eGain Corp (EGAN) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the eGain fiscal 2014 third-quarter financial results conference call. (Operator Instructions)

I would now like to turn the conference over to Charles Messman of eGain.

Good afternoon, ladies and gentlemen, and thank you for joining us today for eGain's conference call to discuss results for our fiscal 2014 third quarter ended March 31, 2014. Please note this call is being recorded and will be available for replay from the Investor Relations section of our website at www.eGain.com for seven days following this call.

Before I begin I would like to remind all listeners that this conference call contains forward-looking statements within the meaning of the safe harbor provision of the US Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other matters, statements about the Company's market opportunities; statement about the Company's partnership with Cisco; statement about the Company's expected financial results for the fiscal third quarter ended March 31, 2013, with respect to total revenue, subscription and support revenue, license revenue, and statements regarding our fiscal 2014 guidance; and ATV metrics including source of revenues and business mix.

The achievements or success of the matters covered by such forward-looking statements involve risk and uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, the Company's results could differ materially from the results expressed or implied by forward-looking statements we make.

The risk and uncertainties referred to above include, but are not limited to, risks that our hybrid revenue model and lengthy sales cycle may negatively affect our operating results; risks related to our reliance on a relatively small number of customers for a substantial portion of our revenue; our ability to compete successfully and manage our growth; our ability to develop and expand strategic and third-party distribution channels; risks associated with new product releases; risks related to our international operations; our ability to invest resources to improve our product and continue to innovate; and other risks detailed from time to time in eGain's filing with the Securities and Exchange Commission including eGain's annual report on Form 10-K filed on September 23, 2013, and eGain's quarterly reports on Form 10-Q which are available on the Securities and Exchange Commission's website at www.SEC.gov.

These forward-looking statements are based on expectations and speak only as of the date of this call. The Company assumes no obligations 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. To begin the discussion, I will now turn the call over to Ashu. Ashu?

Thank you, Charles, and good afternoon, everyone. Thank you for joining us today.

Looking at our results in summary, total revenue for the third quarter increased 17% year-over-year to $18 million. For the first nine months, total revenue increased 26% year-over-year to $51.4 million.

Cloud subscription revenue for the quarter was up 35% over the prior year and up 47% for the first nine months compared to the prior-year period. Total gross bookings for the quarter was $11.7 million and for the first nine months the total gross bookings were $37.1 million. And we also reiterated our guidance for fiscal 2014.

Now let's talk more about the quarter. Notable new logos in the quarter included a global telco, a top 10 electronics manufacturer, a large US-based BPO, and a global 100 multinational bank. However, I want to point out that several significant deals we expected to close in the third quarter slipped into the fourth. In April, we ended up closing four of those slipped deals, each deal was roughly in the $0.5 million booking range and two of those deals were through partners who were direct.

But, for us, accurately forecasting these deals continues to be an area of focus. As we have mentioned before, many of these deals are through partners where we are a component of larger projects. While we have improved our ability to control and forecast these deals, but we still need to do a better job.

Now let's look at partnerships and channels. It is exciting to see significant deal closure on this front. First, with Cisco and its partners.

We closed our first seven-figure deal through Cisco in the quarter. We also closed two other sizable six-figure deals through Cisco, one was a new win and the other was an expansion. Plus we continue to see a steady stream of entry-level deals but all in the large Global 1000 accounts through Cisco.

This customer acquisition engine in our target market is beginning to work. As our Cisco channel pipeline grows and matures, we are confident that we will be able to better manage the pipeline and forecast these larger deals.

We also see competitively that the Cisco plus eGain proposition is working very well against players like i3 in the multichannel compact [time to] market. In fact, one of the larger deals we closed in April with Cisco was a significant i3 knockoff in the US.

Lastly, on the Cisco front we are very excited that starting this week our eGain cloud solution is now available through the Cisco SolutionsPlus channel. You have heard us say this before, both the Cisco and eGain field have been chomping at this bit for some time, so now we believe that this cloud proposition available through the Cisco channel will benefit us significantly in 2015.

Turning to some of the non-Cisco partners, particularly BPO partners, last quarter we talked briefly about these BPO partnerships and how the BPO market, and specifically within the customer management market, is changing from a pure cost-based model to more value-based and transformational propositions. According to Gartner, the adoption rate and growth momentum experienced in non-voice multichannel services such as web chats, email, SMS, self-service, and social CRM services are set to tilt the balance in favor of non-voice-based services by 2016.

So there is an inflection point in this market and we think we have the ability and the access to these partners where we can start to enable them to deliver those value-based propositions that they need to go out with beyond pure voice.

In the third quarter we closed a large six-figure cloud-based deal through IBM BPO, which is now renamed Concentrix, with a global electronics manufacturer, the one that I had mentioned earlier. Overall, we see increasing interest and pipeline activities within our partner network and we are continuing to invest to maximize this channel.

Now let's turn to our sales organization. We've made some key additions and changes so we have promoted AJ Berkeley to run our North America sales team.

AJ has been running our Cisco channel partnership for the last couple of years. He is an accomplished sales and marketing executive who started his career with HP and eventually led billion-dollar-plus business at HP. After that, he ran worldwide sales for and was the CEO of startups and a publicly-traded company in the networking space.

At eGain, he has done a tremendous job developing our fiscal go-to-market and partnerships and so we are very excited that he is now taking on this US sales leadership role and focused on both the direct as well as the partner-enabled opportunities.

To replace AJ in his current role, we have added talent. Vickie McGovern, a contact center industry veteran from NICE and prior to that at Cisco and Avaya, has joined us to replace AJ in his role. She brings a wealth of experience and contacts at Cisco and its partner ecosystems; I'm very excited about her joining on board as well.

And, finally, we had last quarter talked about the fact that we had promoted Andrew McDonald to run EMEA sales. He is settling in quite nicely and building his team with experienced sales professionals and management folks from the contact center and BPO markets. Overall, I am feeling quite good about all these changes that I feel that this team now has both the ability and the ammunition to go out and develop our sales pipeline in the way that we can better forecast and grow our top line.

Moving on to the product side, with our recent product release, which was winter 2014, something that we are now doing every three months, the product releases. With the recent update we have expanded our API capabilities significantly, particularly in the area of knowledge management, so that our partners and customers can build unique solutions on top of our platform.

One example of such a customer who has done some incredibly innovative things is LexisNexis. They are one of our customers who have built not just a strong multichannel customer engagement capability on top of eGain, but also developed new product lines using the core capability of our knowledge management tool. In particular, our reasoning engine.

In fact, LexisNexis and the head of customer operations for them, [Rick Dole], he and I will be presenting the success story of eGain and LexisNexis at the Gartner Customer 360 conference in Orlando, Florida, on May 20. So for those of you who may be there, this is a marquee event which used to earlier be the CRM event. Now they call it the Customer 360 event. We would love to have you there and hear all about how LexisNexis is leveraging the eGain platform. That will be an exciting discussion.

On top of that, we are focusing a lot of our product investments to make our platform more manageable and serviceable for large-scale deployments, particularly through partners. As we are seeing more and more partner interest and we are enabling more of these partners to implement and support our platform, it's critical that we make sure that our product is easy to manage and build on and support for these partners. So that is an area of investment for us and we expect to see more improvements and innovation coming out in that area in the near future.

If you look at the landscape and step back from our product, look at where we are in the market, we see strong demand for the two areas that we have been focused on for quite some time, which is the multichannel area, which is now being called the omnichannel area, but essentially all the digital channels in addition to voice, as well as knowledge. So these two have been the two big product pillars for us.

What we are seeing is emerging and, interestingly, quite unique set of demands on the analytics side, where we find clients looking for end-to-end customer journey analytics so that they can better understand where the risk of attrition is, where the opportunities for upsell and cross-sell are, and how to improve conversion, and how to increase customer loyalty, as well as customer ease through these journeys. And eGain is in a unique position to have both access to a tremendous about of those channel data as well as the knowledge that underpins those interactions.

We are adding to our focus on the analytics side, as you all probably are aware of. We introduced our integrated analytic capability last year and we have continued to improve that to the point where we are increasingly closing the gap with niche analytic vendors in the market. And now we believe that there is an opportunity for us to leverage our fiscal partnership and go out to extend the analytic data sources to include the voice channel, not just the multichannel digital channels that we have had in the past.

So that is an area that we believe is going to present new opportunities, not just the ability to collaborate through these channels, not just the fact that the knowledge underpinning those interactions is powerful, consistent, and easy, but also the analytics on top of these to make sure that there is a closed loop of improvement in terms of the engagement of clients through that multichannel journey.

To conclude, we are excited about the market and within that the strength of our platform, especially as we continue to improve our reach in the market through direct and partner investments. And we are very excited about the changes we have made on the sales team side and we believe that this will help us better address our short-term challenges.

The three areas that we are focused on in this sale refinement effort and expansion effort is to improve our forecasting, even as we are looking at partner-led deals more and more. To make sure that we are continuing to invest and expand in our strategic clients so that the expansion with that really becomes the big pride is not overlooked without customers. And, finally, to enable our partners better and better, not just through training, but also through product improvements.

So given these three areas of focus we feel that we have put in a good team with strength and leadership and we look forward to sharing with you the updates as we see that over the next few quarters.

So with that let me turn over to Eric Smit, our Chief Financial Officer, for more financial outlook.

Thank you, Ashu, and thanks for joining us today. I will start by reviewing our ACV and booking metrics for the quarter, then go into the details of our financial results, then close with an update on our guidance for fiscal 2014.

As we announced last quarter, due to the hybrid delivery model that we currently offer, we have concluded that the gross bookings metrics alone provide a limited view to our business performance as it does not detail the makeup of the booking between cloud and on-premise. In addition, it does not provide a time-based view of when the recurring revenue bookings are expected to be recognized as revenue.

To address this we now disclose the annualized contract value, or ACV, of our total recurring revenue, including a breakdown of our cloud and support revenue. This new metric is the annualized contractual obligations at the end of the period that we expect to convert to revenue over the next 12 months, but it is forward-looking and subject to change due to any possible cancellations or timing of system deployments.

So our total recurring revenue ACV at the end of the third quarter was $40.6 million. This is up from $37.5 million at the end of the third quarter last year and $39.8 million at the end of the second quarter of fiscal 2014. The ACV for our cloud revenue at the end of the third quarter was $25.2 million, which compares to $24.5 million at the end of the third quarter last year and $25 million at the end of the second quarter of fiscal 2014.

The ACV for our support revenue at the end of the third quarter was $15.4 million, which compares to $30 million at the end of the third quarter last year and $14.8 million at the end of the second quarter of fiscal 2014. As we noted on our last call, we saw a sequential decrease in ACV for cloud revenue in the second quarter, primarily due to an expected reduction for the large customer who is running versions of eGain 10 and eGain 11 concurrently. This change had an impact of approximately $2.4 million on the cloud ACV.

Initially, we expected the full impact on our quarterly revenue to take place in Q3, but as it turned out this ended up being delayed to Q4.

Now turning to our bookings, total gross bookings, or revenue plus the change in deferred, for the third quarter was $11.8 million. While this is a decrease of 25% compared to the same quarter a year ago, I should note that total gross bookings in the comparable year-ago quarter included a two-year cloud renewal of approximately $3 million. Backlog as of March 31, 2014, or total deferred revenue plus unbilled and collected revenue was $31.5 million compared to $40.8 million reported last year.

Now turning to our financial results, total revenue for the third quarter was $18 million, up 17% from $15.5 million in the comparable year-ago quarter. For the first nine months total revenue was $51.4 million, an increase of 26% on a year-over-year basis.

Our subscription and support revenue for the third quarter was $10.6 million, an increase of 27% on a year-over-year basis. Looking at subscription and support revenue in more detail, cloud revenue was $7 million, up 35% over the third quarter of last year and support revenue was $3.6 million, up 13% compared to the third quarter of last year.

For the first nine months, subscription and support revenue was $30.3 million, up 30% compared to $23.3 million for the same period last year. For the first nine months, cloud revenue was $19.8 million, up 47% from the same period last year.

License revenue from potential sales came in for the quarter at $2.5 million, a decrease of 39% from the comparable year-ago quarter. For the first nine months, license revenue was $9.4 million, up 14% compared to $8.2 million for the same period last year.

Professional services revenue for the quarter was $4.9 million, an increase of 62% on a year-over-year basis. For the first nine months, professional services revenue was $11.6 million, an increase of 24% on a year-over-year basis. The increase in professional services revenue for the quarter and the first nine months was primarily due to the professional services for cloud arrangements, which we determined to have value to the customer on a standalone basis as of July 1, 2013, and therefore are now accounting for separately.

When accounted for separately, these professional services revenue will generally be recognized as the services are rendered. Prior to this, professional services revenue for cloud arrangements were generally recognized ratably over the estimated life of the customer cloud relationship.

Looking at the geographic mix of our revenue, total third-quarter revenue comprised of 53% domestic revenue and 47% from international.

Now looking at gross profit and gross margins, gross profit for the quarter was $12 million, or a gross margin of 67%, compared to a gross profit of $10.9 million, or a gross margin of 70%, in the comparable year-ago quarter. If you look at the breakout of gross margin by revenue type, subscription and support revenue gross margin for the quarter was 79% compared to 84% in the comparable year-ago quarter. Professional services margin was 24% for the third quarter compared to a 5% negative margin in the comparable year-ago quarter.

For the nine months, gross margin was $34 million, or a gross margin of 66%, compared to a gross profit of $27.7 million, or a gross margin of 68%, for the same period last year. Subscription and support revenue gross margin for the nine months was 80% compared to 83% in the same period last year. Professional services margin for the nine months was 4% compared to 3% in the same period last year.

Turning to our operating costs, total operating expenses for the quarter were $12.7 million compared to $10 million in the comparable year-ago quarter. For the nine months, total operating expenses was $37.4 million compared to $28.6 million in the prior year.

Looking at the expenses in more detail, research and development expense for the quarter was $2.7 million compared to $2.1 million in the prior-year quarter. Sales and marketing expense for the quarter was $8.6 million compared to $6 million in the prior-year quarter. G&A expense for the quarter was $1.4 million compared to $1.9 million in the prior-year quarter.

Depreciation and amortization in the third quarter was $553,000 compared to $367,000 in the prior-year quarter and stock-based compensation expense for the quarter was $470,000 compared to $225,000 in the comparable year-ago quarter.

GAAP net loss from operations for the quarter was $688,000, or a negative operating margin of 4%, compared to GAAP net income from operations of $911,000, or an operating margin of 6%, in the comparable year-ago quarter. GAAP net loss from operations for the nine months was $3.4 million, or an operating loss of 7%, compared to GAAP net loss from operations of $903,000, or an operating loss of 2% in the same period last year.

Net loss for the quarter was $1 million, or a loss of $0.04 per share, compared to net income of $1 million, or $0.04 per share, on a basic and diluted basis for the comparable year-ago quarter. For the nine months, net loss was $4.2 million, or a loss of $0.17 per share, compared to a net loss of $1.2 million, or a loss of $0.05 per share for the same period last year.

Turning to our balance sheet and cash flows, total cash, cash equivalents, and restricted cash was $8.8 million at March 31, 2014, compared to $16.2 million at June 30, 2013. Cash used by operations for the nine months was $2.5 million compared to cash provided by operations of $9 million for the same period last year.

Capital equipment purchases in the third quarter were approximately $[523,000]. Total net accounts receivable was $9.5 million at March 31, 2014, compared to $12.3 million at June 30, 2013. DSOs for the third quarter were 47 days compared to 60 days for the comparable year-ago quarter.

Total deferred revenue, which includes both deferred revenue on a balance sheet of $15.8 million and unbilled deferred revenue that remains off-balance-sheet of $15.7 million was $31.5 million at March 31, 2014, compared to $44.5 million at June 30, 2013.

Looking at our debt obligations, as of March 31, 2014, we had Comerica Bank debt of $2.7 million and no related party debt. I would, however, like to note that on April 30, 2014, we updated our financing with Comerica Bank by amending our existing agreement. We borrowed an additional $3 million to replace the original $5 million notes that will be paid in full by the end of next month. We have also added a more significant revolving line of up to $7 million, replacing a previous line of $1.5 million that had expired.

Now turning to our fiscal 2014 guidance, we are reiterating our fiscal [2014] guidance for annual total revenue growth of between 20% and 25% and for annual cloud revenue growth of between 35% and 40%. With that said, I will now open the call for questions, operator.

(Operator Instructions) Michael Huang, Needham and Company.

Thanks very much, guys. First of all, the first question, so in terms of the deal that actually slipped out of the quarter and were subsequently closed early in Q4, was wondering had these closed in Q3 any sense for what kind of the returning ACV growth would've looks like if -- had everything gone right?

Michael, we don't actually have that detailed out at this point. I think there was a mixture of on-premise deals as well, so we don't have that exact number.

Okay, got you. For kind of the large Cisco deal that you guys got done, was wondering if you could share with us what products actually were sold. And maybe you could you share with us the competition that you guys saw there.

Sure. Mike, this is Ashu. First of all, in terms of product sold it was pretty much the multichannel agent desktop, so all the capability that we have around the desktop of handling channels and the knowledge capability underlining it. All that is part of the deal. This is -- what we know is a first phase of a deal that we believe will become much more significant over time.

And in terms of partnerships or competitive environment, we know that we were -- we competed for this opportunity a couple of years ago and at that time eGain was not considered the favorite. When this opportunity presented itself through the Cisco channels, I think the integrated proposition was seen as more compelling by the clients. So we don't know exactly who the competitors were in this particular deal but we do know that our competitive position improved significantly when we went back and partnered with Cisco.

Okay, got you. And just going back to kind of the deal that had slipped out of the quarter, if you could just -- is that driven at all by -- is that driven more by external factors, like macro or competition? Or do you believe that the lengthening of some of those sales cycles is more due to internal things that you guys can control and fix?

I think some of it is better forecasting for us, frankly. So for an example, and we have seen this now enough that we are now not forecasting opportunities that are going through the Cisco channel in the quarter in which we believe they are going to close it because their end of quarter happens to be a month out of step. So essentially their quarter close is April end, whereas -- so it's April to July and so on. So there is that element.

A couple of deals were because of that delta, where we were told, and our sales team felt that we had enough confidence that we could get a deal done, but just getting all the final bits of paperwork through in the fiscal partner channel. And mind you that we are going through this for the first few times now. We haven't done this before, so we are learning our way.

And while we did manage to close it in April, we -- so two things are happening. One, we will get better at the whole procedural elements as we do it again. And the second is that we are learning that some of these last elements of paperwork and approvals that go through that channel of partner and Cisco take longer than we have expected because we had never been through that before.

Got you, okay. The last question for me just on the -- I wasn't sure if I missed this, Eric, but could you help us understand the drivers behind kind of some of the compression that you saw in the subscription gross margin line?

I think when we looked back at the comparison to the previous year we had generally made it clear that the expectation of seeing some compression, in the margin was going to happen as we needed to increase the investment in the infrastructure, which is something that we have done aggressively, certainly this year. So I think where we had margins north of 80% we certainly had not expected to maintain at those levels. So around the 79%, 80% range is certainly in the range where we expect it to be sort of as a more sustainable number as opposed to necessarily being above that block.

Mike, I can add a little bit to that. We have talked about this I think in Q1. In our Q1 quarterly we talked about the fact that we have increased our investment on the data center side so we opened up a new data center in the US with -- a colo center with AT&T, and so that has been an increased investment for us.

As a result of that we are now offering higher levels of service, higher levels of SLAs and disaster recovery, etc., that our high-end clients are asking for beyond the standard sort of industry norms that you see in the cloud business. But we are getting paid for that as well, so I think there is that increased step investment as well as some investment that is leading the returns that we should see coming out of those.

Thanks, guys. Appreciate it.

Jeff Van Rhee, Craig-Hallum.

Ashu, could you update us on the sales leadership in general? You have made a change in the North American head, promoting someone internally, and then you have been running a search for the Head of Worldwide for a while. Just update us on both the process, because originally I think you were considering both internal and external on North American, and then also the progress on the worldwide position.

Sure, so first the North America sales leadership. Yes, we looked at external and internal options on that and we decided -- and mostly myself -- that at this time, given the progress and the moment we are seeing with our partner-enabled sales traction that that was an area where having someone like AJ, who has tremendous context of what is working well and not working well in the partner side as well as essentially a zero learning curve jumping into this role because of his current set of roles within eGain, that tipped the scales in his favor against some of the external candidates that we are looking at.

He has done very senior leadership roles in sales and in overall company operations as well, so he has that better than a lot of other people that we saw. That combined with his internal awareness and understanding of what we need to do now was the critical factor. So that is on the North America sales.

On the worldwide sales, the search continues well. We are at a point where I think that this quarter, which is what I had guided to, saying that by the end of fiscal 2014 we would have someone in place. I think that we would be looking to conclude in that timeframe.

Then I guess if I just step back and sort of take a rolling look at the bookings, you are certainly getting the benefit of some bookings that took place six, nine, 12 months ago. But as it relates to the last several quarters, on a rolling basis, very clear deceleration.

And just sort of step back to the high level, forgetting the pushes this quarter and sort of the tough compares and all the noise that can throw things off on a quarter, where is it? What do you think the fundamental driver of that slowdown is? Is this a function of end-market demand, competitive position, purely sales execution? What do you think is sort of driving that?

And then, obviously where I am going with that is you are not giving a guide for the out-year, but it's a pretty wide range as we think about what that out-year could look like based on sort of those answers.

Sure. So as we have talked about this in the past, we made a big -- and we have continued to make a bet on the partner side to increase our reach in ways that we could not through our direct salesforce. And so that investment -- and we primarily pushed on the Cisco and Cisco ecosystem as that reach enhancer for us. That has taken some time, we know, that but we are seeing the benefit now.

If you look at the kind of logos we are acquiring and the rate at which we are seeing the pipeline, early-stage pipeline built and our ability to work with that partner network, those are starting to come together. So I think this is the first quarter where we have shown real evidence of a large deal closing through Cisco or with Cisco. We have seen the benefit of the fact that even though some views slipped we managed to close those as well in April.

So I think we are starting to see -- and I know you asked me to step back, but even if I look at the nine months, these are significant in my mind enough to say that we are starting to see the results of the investments on the partner side.

The second bit is that as we look to the partner side we saw a drop in the cloud business bookings, if you will, because at that time the Cisco network for us was only on-Prem. We could only sell the products on-prem and that was a -- we knew that that was a challenge going in. The cloud capability being available through this network was something we were hoping would happen -- would have happened three months ago, but it has happened now. And so that -- I think if I look at -- step back and look at the larger trajectory now we are in a position where we can sell both cloud and on-prem through the fiscal network.

And the rate at which we are getting partners off the Cisco ecosystem to join hands with eGain and the rate at which we are seeing early pipeline build tells me, combined with the conversions we are now seeing of the large deals, that this model is starting to work. And now we have to press the gas on this and the medium-term effect of this is going to be very positive, even though the short-term impact has been what you said, which is a slowdown in our bookings.

If you take a look at the success, I guess if you segmented Cisco and non-Cisco, how about the remainder of the sales efforts? The goal of Cisco was to be additive. Has it distracted, detracted, the core direct-selling efforts and somehow sort of disrupted that or is there -- how would you describe the core direct efforts?

I would say that is has spread our sales effort across direct and Cisco. So Cisco's selling process is still very intensive on our direct team. It's not as if we have a small group of salespeople who are only selling Cisco and everyone else is not working with Cisco and partners.

So we looked at that carefully. We are refining it around the edges, but we still think that the significant benefit of getting into opportunities that we would otherwise not be aware of overshadows the distraction that we have suffered in the last couple of quarters as a result of that. But I think that now that we have enough activity blended between Cisco and non-Cisco, our sales team is going to start to get that return on the early-stage work that they put in trying to work with the Cisco channel.

Okay, and then last one for me. In terms of the pipeline, and I jumped on late so apologies if this is a repeat or something you've already addressed, but can you be -- to whatever degree you are willing, quantify or give us a little more visibility into the pipe to give us a sense of the magnitude of the build?

You've commented on a lot of push outs and other things, but is there any way you can give us a little better quantification of the pipe build, scale, scope, anything along those lines?

I don't have very specific numbers for you right now. What I can tell you is that the pipe, the early-stage opportunities that we are getting into is very positive right now. We are being brought into a lot of early-stage opportunities. So, for instance, last quarter in Q3 we closed 15 new logos total, of which 10 were influenced by partners and five were pure direct.

The partner influence does not mean that eGain sales was not involved. eGain sales was involved in probably a dozen of those 15 and three happened without us even knowing about them through the channel, but that number has gone up over the last several quarters. So it's not just a pipeline build, but also new logo wins that is encouraging to me because that becomes the foundation for expansion and significant expansion in those accounts.

I think we shared with you an example of an expansion in the Cisco channel where we acquired a customer in the Q1 fiscal 2014 and -- this was the US -- and in Q3 we generated a $0.5 million additional bookings from them, even though the first deal was a $100,000 kind of deal. So we are seeing that sort of -- not enough of those yet, but we are seeing instance of that expansion so the new logo acquisition for us is an important metric for future opportunity.

I think last quarter you had said you had triple the seven-figure deals in the pipe. Any update on the higher-end, larger deals?

Yes, those still continue to move through. I would say that there has not been -- that tripling was more over a period of time, so we have not --. This time around we haven't really counted that and not available at this time to share with you as to how much that percentage may have grown.

Raghavan Sarathy.

Good afternoon. Thanks for taking my questions. First question is for Ashu.

You mentioned two of the direct deals slipped, they closed in the current quarter, and you looked at the reasons behind why those deals took longer. Ashu, you talked about two deals that slipped from last quarter's, but you closed since then. What are the reasons behind those deals taking a longer time to close, slipping from one quarter to another quarter?

Sure, so you are talking about the direct deals then. One of them was a pilot that we had been running for a while and we had to convert that, and essentially I would say that was a sales execution issue.

The second one was more of a company, the client's timing. They just did not have the budget approvals. We felt that we could get it done in time, but it got done two weeks into the new quarter as opposed to the prior quarter. So both of those, if I remember correctly, were cloud deals, right?

Cloud deals, all right. So in terms of the sales capacity, I know you've had a lot of salespeople, some (inaudible) this time last year. Can you talk about the quota-carrying reps you have, the productivity you are getting from them? I know there's a lot of talk about Cisco on channels, so I am interested in your direct -- how your direct sales efforts are going.

Sure. Like I said earlier, the Cisco channel activity is not limited to a small group of sales reps. Rather, it is something that now is in the pipeline of almost all of the direct sales reps as well.

The direct sales reps are selling. We have an overlay organization that helps the direct sales guys sell when they are selling alongside Cisco, but the direct sales guys are carrying pipeline that includes both pure eGain selling as well as eGain through the Cisco SolutionsPlus. So that's one part.

At this time would say, as I look at -- I'm trying to see where the rough numbers are, but almost on average in the US every sales rep would have a couple of deals through the Cisco Solution pipeline. So that sort of gives you an idea of the level of mixing, if you will, because we stand to gain when we go along side that channel so we are pushing that across all direct sales reps as well.

As far as the number of sales reps and what quota-carrying capacity, I think we had talked earlier about a number of 45 sales reps worldwide. What we're finding is that with the new partner-oriented sales refinement that we continue to make, and this is something that both AJ and Andy are very much on board with, is that we need to not necessarily just look at adding more sales reps. Instead we should be, and will be, looking at more of how can we drive more business per sales rep by providing more support and assistance around that salesperson?

So moving forward we will see that our capacity or our targets don't necessarily just map to a number for sales rep and the number of sales reps. So that's an area that we will be adjusting our modeling and sharing our thinking around as well.

Just a couple of questions for Eric. I guess, based on Ashu's comment, it seems like the deal side that slipped that closed seemed cloud deals. We are seeing a year-on-year decline in license revenue. I thought last quarter you had more license bookings than cloud, so that I'm just trying to figure out this flip-flop that has happened in the current quarter.

Then the second question is professional services (inaudible) strong. Margin was strong; sort of made up for the license revenue shortfalls. But can you talk about the utilization of the group? What should we expect in terms of services, revenue, and margin for the current quarter? Thank you.

Sure. I think first on the PS side, so we still had some residual recognition related to the change in the timing of recognition on the cloud deals. And so I would say that going forward for the upcoming quarter the expectation is that that number will likely drop down in between -- PS revenue in the range of the $3.5 million to $3.7 million ranges is sort of our expectation based upon our current view at this point.

So then into your earlier question, I'm not sure I fully understood what you are asking but just regarding the mix between cloud and license, I think that certainly from our expectation, especially with the Cisco businesses, is that we still are tracking the number of license opportunities. Obviously, it's going to take some time before the cloud opportunity or options from Cisco materialize into actual deals. And so I think we are still seeing, certainly for the next or the current quarter that we are probably seeing new bookings skewed towards license versus cloud overall.

Okay, thank you.

Jon Hickman, Ladenburg.

Hello, I just have a couple of quick questions. So the large Cisco deal that closed in the third quarter, that would have been about half of the total license for the quarter. Am I thinking about that right?

Not quite, but it's at least more than a third.

Okay. Then out of the four deals that slipped, and you said two were cloud, where the other -- the ones that were direct were cloud. What were the other two; were they cloud or on-premise?

They were on-prem.

They were on-prem with Cisco.

Okay. Then I think you answered this question but I'm not really sure I got it all. Could you explain to me why you think the cloud gross margins or the service and the support and the recurring revenue side, why those gross margins are somewhat lower this quarter?

So it's based upon the increased investments that we've made in the cloud infrastructure, so as we are looking to increase and expand the reliability and service levels that's investments that were planned.

Okay. So going forward you would expect more like last quarter or more like this quarter?

I think it's going to be closer to this quarter and then over time we would obviously look to see an appreciation of that number, but it wouldn't be something that would happen immediately.

Then because of your efforts to get the cloud platform up and running with Cisco and to increase your capabilities or with the cloud just generally, your R&D expenditures are just going to be higher going forward. I mean there was a bit of a jump.

Yes, I'm not sure if those are connected, but I don't see unusual jumps in our R&D. I think we will probably stay in line with our sort of target levels as it relates to our overall business size.

Okay. Then, Ashu, can you, based on the last couple of questions that you've answered as far as the bookings, so is it safe to say that you think bookings are on their way up?

I believe so. I think we are now going to see the benefit of that transition that we've made from pretty much a pure direct model to a direct-plus partner. So, yes, I think that is our expectation.

Okay, that's it for me. Thanks.

Mike Latimore, Northland Capital.

You may have mentioned this earlier, but have you seen any current customers that are on maintenance willing to shift to cloud? Or what is the prospect there and have you given any sort of financial incentives to do that?

Sorry, could you repeat? I wasn't sure if I caught the gist of your question. Are you asking if we are providing incentives to them to move to the cloud, Mike?

Yes, I was just curious if there was any cloud wins that are basically maintenance customers converting to cloud. And then, second, are there any incremental financial incentives for them to do that?

Okay, got it. Thank you. To the first point, we are continuing to work with them. We don't have any notable large ones that we can speak to for the third quarter, but we are continuing to work with a bunch of them and there is active discussion in those areas.

One of the things that we are doing is to put together aggressive incentives for these customers in the fiscal 2015 timeline. So we are just sort of sequencing our own delivery capability around that and there is a good amount of interest around financial incentives when you offer it to them. We are -- to your point, yes, we are looking to do that but that is not something that has resulted in the wins that we can share at this time.

Then with regard to the Cisco channel for your cloud service, do you anticipate that the cloud sales for eGain through the Cisco channel will be when Cisco partners sell their own kind of cloud service? Or can Cisco sell eGain cloud as maybe a complement to a Cisco on-premise system?

That's a fair question. The answer is that eGain cloud can be sold, and hopefully will be sold, both to on-prem Cisco voice customers as well as to cloud voice customers of Cisco. To both of them, because the eGain cloud will connect seamlessly to either one of them.

Okay. Then how are the number or did you see demand for chat deals in the quarter and how does the chat pipeline look?

The two big areas for us continue to be, shall we say, super chat, what we call super chat, which is chat. Meaning not just standard chat, but proactive engagement with co-browse and video and click-to-call. So that' part is still very strong.

Then the second place where we are seeing continued demand is the knowledge side. So, yes, that pipeline is good and that pipeline is also a more natural first product or first solution that Cisco's network tends to gravitate towards because it's more channel and interaction-oriented, if you will.

Got it, that makes sense. Then just last, in terms of -- it sounds like you are getting closer on head of sales. Can you give a little more color there? Are you focused on people with SaaS backgrounds or does it just sort of industry expertise or enterprise software? What are some of the key things you're looking for with the head of sales?

I think the key thing we're looking for is someone who, of course, has strong sales performance. That goes without saying and all the sort of individual characteristics, but the part that I am interested in more is people who have sold solutions before, whether it's in the cloud or on-prem doesn't matter. I feel like the proposition that we are putting in the market is much more solution-oriented than just a widget or a tool.

So that is an area that I am particularly keen on getting someone who can cultivate that for a (inaudible) culture and the organization around solutioning.

Okay, great. Thank you.

That does conclude our question-and-answer session for the day. I would now like to turn the conference over to management for any closing remarks. Please go ahead.

I want to thank you for joining us today. As always, should you have any further questions or comment, please feel free to give us a call. We will look forward to talking to you again in our 2014 fiscal fourth quarter and year-end conference call.

We will also be attending some upcoming investor conferences this summer, so if you happen to be at them, please stop by and say hello. Thanks and have a great day.

Ladies and gentlemen, that does conclude the eGain fiscal 2014 third-quarter financial results conference call. You may now disconnect.