eGain Corp (EGAN) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the eGain Fiscal 2017 Third Quarter Financial Results Conference. Today's conference is being recorded.

And at this time, I'd like to turn the conference over to Jim Byers at MKR Group. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Welcome to eGain's Fiscal 2017 Third Quarter Financial Results Conference Call. On the call today are eGain's Chief Executive Officer, Ashu Roy; and Chief Financial Officer, Eric Smit.

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 objection -- objectives regarding future financial and operational performance. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate or similar expressions.

Forward-looking statements are protected by safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a wide range of risks and uncertainties that could cause actual results to differ in material respects, including those related to our beliefs that we are seeing and will continue to see the benefits of the company's transition to a cloud-based business and will continue to see success in implementing the land-and-expand sales model. Actual sales could differ materially from those described in this conference call and presentation.

Information on various factors that could affect eGain's results are detailed in the company's reports filed with the Securities and Exchange Commission. eGain is making these statements as of today, May 10, 2017, 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 in this conference call such as adjusted EBITDA and non-GAAP net income. Our earnings press release can be found on the news release link on the Investor Relations page at eGain's website at www.egain.com. The tables included with the earnings press release include reconciliation of the historical non-GAAP financial measures to the mostly directly comparable GAAP financial measures. A replay of this conference call will also be available at the Investor Relations section of eGain's website.

And with that said, I'd like to turn the call over to eGain's CEO, Ashu Roy.

Thank you, Jim, and hello, everyone. We are pleased that we have successfully transitioned our business to SaaS. We delivered good bookings this quarter, even as we drove operating efficiency in our business.

In terms of highlights, our new subscription and support ACV was up 47% sequentially and 88% year-over-year. Our total subscription on support ACV was up 7% year-over-year, despite the impact of a previously announced $5 million ACV reduction that took effect beginning of Q3. And our backlog was up 43% year-over-year to nearly $54 million.

Turning to some of the client wins. I want to share a couple of them that were noteworthy. One of them is a top 5 telco in the U.S. They were looking for a modern platform to drive greater digital engagement with customers. Starting with over 1,000 digital engagement [feeds for now], they intend to double their digital engagement volume in 3 years. Competing with us for this opportunity were the classic CRM incumbents and few best-of-breed providers. 3 reasons for our win, I believe: first, our product depth, solution breadth and platform scale; second, our Try+ Buy experience, which was quite good for them; and third, our strong customer references. Now we are excited that we're now implementing the solution for rollout this summer with this client. Of course, this is all in the eGain cloud.

The other win, which is interesting to mention, is a significant cloud-based deal through the Cisco partnership. This client is a large U.S.-based healthcare provider. They will use the eGain desktop bundle, including all our capabilities and digital knowledge and AI, to deliver better customer expense in concert with the Cisco contact center platform.

Both these wins have been a result of not just our product, but also improved execution, both on the direct side as well as the partner side.

On the product and marketing front, we had a very successful Digital+ AI Day in March in London with nearly 800 attendees, not eGain that is. This was a 50% increase in attendance compared to last year. At this event, we showcased our new eGain Advisor Desktop. It's a reimagined product that extends our core strengths in digital, knowledge, AI and analytics with powerful case management and agent collaboration capabilities.

With this introduction and our expanded desktop footprint, we have now successfully debuted in the Gartner MQ for CRM customer engagement center, something that was released earlier this week. Our customers are very excited about our new capability and so are we. We've already won a couple of mid-sized deals with our new Advisor Desktop going up against some classic CRM vendors. We believe that our innovative product in this area and attractive price point with the bundling that we offer is going to be compelling for the enterprise B2C market.

On the sales side, we are finding more sweet spot opportunities for knowledge and AI, especially in the U.S. market. And some of these seem to be coming from a lot of SharePoint implementations that are struggling for effective knowledge management and process guidance in large customer service environments. Also, our sales teams across the direct sales channel and installed base are collaborating even more actively than before, especially with partners, so that we can leverage them more to reach more opportunities. This is helped by the fact that our new go-to-market for our Cisco partnership is now fully rolled out. As you know that the new go-to-market from eGain and Cisco is based on pure subscription pricing, and therefore, fully SaaS-based model.

With this SaaS transition now complete, we expect all new business going forward to be SaaS-based. And this positions us really well for steady SaaS-type revenue growth in fiscal 2018 and beyond.

With that, I'll ask Eric Smit, our Chief Financial Officer, to add more color around finance and operations. Eric?

Thank you, Ashu, and thanks for joining us today. Before I begin my prepared remarks, I'd like to note that the P&L numbers I will be showing today are non-GAAP unless otherwise noted. Included with the press release is a supplemental table that provides a reconciliation of the non-GAAP to GAAP numbers.

I'll start by reviewing our SaaS bookings metrics for the quarter and then go into detail of our third quarter financial results.

During the quarter, we saw a solid growth in our new SaaS bookings and our backlog. New bookings for the quarter was $4.6 billion, up 47% sequentially and up 88% year-over-year. Gross bookings for the quarter was $21 million, up 27% sequentially and 64% year-over-year. Our total ACV at the end of the quarter was $44.8 million, this is up 7% on a constant currency basis with the prior year, despite the impact of the previously announced onetime $5 million reduction in ACV for the quarter due to the transition of one customer away from the cloud.

Total backlog as of March 31, 2017, or total deferred revenue plus unbilled and uncollected orders was $53.5 million, up 43% year-over-year and up 50% in constant currency. Included in the backlog, there are a few deals we'd booked earlier in the year that we have not yet started revenue recognition due to acceptance requirements. Our expectation is to -- before these requirements and start recognizing the revenue on these contracts in Q1 of fiscal year '18.

Turning to our revenue. Total revenue for the third quarter was $13.9 million, $15 million in constant currency, compared to $16.3 million in the comparable year-ago quarter. For the 9 months, total revenue was $43.6 million, $47.6 million in constant currency, compared to $51.8 million in the year-ago period.

Our subscription and support revenue for the third quarter was $10.1 million, or $11 million in constant currency. This is compared to $10.3 million in the comparable year-ago quarter or up 6% in constant currency year-over-year. Excluding the impact of the one-time $5 million reduction in ACV, as I just talked about, subscription and support revenue for the quarter was up 18% in constant currency year-over-year. Subscription and support revenue for the quarter accounted for 73% of total revenue, up from 63% in the comparable year-ago quarter. For the 9 months, subscription and support revenue was $32 million, or $34.8 million in constant currency, compared to $32 million in the same period last year or up 9% in constant currency year-over-year.

License revenue for the third quarter was $1.2 million compared to $3.2 million in the comparable year-ago quarter. This decrease reflects our business mixed shift to a SaaS model.

As Ashu mentioned, now that we have made this transition, we have no significant license deals in our pipeline. So we expect license revenue to be less than 5% of revenue going forward. Professional services revenue for the second quarter was $2.6 million compared to $2.8 million in the comparable year-ago quarter. For the 9 months, license revenue was $4.2 million compared to $10.7 million in the same period last year, while

professional services revenue for the 9 months was $7.4 million compared to $9.1 million in the same period last year.

Now looking at our gross profits and gross margins. Gross profit for the third quarter was $8.5 million or a gross margin of 61% compared to gross profit of $11.1 million or a gross margin of 68% 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 71% compared to 74% from the comparable year-ago quarter.

Professional services gross margin was 5% for the quarter compared to 12% in the comparable year-ago quarter. For the 9 months, gross profit was $28.9 million or a gross margin of 66% compared to a gross profit of $35.3 million or a gross margin of 68% for the same period last year. Subscription and support revenue gross margin was 75% for the first 9 months, the same as last year. Professional services gross margin for the 9 months was 10% compared to 8% in the comparable year-ago period.

Now turning to our operations. Operating costs for the third quarter came in at $9.3 million, a 21% decrease from the $11.7 million in the comparable year-ago quarter. For the 9 months, total operating costs were $29 million, a 19% decrease from $35.8 million in the prior year. Adjusted EBITDA for the quarter was a loss of $814,000 compared to an adjusted EBITDA loss of $280,000 in the comparable year-ago quarter. For the 9 months, adjusted EBITDA loss was $55,000 compared to adjusted EBITDA of $6,000 in the same period last year.

GAAP net loss for the third quarter improved to $2.5 million or a loss of $0.09 per share compared to a net loss of $3 million or a loss of $0.11 per share in the comparable year-ago quarter. For the 9 months, GAAP net loss improved to $6 million or a loss of $0.23 per share compared to a net loss of $7.6 million or a loss of $0.28 per share in the same period last year.

Now turning to our balance sheet and cash flows. Cash and cash equivalents were $10.3 million as of March 31, 2017, compared to $11.8 million as of June 30, 2016. During the quarter, we generated $2.8 million in cash from operations, the same as in the third quarter a year ago. For the 9 months, cash flow from operations was $1.5 million compared to cash flow used in operations of $326,000 in the same period last year.

With our improved cash flow, we paid down approximately $2 million from our loan during the quarter, and we're pleased to have successfully executed the transition of our business model to -- into cash generation. Our net debt position at the end of the quarter was $9.1 million compared to $11.6 million at the end of last quarter and $11.4 million at March 31, 2016. Total net accounts receivable was $7.7 million at March 31 compared to $6.6 million at March 31, 2016.

In summary, we are pleased with our continued progress this quarter. While the business shift has negatively impacted our license revenue and our total revenue this fiscal year, we have focused our efforts on operating efficiencies during this business transformation and are pleased with the progress we have made. For the first 9 months of FY '17, we have maintained adjusted EBITDA breakeven, while total revenue declined by more than $8 million.

Looking forward, as Ashu mentioned, we are very excited to have completed our transition phase to a SaaS model. We believe this positions us for steady continued SaaS-type revenue growth in fiscal 2018 and beyond.

With that said, we look forward to updating you on our continued progress when we report our Q4 and full year results. And this concludes our prepared remarks, and now I will open the call for questions. Operator?

(Operator Instructions) We'll take Mike Latimore with Northland Capital Markets first.

This is Nick Altmann on for Mike. Thanks for taking my questions. Can you guys -- you guys mentioned that one of your bigger deals in the quarter was closed through kind of your Try+ Buy sales strategy. Can you guys just kind of give us an update there on the success rate with that strategy and anything around how the sales force is utilizing that?

Sure. So this is Ashu here. So for us, the Try+ Buy has become embedded as part of our sales model. And we use it where the customer is not late in the evaluation cycle and in an RFP mode. And we find that while our success rate still continues to be in that up above 15%, which is what we had said in the past that we win more than 15% of the opportunities where we will successfully -- we will deploy our Try+ Buy. That's become a way that we show the difference between a lot of marketing claims out there from competitors and what we think is the proof point that businesses are looking for in their own environment in a production pilot.

Got it. Got it. Okay. And then can you guys just give a little bit more update in regards to relationship with Cisco and maybe talk about the pipeline there?

So a couple of points. One, we -- as you know, we have refreshed and sort of gone to the next version of our partnership with Cisco with the new bundled OEM, which is something that is now being sold and we are collecting royalties for it. That's a good thing. On top of that, we've also refined our resell partnership, which is the Solutions Plus partnership. And that one is now on the forward-looking basis 100% subscription-based pricing, which was a big thing for us and Cisco to effect. And that is now completely implemented. Put those 2 together, and we are finding more streamlined pipeline generation than in the past. In the past, we would have a lot of variation as we were transitioning. Sometimes, there would be perpetual deals. Sometimes, there would be cloud deals. And now all the forward-looking stuff is all subscription-based. So that makes the execution a lot better. Specifically, in the U.S., for instance, we're finding good success in the healthcare market. And that's an area where we have been quite successful with the Cisco partnership in the U.S.

Got it. Got it. Okay. And just going off of that, any other verticals that you guys see any near-term opportunities maybe more so than others or pretty consistent with how it's been in the past quarters?

On the direct side, I would say, the one that is the most active for us right now is BFSI, which is banking and financial services insurance, that sector all put together. That's been the most active vertical for us in the -- on the direct side.

Got it. And then just last one, if I could. Do you guys anticipate any more bigger or larger customers in the future that could go from cloud to on-prem?

No, we're not aware of any at this point. No.

(Operator Instructions)

Okay. Well, it looks like we have come to the end here. Thanks again to everybody for joining us today, and we look forward to updating you with our Q4 and fiscal year results. Thank you.

Thank you, everyone. That does conclude our conference call for today. You may now disconnect your line.