A(No. 333-171271) February 25,20114.2 Securities Purchase Agreement and Registration RightsSchedule dated as of January 31, 2003, between theRegistrant and the 2003 Holders 4.2 Form S-1/A(No. 333-171271) February 25,20114.3 Specimen common stock certificate of the Registrant 4.3 Form S-1/A(No. 333-171271) March 11,20114.4 Indenture between ServiceSource International, Inc. andWells Fargo Bank, National Association, dated as of August13, 2013 4.4 Form 8-K (No. 001-35108) August 14, 20134.5 Registration Rights Agreement dated as of November 13,2014, by and between the Company and Altai CapitalManagement, L.P. 10.2 Form 8-K (No. 001-35108) November 14,201410.1+ Form of Director and Executive Officer IndemnificationAgreement 10.1 Form S-1(No. 333-171271) December 20,201010.2+ 2004 Omnibus Share Plan and forms of agreementsthereunder 10.2 Form S-1(No. 333-171271) December 20,201010.3+ 2008 Share Option Plan and form of agreement thereunder 10.3 Form S-1(No. 333-171271) December 20,201010.4+ 2011 Equity Incentive Plan and forms of agreementsthereunder 4.4 Form S-8(No. 333-173116) March 28,201110.5+ 2011 Equity Incentive Plan form of Restricted Stock AwardAgreement 10.1 Form 8-K(No. 001-35108) February 10,201210.6+ 2011 Employee Stock Purchase Plan and form of agreementthereunder 4.5 Form S-8(No. 333-173116) March 28,201176Table of Contents Incorporated by Reference HereinExhibitNumber Exhibit Description Filed and FurnishedHerewith Exhibit Form/File No. Filing Date10.7 Form of Convertible Note Hedge Confirmation 10.3 Form 8-K (No. 001-35108) August 9, 201310.8 Form of Warrant Confirmation 10.4 Form 8-K (No. 001-35108) August 9, 201310.9 Employment and Confidential Information Agreement datedas of December 1, 2014, between the Company andChristopher M. Carrington 10.15 Form 10-K/A(No. 001-35108) March 17, 201510.10+ Employment and Confidential Information Agreement datedas of April 6, 2015, between the Company and Robert N.Pinkerton 10.1 Form 10-Q (No. 001-35108) May 8, 201510.11+ Employment Agreement dated as of June 8, 2015 betweenthe Company and Brian Delaney 10.1 Form 10-Q (No. 001-35108) November 6, 201521.1 List of subsidiaries X 23.1 Consent of Ernst & Young LLP X 23.2 Consent of PricewaterhouseCoopers LLP X 31.1 Certification of Principal Executive Officer required by Rule13a-14(a) or Rule 15d-14(a) of the Securities Exchange Actof 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of Principal Financial Officer required by Rule13a-14(a) or Rule 15d-14(a) of the Securities Exchange Actof 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1* Certification of Chief Executive Officer pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002. X 32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 X 77Table of Contents Incorporated by Reference HereinExhibitNumber Exhibit Description Filed and FurnishedHerewith Exhibit Form/File No. Filing Date101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.DEF XBRL Taxonomy Extension Definition Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase +Management contract or compensatory plan or arrangement.*In accordance with Item 601(b)(32)(ii) of Regulation S-K, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompanythis Annual Report on Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not bedeemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrantspecifically incorporates it by reference.SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. SERVICESOURCE INTERNATIONAL, INC. Dated:March 2, 2018 By: /s/ CHRISTOPHER M. CARRINGTON Christopher M. Carrington Chief Executive Officer (Principal Executive Officer)POWER OF ATTORNEYKNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Robert N. Pinkerton and Patricia Elias,and each of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution, each with power to act alone, to sign and execute onbehalf of the undersigned any and all amendments to this Annual Report on Form 10-K, and to perform any acts necessary in order to file the same, with allexhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorney-in-fact and agentfull power and authority to do and perform each and every act and thing requested and necessary to be done in connection therewith, as fully to all intentsand purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their or his or her substitutes, shalldo or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theServiceSource International, Inc. and in the capacities and on the dates indicated. 78Table of ContentsDate Signature TitleMarch 2, 2018 /s/ CHRISTOPHER M. CARRINGTON Chief Executive Officer (Principal Executive Officer) Christopher M. Carrington March 2, 2018 /s/ ROBERT N. PINKERTON Chief Financial Officer (Principal Financial and Accounting Officer) Robert N. Pinkerton March 2, 2018 /s/ ROBERT G. ASHE Director Robert G. Ashe March 2, 2018 /s/ MADHU RANGANATHAN Director Madhu Ranganathan March 2, 2018 /s/ BRUCE W. DUNLEVIE Director Bruce W. Dunlevie March 2, 2018 /s/ RICHARD G. WALKER Director Richard G. Walker March 2, 2018 /s/ THOMAS F. MENDOZA Director Thomas F. Mendoza March 2, 2018 /s/ GARY B. MOORE Director Gary B. Moore March 2, 2018 /s/ BARRY D. REYNOLDS Director Barry D. Reynolds 79Exhibit 21.1SUBSIDIARIES OF SERVICESOURCE INTERNATIONAL, INC.SUBSIDIARIES STATE OR OTHER JURISDICTION OFINCORPORATION OR ORGANIZATIONServiceSource International, Inc. DelawareServiceSource Delaware, Inc. DelawareServiceSource Europe, Ltd. IrelandSSI Europe UK Limited United KingdomServiceSource International Singapore Pte. Ltd. SingaporeServiceSource International Malaysia SDN. BHD. MalaysiaServiceSource International Japan G.K. JapanServiceSource International Philippines, Inc. PhilippinesServiceSource International Bulgaria EOOD BulgariaExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the following Registration Statements: (1)Registration Statement (Form S-8 No. 333-173116) pertaining to the:•ServiceSource International, Inc. 2011 Equity Incentive Plan•ServiceSource International, Inc. 2011 Employee Stock Purchase Plan•ServiceSource International, LLC 2008 Share Option Plan•ServiceSource International, LLC 2004 Omnibus Share Plan(2)Registration Statement (Form S-8 No. 333-181104) pertaining to the:•ServiceSource International, Inc. 2011 Equity Incentive Plan•ServiceSource International, Inc. 2011 Employee Stock Purchase Plan(3)Registration Statement (Form S-8 No. 333-188652) pertaining to the:•ServiceSource International, Inc. 2011 Equity Incentive Plan•ServiceSource International, Inc. 2011 Employee Stock Purchase Plan(4)Registration Statement (Form S-8 No. 333-194440) pertaining to the:•ServiceSource International, Inc. 2011 Equity Incentive Plan•ServiceSource International, Inc. 2011 Employee Stock Purchase Plan(5)Registration Statement (Form S-8 No. 333-202809) pertaining to the:•ServiceSource International, Inc. 2011 Equity Incentive Plan•ServiceSource International, Inc. 2011 Employee Stock Purchase Plan(6)Registration Statement (Form S-8 No. 333-210014) pertaining to the:•ServiceSource International, Inc. 2011 Equity Incentive Plan•ServiceSource International, Inc. 2011 Employee Stock Purchase Plan(7)Registration Statement (Form S-8 No. 333-216472) pertaining to the:•ServiceSource International, Inc. 2011 Equity Incentive Plan•ServiceSource International, Inc. 2011 Employee Stock Purchase Planof our reports dated March 2, 2018, with respect to the consolidated financial statements of ServiceSource International, Inc. and the effectiveness of internalcontrol over financial reporting of ServiceSource International, Inc. included in this Annual Report (Form 10-K) of ServiceSource International, Inc. for theyear ended December 31, 2017./s/ Ernst & Young LLPDenver, ColoradoMarch 2, 2018Exhibit 23.2CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-188652, No. 333-181104, No. 333-173116, No.333-194440, No. 333-202809, No. 333-210014 and No. 333-216472) of ServiceSource International, Inc. of our report dated March 8, 2016, except withrespect to our opinion on the consolidated financial statements insofar as it relates to the effects of the revisions, the change in composition of reportablesegment and the manner in which the Company accounts for debt issuance costs described in Note 2 to the consolidated financial statements appearing underItem 8 of the Company’s 2016 annual report on Form 10-K, as to which the date is March 6, 2017 relating to the financial statements, which appears in thisForm 10-K./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaMarch 2, 2018Exhibit 31.1CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Christopher M. Carrington, certify that:1.I have reviewed this Annual Report on Form 10-K of ServiceSource International, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlsover financial reporting. Dated:March 2, 2018 By: /s/ CHRISTOPHER M. CARRINGTON Christopher M. Carrington Chief Executive Officer (Principal Executive Officer)Exhibit 31.2CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Robert N. Pinkerton, certify that:1.I have reviewed this Annual Report on Form 10-K of ServiceSource International, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlsover financial reporting.Dated:March 2, 2018 By: /s/ ROBERT N. PINKERTON Robert N. Pinkerton Chief Financial Officer(Principal Financial Officer)Exhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, Christopher M. Carrington, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, thatthe Annual Report of ServiceSource International, Inc. on Form 10-K for the fiscal year ended December 31, 2017 fully complies with the requirements ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such Form 10-K fairly presents, in all material respects, thefinancial condition and results of operations of ServiceSource International, Inc. Dated:March 2, 2018 By: /s/ CHRISTOPHER M. CARRINGTON Christopher M. Carrington Chief Executive Officer (Principal Executive Officer)Exhibit 32.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002I, Robert N. Pinkerton, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that theAnnual Report of ServiceSource International, Inc. on Form 10-K for the fiscal year ended December 31, 2017 fully complies with the requirements ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such Form 10-K fairly presents, in all material respects, thefinancial condition and results of operations of ServiceSource International, Inc. Dated:March 2, 2018 By: /s/ ROBERT N. PINKERTON Robert N. Pinkerton Chief Financial Officer (Principal Financial Officer)

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