eGain Corp (EGAN) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to eGain fourth-quarter full-year fiscal 2012 financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call may be recorded.

I would now like to hand the conference over to Mr. Charles Messman of the MKR Group. Sir, you may begin.

Good afternoon, ladies and gentlemen, and thank you for joining us today for eGain's conference call to discuss results for fiscal 2012 fourth quarter and full-year ended June 30, 2012. Please note this call is being recorded and will be available for replay from the investor relations section of our website, www.eGain.com, for seven days following the call.

Before I begin, I would like to remind listeners that all statements in this conference call and release that involve eGain's forecasts including the above stated guidance, beliefs, projections, expectations, including but not limited to our financial performance and guidance, the anticipated growth of our business, market trends, plans to invest in our business and expectations regarding the market acceptance of our products are forward-looking statements within the meaning of the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements which are based on information available to eGain at the time of this conference call and release are not guarantees of future results. Rather, they are subject to risks and uncertainties that may cause actual results to differ materially from those set forth in this release.

These risks include but are not limited to the uncertainty of demand of eGain's products including our guidance regarding revenue and mix of new license and hosting contracts; our expectations relating to our operations; our ability to invest resources to improve our products and continue to innovate our partnerships; our future markets; and other risks detailed from time to time in eGain's filings with the Security and Exchange Commission including eGain's annual report on Form 10-K filed on September 27, 2011 and eGain's quarterly reports on Form 10-Q. eGain assumes no obligation to update these forward-looking statements.

With me today are Ashu Roy, Chairman and Chief Executive Officer, and Eric Smit, Chief Financial Officer of eGain Communications.

To begin management's discussions, I will now turn the call over to Ashu Roy. Ashu?

Thank you, Charles, and good afternoon, everyone. Thank you for joining us today. Our sales investments are starting to show some good results. In the fourth quarter of fiscal 2011 -- sorry -- 2012, we booked more business including renewals than in any other quarter in our Company history. That includes the first quarter of fiscal 2011 when we booked our single largest deal ever; if you recall that was with Vodafone.

So now let me share some notable wins in the fourth quarter of fiscal 2012. We will start with a new client with a rather unusual name, Everything Everywhere. You may not have heard of them but they are the number one mobile service provider in the UK. We will provide cloud-based knowledge solution to them for customer self-service and contact centers.

In this opportunity, we beat Salesforce and RightNow with our platform breadth, innovative features and telco industry experience.

Next, we won a knowledge self-service opportunity at Your Phone, a rapidly growing mobile service provider in Germany. We also signed up AXA Insurance as a client in France. They are the number one insurance company in the world, as you may know. They will use our multilingual and e-mail management solution to start with.

Coming to stateside, we signed up Andersen Windows, the largest manufacturer of windows in the world. They will use our cloud-based knowledge solution for customer self-service. Again, a start and they will add more as they look at other interactions.

In partnership with SAP, we won Carestream, a leading medical imaging equipment company. They will use our knowledge solution integrated with SAP CRM for customer service.

We also signed up Catamaran, a leading US-based healthcare software and services provider. Many of you may know as the company, old company called SXC Health Solutions. They combined with another company that they bought and renamed themselves Catamaran. They will start with our cloud-based knowledge solution as well.

Finally, we won Alberta Blue Cross as a new client. Now we have five Blue Cross entities as clients in North America. With the continuing quality cost regulatory pressure on healthcare, delivering better customer experience at lower cost is becoming crucial for health insurance companies and service providers alike.

We also in addition to these new clients expanded our business with several existing clients. Notable among them were State Farm and Avon. Both opted to expand their usage of eGain in the cloud solution.

So you can see the trends toward more cloud business in these wins. In fact our second-half new cloud bookings in fiscal 2012 were up nearly 400% compared to our first half new cloud bookings in fiscal 2012.

Large enterprises are increasingly getting comfortable with cloud-based solutions to run their 24-by-7 customer-facing processes. With cloud solutions, our clients get end-to-end accountability and shorter time-to-market while we get greater long-term economic value with revenue visibility, so we are happy about this trend.

Looking back at fiscal 2012 as a year, as we have planned and mentioned in our calls, we invested aggressively in sales and marketing while running some necessary experiments to accelerate growth. And the results were mostly positive. Where we were not satisfied, we adjusted course.

Part of our planned growth was contingent on aggressive sales hiring and ramp up in the early part of fiscal 2012. While we attracted good sales talent in the hiring process, I believe that we were slow to ramp them up. We could have done better.

To improve sales execution therefore, we have reorganized our sales team globally earlier this quarter. I have promoted Chuck Jepson, who was running business development for us to a newly created worldwide role for sales and business development. Chuck now oversees and directs all our direct sales and channel sales worldwide. His mandate is to ensure effective sales performance based on consistent training and best practices. He will also ensure that we are balancing investment with performance moving forward so we can fully capitalize on the market opportunity.

We have also integrated our service and support teams globally to better serve clients by matching best resources on a worldwide basis to client needs. However, it's not always gloom and doom in fiscal 2012. We executed quite well on a number of fronts. We grew our new bookings in fiscal 2012 over a tough compare with fiscal 2011.

We attracted strong talent across the Company. For instance at the end of fiscal 2012, we have 36 sales reps worldwide compared to 20 sales reps worldwide at the end of fiscal 2011. To match it, we grew our professional services capacity by over 40% year-over-year. This investment will help us rapidly expand our solution among premium clients this year.

We also hired some great product talent, an investments that will show results in the medium term.

Our investment in new geographies is also showing early returns. We established presence in Germany in October 2011. As I noted, Your Phone was a nice recent win for us in the telco vertical in Germany. We also established a direct presence in France last quarter and in France, we won two new marquee clients, AXA Insurance and Euro Disney last quarter.

On the partner front, we struck a strategic partnership with SAP, as you know, in January 2012. Since then, we have signed up four joint clients including HP and Carestream. As planned, the first phase of the eGain product integrated with SAP CRM will be generally available this quarter. This product milestone will build even more momentum in our joint pipeline.

Our OEM partnership with Cisco continues to be solid and successful. Now we are looking to expand on it to enable Cisco contact center clients to buy more applications in the eGain suite directly from Cisco. In particular, our rich knowledge suite will be attractive for Cisco's contact center clients.

On the midmarket front, sales ramp has been a little slower than expected. However, based on continued pipeline strength, channel pull and customer feedback, we believe that our strategy to recruit Cisco UCC ex-partners to sell an integrated eGain Cisco solution to the midmarket is sound.

In fiscal 2012, we sold the integrated solution to eight customers compared to three customers in fiscal 2011. Four of these customers now have gone live. Others are still in deployment. All the deployed customers are happy with the solution, so we know the value proposition works. We should see meaningful sales volume from this channel in fiscal 2013.

Turning to our products, we were rated a leader in the Gartner Web Customer MQ, or Magic Quadrant, for the fourth year in a row. In that report, Gartner noted that "eGain continues to be the most complete solution in the market". This coming from an analyst group that is not easily given to superlatives.

Further, eGain Offers and eGain Social, two brand new products that we launched in version 10 last year have been well received by the market. In fact, Lands' End and Virgin Media, two sought-after brand names and early adopters in the market, spoke about their successful experience with Offers and Social respectively at our 2012 Customer Summit. Thanks to enthusiastic customer engagement and our agile innovation, I am confident that we will soon have the best solution for social and proactive customer engagement as well.

Today, no competitor offers the breadth of multichannel customer engagement capabilities that we do. Most are throwing in the towel to merge with larger companies or looking to cobble solutions through combinations and acquisitions. This market confusion presents a great short-term opportunity for us to gain share among global enterprises who seeks stable proven and innovative providers of multichannel customer engagement solutions.

Finally, our platform-based product adoption strategy is gaining more traction especially with version 10 that we launched last year. In fiscal 2012 for instance, we sold an average of 2.3 applications to each new client compared to 1.6 applications that we sold to each new client in fiscal 2011. This trend validates our long-pursued platform strategy to help clients reduce the cost of ownership and increase their business agility.

Looking ahead, we see growing opportunity for a true multichannel customer engagement solution in a dynamic market. Furthermore, the cloud trend continues to grow what we are happy to offer what the client wants.

Finally, our premium plants are looking for even more commitment and engagement from us as they make our platform a critical component of their customer-facing processes. This is a great opportunity for us. We have a strong team to capitalize on it and we are entirely focused on making our expanded team productive based on a scalable execution model.

Now I would like to turn the call over to Eric Smit, our Chief Financial Officer, to discuss our financial performance for the quarter and fiscal year and then we will be happy to take your questions. On that note, Eric.

Thank you, Ashu. Before I walk you through our financial results, I want to let you know of a change to our bookings disclosure. We have made a decision to discontinue the use of our new and gross bookings metrics and are moving to the more standard booking definition of revenue plus change in deferred revenue. The primary reason we have not adopted this bookings definition in the past is due to our hybrid delivery model, a large percentage of our deferred revenue is off-balance sheet.

To address this issue, in our release today and going forward, we will disclose our unbilled deferred revenue that includes contractual commitments not yet invoiced or collected and therefore off-balance-sheet.

Deferred revenue on our balance sheet as of June 30, 2012 was $8.2 million, up from $6.4 million as of March 31, 2012 and $5.8 million as of June 30, 2011. Unbilled deferred revenue representing business that is contracted but not yet invoiced or collected and off-balance-sheet, was approximately $20.7 million, up from approximately $13.4 million as of March 31, 2012 and $11.9 million as of June 30, 2011.

If you add the revenue for the quarter of $10.6 million to the change in our deferred revenue, you come up with a quarterly bookings number of $19.6 million. Not only is this up 36% over the comparable year-ago quarter, it is the largest quarterly booking in the Company's history.

Bookings for fiscal 2012 using the same formula were $54.7 million, up 13% over fiscal 2011.

Of the new business in the quarter, 80% were from new hosting contracts and 20% from new license and support contracts. This compares to 10% from new hosting contracts and 90% from new license and support contracts in the comparable year-ago quarter. Of the new business in fiscal 2012, 55% were from new hosting contracts and 45% were from new license and support contracts compared to 22% from new hosting contracts and 78% from new license and support contracts in fiscal 2011.

This significant mix shift to hosting contracts negatively impacted our revenue and profitability for the year but it increases revenue visibility for us for fiscal 2013 and beyond.

Now turning to our financial results, total revenue for the fourth quarter was $10.6 million compared to $12.6 million for the comparable year-ago quarter. Total revenue for fiscal 2012 was $43.4 million compared to $44.1 million for fiscal 2011.

On a pro forma basis, if you take new license and hosting contract mix as being consistent with that of fiscal 2011, revenue would have been approximately $53 million for fiscal 2012.

License revenue for the quarter was $2.3 million compared to $5.6 million for the fourth quarter last year. License revenue for fiscal 2012 was $11.1 million compared to $17.4 million for fiscal 2011.

Recurring revenue for the quarter was $6.3 million, an increase of 21% from the comparable year ago quarter. Looking at the recurring revenue in more detail, hosting revenue was up 35% and support revenue was up 9% from the comparable year-ago quarter. Recurring revenue for fiscal 2012 was $23.6 million, an increase of 18% from fiscal 2011.

Posting revenue was up 21% and support revenue was up 15% from fiscal 2011. Professional services revenue for the quarter was $2 million, an increase of 15% from the comparable year-ago quarter. Professional services revenue for fiscal 2012 was $8.7 million, an increase of 31% from fiscal 2011.

Looking at our gross profit and gross margins, gross profit for the fourth quarter was $6.7 million for a gross margin of 63% compared to gross profit of $9.7 million or a gross margin of 77% in the comparable year-ago quarter.

If you look at the break out of gross margin by revenue type, recurring revenue gross margin for the quarter improved to 77% from 73% in the comparable year-ago quarter and the professional services margin was negative 22% compared to 16% in the comparable year-ago quarter.

Contributing to the negative PS margin for the quarter was the increase in PS costs associated with the delivery of services for new hosting arrangements where the revenue from these arrangements is deferred and will be recognized over the life of the hosting contract.

Deferred professional services at the end of the quarter was approximately $1.8 million up from approximately $1.4 million as of March 31, 2012 and $1.3 million as of June 30, 2011.

Gross profit for fiscal 2012 was $29.9 million for a gross margin of 69% compared to gross profit of $33.1 million or a gross margin of 75% for fiscal 2011. This decrease again is primarily due to the shift to hosted based business resulting in a decrease of our license revenue as a percentage of total revenue.

The recurring revenue gross margin for fiscal 2012 improved to 77% from 74% for 2011 and the professional services gross margin for fiscal 2012 was 7% compared to 16% for fiscal 2011.

Turning to our operating costs, total operating expenses for the quarter were $9.4 million, an increase of $2.1 million or 28% from the comparable year-ago quarter. Most of this increase comes from the planned increased investments we have made in sales and marketing.

Total operating expenses for fiscal 2011 were $33.1 million, an increase of $9.6 million or 41% from fiscal 2011 and again approximately $6.5 million of this increase was related to new personnel and related personnel costs for the sales group.

Included in total costs and expense was stock-based compensation expense for the quarter of $336,000 compared to $60,000 in the comparable year-ago quarter. The stock-based compensation for fiscal 2012 was $854,000, up from $218,000 in fiscal 2011.

GAAP loss from operations for the quarter was $2.7 million or a net operating -- net loss of 25% compared to income from operations of $2.4 million for an operating margin of 19% in the comparable year-ago quarter. GAAP loss from operations for fiscal 2012 was $3.1 million or an operating loss of 7% compared to an income from operations of $9.7 million or 22% for fiscal 2011.

On a pro forma basis, if the new license in hosting contract mix was consistent with fiscal 2011 and fiscal 2012, we would've shown an operating profit of approximately $6.2 million or an operating margin of [12]% for fiscal 2012.

Net loss for the fiscal fourth quarter was $3.4 million or a loss of $0.14 per share compared to net income of $2.1 million or $0.09 per share on basic and $0.08 per share on a diluted basis for the comparable year-ago quarter. Net loss for fiscal 2012 was $4.9 million or a loss of $0.20 per share compared to a net income of $8.5 million or $0.37 per share on a basic and $0.35 per share on a diluted basis for fiscal 2011.

Now turning to our balance sheet and cash flows, total cash, cash equivalents and restricted cash were $10.9 million at the end of fiscal 2012 compared to $12.5 million at the end of fiscal 2011.

Cash flow from operations for fiscal 2012 was $900,000 compared to $6.8 million for fiscal 2011.

Total net accounts receivable was $6.5 million at the end of fiscal 2012 compared to $8.2 million at the end of fiscal 2011.

Turning to our deferred revenue, as I mentioned earlier, deferred revenue on our balance sheet as of June 30, 2012 was $8.2 million, up from $6.4 million as of March 31, 2012 and $5.8 million as of June 30, 2011.

Unbilled deferred revenue representing business that is contracted but not yet invoiced or collected and off balance sheet was approximately $20.7 million, up from approximately $13.4 million as of March 31, 2012 and $11.9 million as of June 30, 2011.

Looking at our debt obligations, our bank debt was $3.3 million at the end of fiscal 2012 compared to $5 million at the end of fiscal 2011. Our related party debt was $5.6 million at the end of fiscal 2012 compared to $5 million at the end of fiscal 2011.

During the quarter, we extended the maturity of the related party debt through the end of July 2013. We did this at the reduced interest rate of 8% down from the original rate of 12%.

Now turning to our guidance for fiscal 2013 based on an estimated split of 40% new license and support contracts and 60% new hosting contracts for fiscal 2013, eGain is estimating total revenue growth for fiscal 2013 to be between 20% and 25% and total hosting revenue growth of approximately 40%. This mix in license and hosting may change during the year and if it does, this may impact our revenue guidance and so we plan to update you on any significant mix shifts throughout the year.

This ends management's presentation. We will now open up the call for questions. Operator, we will now turn back to you to open up the call for questions.

(Operator Instructions). Noel Atkinson, LOM.

Hello folks. Very nice results in the recurring revenue. That's really good. I was wondering if you could talk a little bit about your outlook for fiscal 2013 in terms of your split between the hosted and the license. Are you starting to see demand again from folks for the licensing? Or is this just something that you are expecting to just sort of come back over the next little while?

No, this is Ashu here. The rate at which we've seen the change over the last six months compared to, say, the six months before that has been somewhat steep. And so we -- what we see happening in a lot of these large enterprise opportunities is that the customer keeps their options fairly open till the advanced stages of the opportunity. And so we are not sure how to model that in a very reliable way.

But we are seeing a secular trend toward more cloud. It's just not clear if that may oscillate a little quarter by quarter before it sort of steadies into an annual trend, which is more predictable.

Okay, and then you've spent quite heavily in the fourth quarter and it looks like the bookings grew as a result as well. Do you want to talk a little bit about where you think you folks are going to be investing in sales in fiscal 2013? Are you going to be able to sort of slow down or stabilize the sales as a percentage of revenue?

So what we are approaching -- the way we are approaching fiscal 2013 from a sales and marketing standpoint is to say, look, we have hired up very aggressively through the end of fiscal 2012 and this quarter we have kind of gone into a higher grade talent mode but not necessarily higher up to increase territorial coverage and now what we are doing is focusing on ramping up these sales reps and I believe that this quarter once we're through that process, then we start to engage again in increasing their territorial coverage.

And so I do think there will be some slow down in the first quarter and maybe a little in the second quarter but we will probably pick up again on the expansion of the direct sales coverage in the second half of the year.

That's great for me for now. I will get back in the queue, thanks.

(Operator Instructions). Jon Hickman, Ladenberg.

Good afternoon. I was wondering if you could tell me what -- you said the trend in the quarter was 80% hosting and 20% licensing. If you look back six months, what was -- what are the percentages?

Right. Just give me one second. We mentioned it so I will just pull it up. So if you look at the first six months of the fiscal 2012, our hosting bookings in the second half were to be precise 384% of the hosting bookings for the first half of fiscal 2012. So I think that number -- do you have that, Eric?

Yes.

We'll give you the number. Give us a second.

I guess I was just trying to maybe dig a little deeper on that first question is one, it seems like the way the trend is going it's much more than 60% hosting and I guess I am wondering what gives you the feeling that hosting -- that licensing is going to come back?

So some of the pipeline visibility as well as the fact that we -- if you look for the entire year, the percentage has been not as steep. So I guess if the trend continues and this is the trend and you are absolutely right, but we have seen these oscillations in the past, so even though the secular trend is in that direction, we are not sure if we want to necessarily call a extreme cloud percentage mix for fiscal 2013.

Yes, it was 75% cloud to 25% in the second half of the year.

Jon Hickman And the first half?

In the first half, it was more like --

So that is primarily the reason here, Jon. But you have a valid point and we will keep everyone informed as we see the quarterly changes.

So are you going to tell us every time you do a call or --?

Yes.

Would you update us in between quarters?

Probably not between quarters but certainly on the call. And I think another point to add to this, Jon, is again with the popular relationships again these are at the early stages of it but certainly the tie-in with the license part of the business that most of the partner customers may have an installed base opportunity, not to say that they wouldn't go with our SaaS model in that case but that's also part of our modeling here.

And could you explain to me a little more the professional services? So you do all the work but you don't get to bill or you don't get to recognize the revenues for those services?

That's correct. So for the accounting treatment for the professional services revenue for the pure hosting opportunities that we bill the customer and collect the payment for it but the recognition of that revenue is then spread out ratably over the life of the hosting contract. So as we're seeing the movement towards more of the hosting business, then that has had an impact on the recognition for the PS revenue.

So when would you expect that to catch back up and you start having positive margins there?

I think certainly from a positive margin standpoint, we would expect that to be our belief starting next quarter just with the -- because I think the other combination of the negative margin was also the additional ramp up in the PS group, the additional hirings. So there is some element of that that's tied towards sort of getting that PS group productive as well.

Okay. Eric, just one last question. A number, you said that in the quarter like on the recurring revenue side, hosting was up some percent. I missed that. And support was up 9%. Was it like 35% or --?

Sorry, could you --?

In the fourth quarter, you were talking about your recurring revenues and you said that hosting was up 35% and support was up 9%?

Right, so the recurring revenues, the hosting revenue was up 35% and support revenue was up 9%.

And that's sequentially --? Is that --?

No, that's compared to the year-ago quarter.

Year-over-year, okay. Thank you. I will get back in the queue.

Noah Steinberg, G2 Investment.

Hi, guys. Excuse me if I am breaking up here on my mobile phone. I wanted to know if you would provide the unbilled deferred revenue on the off balance sheet for the first two quarters of the year?

So we don't have that information available at the moment.

Also on SAP, was that (technical difficulty) are there any other 10% customers?

Sorry, Noah, you broke up there. We couldn't hear your question.

SAP (inaudible) are they 10% or close to that of revenue or bookings yet?

I think we lost you again. One more time?

For SAP, are they -- how much are they (technical difficulty)

Okay, I think we got your question. So you are talking -- you're asking if SAP is a 10% source of revenue as a channel partner or not. Is that your question?

Yes, thank you.

Sure, no problem. The answer is not yet.

Okay.

Again as we pointed out, we announced a partnership in January, so it has been eight months and now with the first product launch of that integrated product this quarter, we expect that sort of pipeline is going to build up [better].

Okay, thank you.

Noel Atkinson, LOM.

I just had a follow-up. Can you guys talk a little bit about the competitive environment? You mentioned in your prepared remarks that you won out in the UK over Salesforce and RightNow. Who are you seeing as prime competitors in the space right now and if you can talk a little bit about what's happening for your -- what I would call your self-service or your inbound tools versus your outbound sales support tools?

So on the service side, as in customer service side, I think most of our competition now is with the bigger companies that have signed up or integrated through acquisition so whether it's Oracle or whether it is Salesforce because Oracle has RightNow and InQuira inside them.

So I think most of our petition comes from that and a little bit comes from the smaller point solution vendors but that's not very significant.

On the sales side, the competition is mostly with the APG Group of Oracle as well as with live person. So that's how I would characterize the primary competition sources.

Okay, thanks.

(Operator Instructions). I'm showing no one else in the queue at this time.

Great, okay. Thank you again for joining us today on the call. We believe that this is a very exciting time for eGain and we continue to build a world-class organization. So should you have any questions or comments, please feel free to give us or our investor relations firm a call.

I look forward to talking with you on our fiscal first-quarter call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.