eGain - Earnings Call - Q2 2020
February 6, 2020
Transcript
Speaker 0
Good day, and welcome to the eGain Fiscal twenty twenty Second Quarter Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Jim Byers at MKR Investor Relations. Please go ahead.
Speaker 1
Thank you, operator, and good afternoon, everyone. Welcome to eGain's second quarter fiscal twenty twenty financial results conference call. On today's call 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 and could cause actual results to differ in material respects. Information on various factors that could affect eGain's results are detailed in the company's reports filed in the with the Securities and Exchange Commission. EGain is making these statements as of today, 02/06/2020, and assumes no obligation to publicly update or revise any of the forward looking information in this conference call. In addition to GAAP results, we will discuss certain non GAAP financial measures such as non GAAP operating income.
Our earnings press release can be found on the news release link in 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 directly comparable GAAP financial measures. 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 are quite pleased with our financial results for the second quarter. Both on the top line and the bottom line, we exceeded our guidance and were ahead of, street consensus, And we saw solid growth in SaaS revenue both sequentially and year over year. We also continue to rapidly march toward a SaaS only business model. In fact, fast plus professional services revenue, which is essentially our go forward business, represents 87% of our total revenue in q two.
This is up from 77% of total revenue in the same quarter last year. So good progress. And our SaaS plus professional services revenue grew 16% this quarter year over year. As we drive our legacy customers actively to adopt our SaaS solution even at the risk of attrition, sometimes, We have talked about this for a few quarters now. Going forward, we believe this is the the relevant top line number, which is fast plus professional services revenue, the relevant top line number for our business.
So we focus on that from a growth and value standpoint. Looking at business in the quarter, our customer health remains strong. We booked good business in the quarter as well across new logos and existing customers. One of our exciting new logos last quarter was a very large retailer, where we partnered with Cisco. Turning to the market, we see a couple of trends in terms of vertical and geography.
On the positive, financial services continue to be our number one vertical as always, and they're growing fast. Especially in The US, financial services clients are investing heavily in customer engagement and intelligent self-service. On the negative, we see Europe slowing down in terms of technology investment. Given the strength, we anticipate increased attrition risk in our European customer base. Accordingly, we are investing more in the financial services vertical and more so in The US than in Europe.
Our sales and marketing investment, as you may have seen, stands at 26% of revenue in q two. With continued hiring and increased marketing, we expect it to move closer to 30% in q three and then move up into the low 30% range in q four. As we have mentioned before, our sales and marketing investment falls in three buckets. First, customer success, which includes customer success teams partnering closely with our expanding professional services team to deliver continuous value to our SaaS customers. Second, demand generation, which includes more marketing, both people and programs, as well as expanded partner recruiting enablement and training.
And third, a sales capacity expansion, both inside and free. So we're tracking nicely to the growth plan in terms of increased investment in sales and marketing across these three, threats. The next topic I want to share an update on is our progress on go to market around our new sales adviser solution. As you all know, we launched the sales adviser solution to very good reception last October in Chicago. Since then, market feedback has been very encouraging and broad based across mega banks, regional banks, credit unions, mortgage funds, insurance companies, and fintechs, so very broad based.
In fact, our team led by Evan Evan Siegel has conducted over 25 demos to interested prospects in the last three months, including the holidays. Solution is also attracting good conversations and interest with virtually focused teams in both large and mid sized SI and consulting organization. These are potential partners for us. They are interested in our solution because they are looking to provide interesting approaches to c suite clients who they are advising on how to move the growth needle. It's an interesting approach for us to be relevant in these c suite conversations working with some of the partners.
What we are hearing consistently is that our sales adviser solution is addressing three outstanding strategic pain points. Number one, sales effectiveness. How do you drive it up? Second, compliance adherence. How do you ensure it better?
And in an auditable, provable way. And third, operationalizing the what is now almost a universal corporate mission in fintech and financial services companies of improving customer financial health, quote unquote. So these three pain points are strategic. They seem to be getting broad based, and we seem to be addressing them in a way that is quite compelling and differentiated compared to what is available out there. That's what we hear.
So we have now landed 200 customers, both in the SMB area because their decision making is faster, as you know. Interestingly, both of those, we are in direct relationship and conversation with the CEO of the two clients. They are the sponsors of our engagement. And now our team is actively deploying the solution. Overall, sales focused customer engagement, which is what sales advisor is, is proving to be a natural extension of our current business, which is centered around customer service.
We are super excited about the potential. Third and finally, I wanna share an update around our partnership with Avaya. Today, we announced that we have entered into an OEM agreement with Avaya, which will enable Avaya to offer our cloud based digital engagement capabilities, branded Avaya to Avaya Workspace for Elite customers. This solution is currently slated to be generally available later this quarter. Avaya announced this capability at their customer event, Avaya Engage in Phoenix, earlier this week.
We are thrilled about this agreement. We see this as a very nice opportunity to jointly serve Avaya clients with integrated best in class solutions across voice and digital. Early interest at the field level in Avaya and their partner ecosystem is strong. We believe this partnership, just like our successful Cisco partnership, will, over time, enable us to serve many more global businesses with rich easy solutions that we offer. As market analysts and our customers tell us, our solutions are best in class in terms of feature, usability, scale.
What we are focused on now with an example of this Avaya partnership and, of course, our successful Cisco partnership is to increasingly deliver these cloud based solutions through these partnerships with complementary technology platforms and vehicle systems as well as direct to clients. So we're driving both. With that, I'll ask Eric Smith, our chief financial officer, to add more color around financial operations. Eric?
Speaker 3
Thanks, Ashu. As Ashu noted, we achieved top and bottom line results in Q2 that exceeded our guidance and were ahead of Street consensus. Looking at the financial highlights for Q2, SaaS revenue was up 19% year over year and 13% sequentially. Our non GAAP gross margins were 72% for the quarter, a 300 basis point improvement year over year and well on pace to achieve our long term target of 75%. Non GAAP net income was 2,500,000 or $08 per share, and we generated $5,300,000 in cash from operations during the quarter, a cash flow margin of 29%.
Now looking at our quarterly results in more detail, as we have shifted to 100% SaaS business, essentially all of our Professional Services is now for our SaaS customers. So we believe, as Ashu mentioned, the combination of SaaS revenue and Professional Services revenue is a useful measure to value our business on a forward looking basis. For Q2, our SaaS and Professional Services revenue of $15,900,000 comprised 87% of of our total revenue. This leaves 13% of our total revenue in the legacy bucket, something that we are comfortably tracking to get down to 10% of total revenue on a quarterly basis by the end of calendar twenty twenty. Further, our Q2 SaaS plus Professional Services revenue grew at 16% year over year and on a year to date basis grew 18% year over year.
This highlights our progress towards a long term target model of total revenue growth of between 20% to 25 per year as we increase investment in sales and marketing in line with our plan. Looking at the revenue components, SaaS revenue was $14,000,000 up 19% year over year and accounted for 77% of our total revenue in Q2. While we were up against a tough comp from Q2 last year, given one time 900,000 seasonal benefit we experienced last year. On a sequential basis, revenue grew 13% over Q1. And year to date, SaaS revenue is up 24% year over year.
As expected, the seasonal impact was down significantly when compared to a year ago. The amount of seasonal benefits we estimate to be approximately $150,000 in this quarter. When looking at the sequential growth rates, the primary drivers lumped into three categories. We saw new bookings, expansion of our installed base and the migration of a large legacy customer to SaaS. Our renewals and retentions continued to be positive in the quarter.
The trailing twelve month SaaS retention rate remained healthy with gross retention in the low 90% range. And our net retention, which includes upsell and uplift, continued to be above 100%. Legacy revenue was $2,300,000 down 42% from the year ago quarter, driven primarily by the large customer migration. And legacy accounted for 13% of our total revenue in the quarter. And as we've noted on past calls, we are driving the transition of our remaining on premise customers to our SaaS offering.
And as such, we expect to see a further decline in legacy revenue over the next several quarters. Professional services revenue was $1,800,000 or 10% of total revenue, down 4% from $1,900,000 As we've noted before, our goal was to get our peers' revenue in the high single digits as a percentage of total revenue. Now that we've achieved this goal, we would expect our peers 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, we saw a healthy improvement in our margins in Q2. Gross profit for the second quarter was $13,000,000 or a gross margin of 72%, up from a gross profit of 12,300,000 or a gross margin of 69% a year ago.
This 300 basis point improvement year over year in our overall gross margin reflects a combination of the benefits we are starting to see in the scale and efficiencies around our SaaS operations and the growth in our higher margin SaaS revenue, while our lower margin TS revenue has declined. Now turning to operations. Non GAAP operating costs for the second quarter came in at €10,500,000 compared to €9,800,000 in the year ago quarter. We continue to prudently increase our investments in sales and marketing. While the December was quieter in terms of hiring due to the holidays, as Ashu noted, hiring activity has increased and our planned investments is very much underway.
We expect sales and marketing as a percentage of revenue to get close to 30% in Q3, up from 26% in Q2. Our non GAAP operating income in the second quarter was $2,600,000 or an operating margin of 14% compared to $2,500,000 or a margin of 14% in the year ago quarter. Looking at net income. Non GAAP net income for the second quarter was $2,500,000 or $08 per share on a basic and diluted basis. This compares to non GAAP net income of 2,400,000.0 or $09 per share on a basic and $08 per share on a diluted basis in the year ago quarter.
GAAP net income for the second quarter was $2,000,000 or $06 per share compared to GAAP net income of $2,000,000 or $07 per share in the year ago quarter. Turning to our balance sheet and cash flows. Total cash and cash equivalents as of December 3139, $40,300,000 compared to $31,900,000 at June 3039. During the quarter, we generated cash flow from operations of $5,300,000 up significantly from $863,000 in Q2 last year. Our operating cash flow margin improved to 29% for the quarter.
Now turning to our financial outlook and guidance. As Ashu stated, we see a large opportunity for our best in class product offering. With a healthy balance sheet, we are well positioned to increase our investments, particularly around sales and marketing to support financial opportunities with our installed base, new business through partners and ramping our inside sales. Before providing our revenue guidance, a few points to highlight. First, we are excited about the Avaya announcement, but have not factored it into our FY 2020 guidance.
As expected, our Q2 seasonal increase was not as great as last year, but we still saw about $150,000 of seasonality that we do not expect to reoccur in Q3. SaaS revenue plus professional services is a metric that is becoming increasingly relevant, and we believe the best measure of the overall growth rate of our core business going forward. And our total revenue will continue to be negatively impacted with our migration, which should drop legacy business below 10% before the end of calendar year 2020. And again, as Ashu mentioned, in EMEA, we are seeing some softness. We expect to see a reduction in some of the accounts that were up for renewal in Q3, and this would impact SaaS revenue by approximately $300,000 in the quarter.
Year to date, the FX impact on our SaaS revenue is a negative $267,000 and for total revenue, a negative $362,000 which we have factored into our guidance. If the U. S. Dollar to British pound exchange rate remains at the current levels, we don't anticipate a significant further impact on the revenue for the remainder of the year. Now on to our guidance.
For the fiscal year ending 06/30/2020, we are increasing the bottom end of our previously provided range for full year SaaS revenue from $53,800,000 up to $54,800,000 The new guidance range for SaaS revenue for the full 2020 is between $54,800,000 to $55,400,000 on a constant currency basis, which would represent growth between 2224% year over year. Further, we expect SaaS and Professional Services revenue of between $61,200,000 and $62,400,000 on a constant currency basis, which would represent growth of between 1820% year over year. We expect total revenue for the full fiscal twenty twenty year to be at the lower end of our previously provided guidance, which was $72,000,000 to $73,600,000 on a constant currency basis, which would represent growth of 7% year over year. And finally, we are raising our previously provided guidance for non GAAP net income of between breakeven to $2,000,000 or $0.00 to $06 per diluted share with the new guidance for the full fiscal year for non GAAP net income of between $3,100,000 to $4,500,000 or $0.10 to $0.14 per diluted share. For the 2020, we are initiating guidance of SaaS revenue of $13,800,000 to $14,100,000 SaaS and Professional Services revenue of $15,500,000 to 15,800,000.0 total revenue of $17,500,000 to $17,800,000 and to generate non GAAP net income of breakeven to $500,000 or $0.00 0 to $01 per diluted share.
We are now assuming a diluted share count of 32,600,000.0 for the third fiscal quarter and for the fiscal year. Lastly, on the Investor Relations front, later this month, Nguyen will be presenting at the JMP Securities Technology Conference taking place February 24 in San Francisco. And then next month, we will be presenting at the fourth Annual ROTH Conference in Orange County, California on March 17. We hope to see some of you there. This concludes our prepared remarks.
Operator, we will now open the call for questions.
Speaker 2
Thank
Speaker 0
Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. And our first question comes from Koji Ikeda with Oppenheimer.
Speaker 4
Hi, this is Chad Schoenning on for Koji. Thanks for taking the question, guys. Congrats on a good quarter. Can you give us a split, an idea of the split between new versus existing ARR signed up during the quarter? I know in the past you've mentioned customers increasingly starting small and growing.
So to that end, I'd be curious to hear kind of what products customers are most excited about in terms of upsell opportunities going forward. And then I have one more question. Thanks.
Speaker 2
Okay. This is Ashu Roy here. Okay. So, yeah, I think the that trend is still very much the the case, which is which is, something we are kind of accustomed to now. So, the the the level we see now is more like in terms of dollars, we see more like two thirds of expansion, one third is new, but not in terms of new logos.
I mean, we still acquire new logos, but they tend to build over time, which which is something that has been a a trend for some time now. Does that answer your question?
Speaker 4
Yeah. Thank you. That's great. And then in terms of kind of, you know, what what customers are most excited about kind of in that that upsell motion, if if anything kinda comes to mind, that'd be great.
Speaker 2
Right now, I would say the the most, the highest level of interest we see is in intelligent self-service around virtual assistance and messaging. Those are the two areas we see a lot of interest in the market. And other than that, of course, the whole omnichannel capability where we don't have these silos of capability, that is always a a steady increase. But in terms of real kind of ability to pull the trigger quickly, I would say those two that I mentioned are top.
Speaker 4
Great. Thank you.
Speaker 0
Our next question comes from Mark Chappell with Benchmark.
Speaker 5
Thank you for taking my question. Ash, I was wondering if you could just address a little bit more detail the slowing in Europe that you noted in your prepared remarks, particularly where in Europe you're noticing the slowing?
Speaker 2
Sure. So I would say, differentially, if you looked at it, Mainland Europe is is definitely slower than UK. But even in UK, we are seeing decisions are are just taking longer. So that's kind of one observation. The other is that US continues to be quite active, and therefore, in comparison, I think it's even more apparent.
Right? So those are the two comments I would have.
Speaker 5
Okay, great. Thank you. And then, Eric, in your prepared remarks, you noted a large legacy customer migrating to SaaS. I was wondering what the company's outlook was for additional SaaS migrations for the remainder of the year.
Speaker 3
That's actually very good. I think this for us, obviously, the number is coming down. But as we've been communicating, this is a very high focus for us. And I think we're encouraged to see that most of the top accounts that we're engaged with are interested in and are in different stages of that migration. So absolutely, we'll continue we expect to continue to see that certainly through the remainder of the calendar year.
Speaker 5
Okay. Great. Thank you. That's that's good news. And then, Ash, just, finally, one last question.
And I realize it's still early, but I wonder wondering if you could just give us an update on your recently released messaging hub and and maybe any progress you're making there.
Speaker 2
Sure. So that's kind of, been adopted very well by the market. It's, we we are selling it not just as messaging, but messaging as part of the overall omnichannel. So in fact, couple of customers we signed up recently, which I didn't mention, in the mid market, they started out with interest around messaging, but but eventually ended up buying the entire, suite. So we've seen messaging as part of the omnichannel story, but it's a great entry point in terms of interest and demand.
Just like I mentioned to the prior question, messaging and virtual assistance and conversational bots, those are the two things we are seeing a lot of interest in.
Speaker 5
Great. Thank you. Very helpful. That's all for me.
Speaker 0
Thank you. Our next question comes from Richard Baldry with ROTH Capital.
Speaker 6
Thanks. Looks like recurring costs fell in the quarter even with the revenues rising. That's the second quarter in a row for that. Is there anything unusual happening in there? How do you see that trending as the second half and maybe next year unfold?
Speaker 3
Good point, Rich. So consistent with what we've seen in previous years, the impact of many of our employees in California, in particular, reaching their Social Security cap provides a positive benefit from reduction in tax expenses, you know, employee expenses. And then that combined with people taking time off towards the end of the calendar year as well, resulted in reductions. So certainly, I would estimate that there was probably 600 to $700,000 worth of benefit that we received from those two components that we obviously would not repeat in Q3.
Speaker 6
And maybe could you talk a little bit more about the Avaya OEM? Sort of maybe compare and contrast that to your Cisco relationship, you know, what type of resources you'll need to allocate to that or, you know, commitments from Avaya to allocate to that, so we kinda understand, you know, what its outlook could be and maybe size what you think the market opportunity would be. Thanks.
Speaker 2
Sure. So many questions in that. Let me see if I can kick off, one at a time. In terms of market opportunity, I would say that the Avaya installed base in the enterprise, as you well know, is very large, probably the largest even now, despite, you know, some historic attrition that they've had. So that's the first point.
Second is that the solution we have, announced and rather Avaya has announced and we are the providers in that is a is a cloud based e game capability that integrates into the, enterprise solution from Avaya. So that is different from what our current OEM arrangement is with Cisco, as you know. In the Cisco, partnership, the OEM component of that is not from from eGain is not served from the cloud. The resell components of eGain, branded eGain, are served from the cloud. So that is an important distinction.
We think that as the market has now moved into the cloud model and adoption is is is good, that that we will, comparatively speaking, be able to deliver greater customer success in this, arrangement just given the nature of a cloud implementation and the ability to control the eventual experience for the client.
Speaker 3
So that's the the second point.
Speaker 2
The third is the partnership the way it stands now is, unlike the Cisco partnership, which is a bundled OEM, which has its own price points and and and attach rate. Unlike that, this partnership, the OEM arrangement is an optional one. In other words, the customer would buy something additional to get the digital capabilities, which will be Avaya branded, and we would be the provider for that. So so those are three kind of comparison points I can bring up. In terms of our sense of the the opportunity here, it's early days with Avaya with Cisco.
Cisco is our number one partner. Very successful. We've been working very closely with them for a number of years, and clearly, we have joint customers and and business success. Avaya, we're just building that. Looks very promising, but it's still early days.
So as Eric mentioned, for fiscal twenty, we are not factoring anything, from that partnership, but we do think that in fiscal twenty one, we should see a positive impact from that.
Speaker 6
And last thing
Speaker 3
sorry. I think that's it. Thanks, Sachin.
Speaker 6
Maybe lastly, the cash on the balance sheet has been growing nicely. Any, you know, thoughts about things like tuck in acquisitions, any small buybacks, any other way to deploy that cash that's building up? Thanks.
Speaker 3
Again, good point, Rich. That's something that we're obviously pleased with the progress. And so definitely, those are all options that we're considering, but nothing at this stage that we would want to highlight.
Speaker 6
Thanks. Congrats on a good quarter.
Speaker 2
Thank you.
Speaker 0
Our next question comes from Geoff Van Rhee with Craig Hallum Capital Group.
Speaker 7
This is Rudy on for Geoff. A couple of questions for me. First, Eric, want to go back to that weakness in Europe. If I heard correctly, I think
Speaker 2
you said that it's going
Speaker 7
to be a $300,000 headwind in Q3 from customers coming up for renewal. Is that from attrition or customers taking less product at renewal, less seats? Just a bit more color there would be great.
Speaker 3
I think it's a there's a bit of both, but I think the most part was, upward renewal reduction was the primary driver. So it was taking less as opposed to a loss.
Speaker 7
Got it. Got it. Helpful. And then with the Avaya, OEM, great color, there. Just one one more thing.
So so your guys' solutions, they're they're OEMs into their Workspace offering, and that's to target their on prem installed base. Are your guys' solutions also available I know it's early for them in the cloud, but are your guys' solutions also available for their cloud contact center seats as well or just the the on prem?
Speaker 2
So we have not announced anything or Avaya has not announced anything in that regard. We're obviously looking at all those things as part of the partnership.
Speaker 7
Okay. Got it. And then lastly, just wanna look at the the deferred revenues on the balance sheet. And, obviously, we'll get the RPOs in the in the 10 q. You know, as I look over the last four or five quarters, revenues, going up and sort of the divergence between the short term RPOs and the guided revenue has gotten wider.
How should we think about how deferred revenue and RPO should trend from here going forward?
Speaker 3
Yes. I know we've addressed this in the past, Rudy. I think just sort of given our current business structure, unfortunately, this is a metric that since it's been adopted, we haven't seen some obvious patterns that it would sort of provide useful leading indicators. And I think as I've said in the past, you know, the main factors that impact this is because we have a relatively concentrated, group of customers, one or two large renewals that could be done on a multiyear cost or renewed on an annual basis is going to sway things. So I think it's really around the timing of when these big renewals come up.
And so from one quarter to the next, you may have fluctuations that are going on, as you point out, really aren't an indication of where the revenue growth is happening. So, yeah, I think to your point, these numbers really haven't moved around much. But, again, more, I would say, a function of the timing of and the length of the renewals more so than anything else.
Speaker 7
Got it. Helpful. Got it. That's it for me.
Speaker 0
Thank you. Our next question comes from Ryan MacDonald with Needham and Company.
Speaker 8
Hey. This is Alex Narum on for Ryan. And I was hoping to get an update, on the partnership with Amazon and if you're seeing any traction on that front.
Speaker 2
So, yeah, we continue to work with Amazon. We have been doing some joint marketing and working with their partners, and that's kind of an ongoing progress.
Speaker 3
Just like in Avaya case. Right?
Speaker 2
I mean, we worked with Avaya for some time, and then now we have something to share and we shared. PEMF in that mode with Amazon, we're working with them. When we have something worthwhile to share in terms of, you know, real progress and milestones, we're starting to bring it up. But as of now, they they are one of the top three partners we're working with, Cisco and Avaya being the other two.
Speaker 8
Okay. Great. And then, could you give us an update on the investment in the mid market and how you're building out the sales organization and when we'll be able to see some of that revenue contribution from that?
Speaker 2
So good good question. So the mid market is already starting to contribute on the booking side. And what we are really working now is how do we systematically scale that sales and the customer acquisition engine. My expectation as a team, our expectation is that in fiscal twenty one, we should be able to show real sort of attributable evidence to the kind of impact that we can have on a new logo acquisition. I think from a total booking standpoint, they'll obviously make a difference, but the real interesting bit to me is going to be, the the increase in in new logo acquisition.
Acquisitions. So yes, that's something we
Speaker 1
would look forward to sharing
Speaker 2
about that.
Speaker 8
Okay. Great. Thank you.
Speaker 0
All right, gentlemen. There are no further questions in the queue at this time.
Speaker 3
Okay. Thanks, everybody.
Speaker 0
This concludes today's conference. Thank you for your participation. You may now disconnect.