eGain - Earnings Call - Q1 2020

Transcript

Speaker 0

Good day and welcome to the eGain Fiscal twenty twenty First Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jim Byers of MKR Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to eGain's first quarter fiscal twenty twenty financial results conference call. On the call today are eGain's Chief Executive Officer, Ashu Roy and Chief Financial Officer, Eric Smith. Before we begin, I would like to remind everyone that during this conference call, management will make certain forward looking statements, which convey management's expectations, beliefs, plans and objectives regarding future financial and operational performance. Forward looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate or similar expressions.

Forward looking statements are protected by Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward looking statements are subject to a wide range of risks and uncertainties that could cause actual results to differ in material respects. Information on various factors that could affect eCain's results are detailed on the company's reports filed with the Securities and Exchange Commission. EGain is making these statements as of today, 11/06/2019, and assumes no obligation to publicly update or revise any forward looking information in this conference call. In addition to GAAP results, we'll discuss certain non GAAP financial measures such as non GAAP operating income.

Our earnings press release can be found on the news release link on the Investor Relations page at eGain's website at www.egain.com. The tables included with the earnings press release include reconciliation of the historical non GAAP financial measures to the most recently comparable GAAP financial measures. And lastly, a replay of this conference call will also be available at the Investor Relations section of website. And now with that said, I'd like to turn the call over to eGain's CEO, Ashu Roy.

Speaker 2

Thank you, Jim, and good afternoon, everyone. We achieved solid performance across the board in q one. This included top and bottom line results that exceeded our guidance and were ahead of Street consensus. And we also generated good cash flow from operations in the quarter. Let me share some financial highlights.

Our SaaS revenue grew 30% year over year. Our subscription revenue grew 13 year over year and comprised about 91% of our total q one revenue. We were GAAP profitable for the quarter with net income of 1,200,000.0 compared to net income of 600,000 in the same quarter of last year. And finally, we generated 2,700,000.0 in cash from operations in the quarter. All in all, very strong numbers and a good start to the year.

Looking at the business, the last quarterly earnings call we did was just a few weeks ago. So what I can tell you, which is all good, that we had nice bookings in the quarter with healthy mix of new customers and expansion opportunities. One of the things I wanna talk about, in terms of sort of market and customer feedback is the experience three sixty event that we had in Chicago, which is our customer event in North America. We had this event on October, and it was very successful. Some of you, attended that event as well.

I would say there are three things I wanna bring out from that event, and they can speak to the state of our business and where we're going. First is around customers, second is around partners, and the third is around products. So at this event, three of our clients presented their journey with eGain. It's fantastic to hear their perspectives. They were different, they were commonalities as well.

So the three of them were Comcast, who need little introduction, Lanzen, many of you know, an iconic, apparel brand, And Northern Trust, a global wealth and asset management leader. Comcast, when they presented, they highlighted the speed and scale at which they have consumed innovation on the e n platform. Over the last couple of years, they have aggressively been able to shift their customer care volume from voice to digital, primarily for their Xfinity business, and that includes a lot of products. In that business, they see a 15 to 20 points Net Promoter Score advantage from when they compare their digital customer service and their voice based customer service. So the same customers, when they get digital customer care, their Net Promoter Scores are about 15 to 20 points better in voice.

And as Eric Burton, who's the VP of Comcast who presented, he put it, if that 15 NPS advantage is not worth getting out of bed for, I don't know what is. And we completely agree. That that customer experience advantage is phenomenal, and big companies like Comcast are recognizing that they can get tremendous improvement in customer experience and customer staff just by delivering customer care digitally rather than on voice. That is on top of the significant cost advantages of digital over voice, which runs to about two x improvement in a typical scenario, which is based on messaging and chat over voice. Then Lanzen talked about how they are expanding their digital customer service, and they're adding virtual assistance and messaging all on the eGain platform.

This is on top of the current capabilities that they have around knowledge and guidance and chat and email based service from eGain. They also shared their strategy of delivering convenience and choice in an omnichannel world. And finally, Northern Trust shared their story of a global deployment v game for digital customer care and the results they saw quantitatively in better service levels, productivity, and customer sat. They also outlined the intent to further expand their omnichannel service options on the eGain platform. What we saw and what we heard, I mean, they were great customer successes and great stories, and we we were very grateful to our clients for sharing those.

What we saw as a common theme across these clients was, first of all, their strategic commitment to a modern digital first customer engagement. And second, they focus on consuming innovation at speed and scale. And as eGain, we being the partner of choice in these cases, What we see is that our solution stands apart from the market in terms of its connected richness and ease of implementation. And our clients experience it, and our prospects learn about it when we do our risk free trial of innovation in thirty days. That was a very nice view of what we saw customers reflecting what they felt was the value they got for their money from Egan and the partnership that we brought to the table.

Turning to partners, at the event, all three of our contact center technology partners, Cisco, Avaya, and Amazon, participated, which is great. It was very heartening to see positive and enthusiastic attendee interest in their joint proposition and our solution with them. With increased sales investment in channel led growth, as we have indicated to investors in the past, we are starting to see a nice pipeline growth, and we expect this trend to continue through the rest of the year. Finally, as we announced in our press release as well, we launched some exciting new capabilities on our cloud platform as part of our fall twenty nineteen release. I'll run through the important ones.

The first one was eGain messaging hub. This enables businesses to rapidly engage with their customers across all messaging channels, including Apple Business Chat, SMS, WhatsApp, Facebook, and others. Using the hub, they can effortlessly launch new ways of connecting with their customers either proactively outbound or interactive messaging, which is chat based. And all these interactions leverage our eGame AI technology and virtual assistance to deliver smart self-service. There are other companies in the marketplace who offer such messaging hubs, but almost all of them that we know of are point tools.

And businesses end up having to glue it all together with their knowledge and AI assets. Our solution comes with a capability, all these dots preconnected, available in one place. Simple, powerful. Next capability we announced, which was very exciting, was virtual assistant for agents. We've been selling and marketing virtual assistants for self-service for customers, but this is more applicable to the agents such that the virtual assistant monitors the digital conversations on the agent desktop and then serves up best practice guidance and knowledge when relevant.

Our clients love the idea of prompted relevant guidance so that their agents can focus on working with customers and helping them, more like a GPS, if you will. Next announcement that we have, and we have a plethora of things and we're very proud of them, was a new way of looking at applying and solutioning using our technology for sales, not just for service. This week, I'll be again sales adviser. You recall, we brought Evan Segal, a banking industry veteran, on board earlier this year. This was about seven months ago.

His mandate was to pursue new new growth initiatives, starting with our number one vertical, which is financial services. In six months, he successfully led a small team internally to conceive and build the eGain sales adviser, which helps guide and coach sales agents in an easy best practice driven manner while ensuring compliance in the sales process. In short, makes all your sales agents as good as your best sales agent with process guidance. Interest in this solution from the attendees of the conference was phenomenal. And now Evan and team have secured a pilot plan.

So we've off the races, and the pipeline is building. So very exciting to see us extending out our core technology and core capability to serve the sales side of the house in our business clients, not just service, which is where we are today. Moving to the optimized layer of our platform, we announced two capabilities. One was analytics for Amazon Connect, which is a Amazon Connect is one of our key contact center partners, as we know. And that's a rich solution for omnichannel analytics on the voice side of Amazon Connect.

And finally, we announced our IVR analytics capability. This is a clever solution in our view because it leverages our core technology and analytics, but it addresses a unmet need in the market around the

Speaker 0

one

Speaker 2

of the largest pools of customer engagement that most businesses engage in today, and that is IVR, where roughly three out of every four calls into a business for customer care end up in IVR, either getting resolved or getting abandoned. And most businesses that we have talked to and in the market have no idea about what goes on in those 75% of the voice calls. Four questions people want to know. Who calls them and why do they call them? What's their experience in IVR?

And when they escalate, what happens? And our solution for IVR analytics enables these businesses to understand that behavior and then assess the experience. We don't know of any other product in the market. There may be some point tools, but not nothing that is part of a platform like ours that addresses this important piece of the engagement puzzle. All these innovative capabilities now with leading edge features, all connected and available on a common platform with the ease and richness that's unique to eGain.

Moving forward, this year, we as you have known, we are systematically ramping our sales investments. We are up to close to about 30% of our top line now going into sales and marketing for q one. We shared under that. And all of it leveraged by channel. So we continue to systematically hire and onboard people for the three layers of investment that we're making.

Marketing first, followed by channel, and finally, sales heads will respond to the demand that we generate. So we are quite enthusiastic about accelerating our SaaS growth in this year. With that, I'll ask Eric Smith, our Chief Financial Officer, to add more color around financial operations. Eric? Great.

Thanks, Ashu. As Ashu noted, we achieved top and bottom line results that exceeded our guidance and were ahead of Street consensus, and we generated strong cash flow from operations in the quarter. Looking at the financial highlights for Q1, SaaS revenue was up 30% year over year

Speaker 3

and 33% in constant currency. Our non GAAP gross margins were 70% for the quarter, an improvement both sequentially and year over year. Non GAAP net income was $1,700,000 or $06 per share on a basic and $05 per share on a diluted basis, up from non GAAP net income of $1,200,000 or $04 per share a year ago. And we generated $2,700,000 in cash from operations during the quarter, a cash flow margin of 16%. Looking at our quarterly results in more detail, total revenue in Q1 was 17,200,000.0 up 9% year over year or 4% in constant currency.

Subscription revenue was $15,600,000 or 13% year over year, 16% in constant currency, and accounted for 91% of total revenue, up from 87% a year ago. Looking at the revenue components, SaaS revenue was $12,400,000 or 30% year over year and accounted for 72 percent of our total revenue in Q1. The trailing twelve month SaaS retention rates remained healthy with gross retention in the mid to low 90% range and the net retention, including upsell and uplift, north of 100% consistent with last quarter. Legacy revenue was 3,200,000 down 24% from the year ago quarter. Legacy accounted for 18% of total revenue in Q1, down from 26% in the year ago quarter.

As we have noted on past calls, we are driving a more accelerated transition of our on premise customers to our cloud offering, and as such, we expect to see a faster decline in legacy revenue over the next several quarters. We are targeting legacy revenue to decrease to less than 10% of total revenue by the end of calendar twenty twenty. With this accelerated transition, we are seeing our legacy retention rates come down slightly to the mid-eighty percent range. Professional services revenue was $1,600,000 or 10% of total revenue, which is down 18% from $2,000,000 or 13% of total revenue in the year ago quarter. As we have noted before, our goal was to get our peers revenue into the low double digit or high single digit as a percentage of total revenue range.

Now that we have achieved this goal, we would expect our PS revenue to remain in this range as a percentage of total revenue going forward. Now looking at our non GAAP gross profits and gross margins. Gross profit for the first quarter was $12,000,000 or a gross margin of 70%, up from a gross profit of $10,600,000 or a gross margin of 68 a year ago. The year over year increase in the overall gross margin reflects a combination of the benefits we are seeing in the scale and efficiencies around cloud operations and the growth in our high margin SaaS revenue, while our lower margin TS revenue declines. Now turning to operations.

Non GAAP operating costs for the first quarter came in at $10,400,000 compared to $9,300,000 in the year ago quarter, with increased investments in sales and marketing and product development as the primary drivers for this increase. Overall, this resulted in non GAAP operating income in the first quarter of $1,600,000 with an operating margin of 9% compared to $1,400,000 or a margin of 9% in the year ago quarter. Looking at net income, non GAAP net income for the first quarter was $1,700,000 or $06 per share on a basic and $05 per share on a diluted basis. This compares to non GAAP net income of $1,200,000 or $04 per share on a basic and diluted basis in the year ago quarter. GAAP net income for the first quarter was $1,200,000 or $04 per share compared to GAAP net income of $604,000 or $02 per share in the year ago quarter.

Now turning to our balance sheet and cash flows. Total cash and cash equivalents as of September 3039, was $34,400,000 compared to $31,900,000 at June 3039. During the quarter, we generated cash flow from operations of 2,700,000 compared to $3,300,000 in Q1 last year. Now turning to our guidance. For fiscal twenty twenty full year ending 06/30/2020, we are reiterating our previously provided guidance for SAT revenue of $53,800,000 to $55,400,000 on a constant currency basis, which represents growth between 2024% year over year and for total revenue of $73,000,000 to $73,600,000 on a constant basis, representing growth between 710% year over year.

We expect to generate non GAAP net income of between breakeven to $2,000,000 or $0.00 to $06 per diluted share. And we assume a diluted share count of $32,600,000 for the fiscal year. Looking at the foreign exchange impact of the pound to the dollar on our first quarter results, You can see the impact accounted for approximately $300,000 difference in our Sets revenue and about a $400,000 difference in total revenue for Q1. Looking ahead, given the strength in the pound to the U. S.

Dollar so far this quarter, if it should remain at this level, we don't anticipate a significant FX impact on our results for the remainder of the year. Now looking to the fiscal twenty twenty second quarter, we expect SaaS revenue of between 13,300,000 to $13,700,000 and total revenue of $17,200,000 to 17,700,000.0 We expect to generate non GAAP net income of $200,000 to $700,000 or $01 to $02 per diluted share. We have assumed a diluted checkout of $32,000,000 for the second fiscal quarter. Adding further color to our Q2 guidance, we expect to see less of a seasonal impact benefiting our SESS revenue this Q2 than we saw last year. This is a function of an increase in our base level business and the way certain of our agreements have evolved, which is expected to reduce overages that boosted our Q2 results last year.

But rather than a significant spike in Q2, followed by a decline in our third and fourth quarters, we expect to see a more linear improvement in our SaaS revenue through the remainder of the year, which we view as a positive change. Lastly, on the Investor Relations front, Egan will be participating in two upcoming investor conferences next week. We will be participating in the Craig Hallum Annual Alpha Select Conference taking place November 12 in New York. And the following day, we will be participating in the Roth Technology and Cleantech Conference on November 13, which is also in New York. We hope to see some of you there.

This concludes our prepared remarks. Operator, we will now open the call for questions.

Speaker 0

We'll go first to Ryan MacDonald with Needham.

Speaker 4

Yes. Good evening, Ashu and Eric. Thanks for taking my questions. Congrats on the strong first quarter numbers. I guess, first off, in terms of the guidance you provided, Eric, know you made some comments about maybe some impacts throughout the year or some changes here.

But I guess the guidance right now at the high end assumes a flat year over year growth to maybe slightly down. Can you talk about maybe what some of the moving parts of that guidance are? And I think it also assumes in the SaaS growth guidance a bit of a deceleration into maybe the mid teens there. So would love to hear some more color on that if possible. Thanks.

Speaker 3

Just to confirm, Arran, you're referring to the Q2 numbers. Is that Yes, the Q2 numbers. Yes. So I think if you recall, last year, we mentioned on the call approximately a $900,000 benefit from seasonal onetime revenue. That as I had mentioned in my prepared remarks that as certain of these contracts have evolved, we are instead looking to see more sequential improvement in the growth of the SaaS revenue as opposed to, as I've mentioned, if you look at last year, we saw a huge spike and actually then decreases in the revenue that followed.

So as I've mentioned, we've sort of maintained the guidance for the year. But instead of being sort of more front end loaded into Q2, we would expect to see that growth rate continue throughout the year, if that makes sense.

Speaker 4

Yes, that's helpful. Thank you. And then in terms of the, I guess, the planned investments, can you talk about how you're tracking to internal plan on sort of that increased level investment on sales and marketing and R and D? And sort of how we should expect the cadence of the additional investment to play out through the remainder of the year?

Speaker 2

Sure. This is Ashu here, Ran. So yes. So we talked about increasing our sales and marketing investment to a certain level, and I think we are right around that level for Q1. I think we'll continue to see the increases that we have indicated leading up.

I think that we probably will exit Q4 around the 35% level is my sense of sales and marketing investment as a percentage of revenue. Now that's not going to go jump up to 35% instantly, but that's the trajectory that we are on.

Speaker 3

And I think one more point to add, Ryan, just that there is an element of seasonality in the sales and marketing spend. So for Q2, where we've had the customer events that Ashu spoke about, you know, we'd certainly see to more increase sequentially from the q one numbers as a result of that.

Speaker 2

Good point. And that applies to the q four as well because we do a significant event in London. So q two and q four, you see those spikes on the marketing side.

Speaker 4

Got it. Got it. Thank you. And then I guess just one more for me. In terms of the the migration or accelerated migration of customers to get them over to the cloud, I know you mentioned you want to have that sort of done by the end of the calendar year 2020.

How should we think about sort of the pace of those migrations, I guess, through the remainder of the fiscal year here?

Speaker 3

I think as we've said in the past, there's going to be somewhat of a step function in it where, you know, we've looked at some of the larger remaining legacy customers as we move them, we would see that step down. So I think, again, timing of these activities is not always that easy for us to predict. But as opposed to it being gradual, we would probably see some fairly steep declines, you know, in one or two quarters.

Speaker 4

Got it. Thank you

Speaker 3

very much. Might see anywhere from several $100,000 decline as a meaningful customer moves. Okay.

Speaker 0

We'll go next to Richard Baldry with Roth Capital.

Speaker 5

Thanks. Sort of curious, the recurring cost line fell sequentially pretty meaningfully, sort of more in line with what you had mid last year. So is there anything unusual in that? Or do you see any step function growth in that ahead? Should we look at this as a new sort of baseline?

Speaker 3

So I think, Rich, the you know, a couple of factors. One, just to reiterate the points about the sales and marketing spend, was generally lighter in Q1. So we would expect to see that pick up again in Q2. And we know that there were some year end costs around our Q4 numbers that drove those costs up higher. So there were certain elements of it that we recorded in Q4.

So I think just to clarify your final points about is there a specific line item or just expenses in general? Just to record on the revenues

Speaker 2

on the what is it?

Speaker 5

Yeah. More focused on the recurring line.

Speaker 3

Got it. Okay. Sorry. So that yeah. I think we'll we'll obviously continue to see that sort of increase as the revenue grows up, but we don't anticipate a dramatic change in the margin profile.

Speaker 2

I'll add a little bit, maybe just color to that. So the recurring line is somewhat sensitive at this scale because, as you know, we use partners for infrastructure as a service, the public cloud with Amazon and Azure. And we we keep working with them to drive better value for us. And so sometimes there is a little bit of a catch up on those that happens. And I think q four may have had some of that catch up element as well.

So

Speaker 5

Okay. And if I look back in the past two years, the the pattern on deferred revenues sort of seasonally has been hard to discern, but it's been growing pretty significantly over the past several quarters on a sequential basis. So how do I think about evaluating the deferred revenue growth from a seasonal perspective? Or is the fact that you're kind of exiting the legacy line going to leave that number more of a sequential grower that gives us an indication of bookings and your future growth rates?

Speaker 3

Yeah. I think as we've said in the past, we're always a little cautious about reading too much into the deferred revenue line just given the the timing of the renewals as they come in and, you know, for customers as a multiyear renewal that's replaced by a single year renewal. So, yeah, at this point, I'm not sure if we can provide any further insights into it at this stage.

Speaker 5

And then, your balance sheet's been improved for a couple quarters now. So I'm sort of curious if you can talk about whether that's had any impact on your pipeline, your ability to engage with, you know, larger customers to attract, higher end employees, change your win rates in competitive deals? Sort of what's your takeaway from that after a few quarters? Thanks.

Speaker 2

It's a good question. It's hard to correlate that with improved win rates right now is my assessment. Looks positive. Customers like it. We hear good things from them.

A couple of customers at the conference in Chicago commented about the fact that we have strong balance sheets now. So, I mean, that's sort of the level at which I see as a positive, but I couldn't put my finger on it and say that we have had this much percentage increase. That's one element. And second part around company confidence and our ability to execute through growth initiatives, that is definitely there. That has changed materially.

Some of the investments we're making on the sales and marketing side, we know that we can sustain it, and we will work through, the sort of the the growing, phase to get to a very, sort of effective, scalable result at the end of it. So I feel like the internal impact is very positive and and clear to me. The the external one is there, but I I feel like it's not something I can quantify.

Speaker 3

And I think the only point I would add is that certainly prior to the improved balance sheet, I had frequent requests from salespeople to participate in due diligence calls around the financial viability. And certainly, the financing, I have not had one single call of that nature.

Speaker 5

And last one would be if if we look at the growth in the SaaS revenue sequentially from the June to September, it's almost two to three x the dollar sequential growth you saw in the year prior period. So I'm sort of curious if you can talk about, is that a material step up to sort of your sales productivity? Is it maybe a go live timing issue that we shouldn't think about as as, you know, sort of, like, sort of an outlier execution given, you know, it's dramatic improvement year over year? Thanks.

Speaker 2

So I think, largely, we should attribute it to this timing of deals earlier in the quarter. And sometimes it happens, as you know. Deals slip from prior quarters and some large ones happened earlier in the quarter. I think that's probably the most significant factor. Booking something good, but not I I wouldn't say that that's the single biggest driver.

Speaker 5

Thanks. Congrats on a good start. Thank you.

Speaker 0

We'll go next to Jeff Van Rhee with Craig Hallum Capital Group.

Speaker 6

Hey, guys. This is Rudy on for Jeff. A couple for me. One, I think you said last quarter, in terms of the new bookings in Q4, it was about a little over 60% from existing, little under 40% from new. I'm curious how that was in this quarter.

And then in terms of the pipeline, just as you look over the last three to six months, what sort of products have been driving the pipe? I know you touched a little bit on the sales adviser driving some good pipeline so far, but if you could just touch on on the products driving the pipeline.

Speaker 2

So sorry, Jeff. I got the first question. Can you just repeat the second question, please?

Speaker 6

Yeah. Yeah. Secondly, on on the pipeline,

Speaker 3

what what products have you

Speaker 6

had rank order, you know, the top couple, are driving driving growth in the pipeline?

Speaker 2

Okay. Gotcha. Okay. So, the first one yeah. The the the percentage of the same versus new or new versus existing is materially similar, I would say, for the q one as well, probably in that low sixties for, the existing expansions and and the the rest for new.

For the numb the products that are driving the growth, we are seeing more and more now that the expansion sales are happening with all ours, like, the suite of capabilities. So a lot bundle of solutions on the expansion side. On the new side, knowledge and AI are clearly, the one the top one. And the second one is is messaging and and digital. So those are the top two entry points we are seeing in new logos.

Speaker 6

Got it. And and then on the, on the investments in SMM, I know one's marketing, two's channel, how much, direct capacity do you do you think you guys are are gonna add, say, in the next twelve months or throughout the remainder of this year?

Speaker 2

On the sales side, you mean?

Speaker 6

Yeah. Direct in terms of direct sales capacity or direct sales.

Speaker 2

Yeah. Yeah. Yeah. We're probably gonna be adding, let's say, 30% or so of sales capacity. Got it.

Okay. But the investment incrementally on the channel and marketing will be, higher in percentage terms because we think that that's a bigger leverage for us.

Speaker 6

Got it. Helpful. Thank you. That's it for me. Sure.

Speaker 0

And at this time, I show no further questions.

Speaker 3

Okay. Thanks, everybody. I appreciate you listening, and hopefully, we'll get to see some of you in New York next week.

Speaker 2

Thank you.

Speaker 0

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.