eGain Corp (EGAN) 2018 Q2 法說會逐字稿

Good day, everyone, and welcome to today's eGain's Fiscal 2018 Second Quarter Financial Results Conference. Just a reminder that today's call is being recorded and at this time, I'd like to turn the conference over to Jim Byers of MKR Group. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Welcome to eGain's Fiscal 2018 Second 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 objectives regarding future financial and operational performance. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate or similar expressions. Forward-looking statements are protected by safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a wide range of risks and uncertainties that could cause actual results to differ in material respects.

Information on various factors that could affect eGain's results are detailed on the company's reports filed with the Securities and Exchange Commission. eGain is making these statements as of today, February 8, 2018, 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 non-GAAP operating income.

Our earnings press release can be found on the news release link on the Investor Relations page of eGain's website at www.egain.com. The tables included with the earnings press release include reconciliation of the historical non-GAAP financial member -- measures to the most directly comparable GAAP financial measures and a replay of this 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. Hello, everyone. This is now our third quarter since the shift to a pure-SaaS model, and we are starting to build a nice cadence of execution. With strong interest in our V-17 product, we're signing up good brands and target verticals, especially financial services. We also see increased migration of our legacy on-premise customers to the eGain cloud, and our partner-leveraged sales model, put in place by Todd last quarter, is being operationalized well. Finally, our financial performance continues to trend the right way.

In the second quarter of our fiscal year, our SaaS revenue was up 24% year-over-year, non-GAAP total deferred revenue was up 47% year-over-year, cash flow from operations improved to $2.6 million from a negative $3.8 million in Q2 last year, and we ended the quarter in a net cash position of $3.5 million, compared to our net debt position of $11.6 million at the end of Q2 last year. So that's -- that performance is looking good.

Turning to customers. Financial services and government were the top 2 verticals for the quarter, across new logos and expansion opportunities.

Some examples of new wins, we won an Top 10 European bank as a client, they selected the eGain platform to embark on their digital transformation in customer engagement. Another one was Waddell & Reed, one of the oldest asset management and financial planning firms in the U.S. They selected eGain as their omnichannel customer service platform.

We also saw an increase, as I mentioned earlier, in the momentum of cloud migration on our on-premise customer base. One of the nice deals we closed this quarter was a 7-figure ARR deal from a government sector client. And this momentum continues to grow, especially in the EMEA client base with the GDPR requirements that are coming on and will be active late May of this year. There is a lot of interest in moving to our eGain Cloud, which we have certified to be GDPR compliant. So that's another driver in the European business at least for our clients to move to the eGain Cloud.

On the sales front, we are investing more in our channel and partner program under Todd's global sales leadership. As you all know, Cisco is a strategic partner for us. Last month, we partnered with Cisco on a 4-city roadshow in the U.S. to educate our partners and Cisco field on our new AI-guided eGain Solve proposition that seamlessly integrates with the Cisco contact center services using web services in our cloud. This is the first of our integrations into big contact center and CRM platforms.

Later this month, we will exhibit at Call Center World 2018 in Berlin, joining forces with Cisco, to showcase our solution embedded in the Cisco desktop. We are continuing to invest more in our Cisco partnership. Last month, Todd added a dedicated Director of Cisco partnership program globally to his team, and we look forward to growing our strategic partnership with Cisco to greater success.

A new partner for us in the contact center space is Avaya. Based on customer demand, we have now integrated eGain Solve with the Avaya desktop and IVR platform. Last week, we exhibited that at the Avaya ENGAGE Conference, New Orleans, co-hosted by Avaya and International Avaya User Group. We are encouraged by the early interest in our solution in the Avaya customer base. So we will see how that partnership develops over time.

Continuing the theme of integrating our solution into larger ecosystems, we recently announced our integration with Salesforce CRM. This integration gives contact center agents using the Salesforce desktop access to guided problem resolution powered by our AI solution. Our goal is to make our solution easily available from all open CRM and contact center platforms.

Turning to customer success. We had a very successful Digital+AI Day in Chicago this December. Some of you attended that, and thanks for coming by. The highlight for the day for us was the Comcast customer presentation. They shared their digital experience strategy and how and why they chose eGain as their platform partner for digital transformation. On the product front, they offered 3 reasons, simple and powerful, for going with eGain. First, they said it was an omnichannel platform; second, they said was the comprehensive set of features they were looking for; and the third, from their perspective, was an open architecture for integration. We couldn't have said it better. Comcast now is servicing 12 million customer chats per year on the eGain platform on a 24/7 basis, handled by over 5,000 agents across multiple locations. Our solution at Comcast has replaced a point chat solution they had deployed several years ago but were struggling to keep up with demand, and it was not in omnichannel solution. Comcast now uses eGain AI for dynamic routing to improve agent utilization and simplify the customer experience, and they have also extensively deployed our analytics to measure and manage their digital workforce, track service level and compensate the providers. It's a journey that we are very proud of, getting into Comcast and look forward to helping them in their transformation. At the Digital+AI Day, we also announced 2 new capabilities in our platform. First, we announced eGain ML or Machine Learning, a core capability added to our platform. Using it, we showcased our enhanced eGain virtual assistant which sits in front of our digital engagement platform to predict customer intent and seamlessly guide the customer through an automated service experience. All the while, the customer is never left out to dry in case they need human intervention. We seamlessly connect the conversation to an agent, when needed, with full context and we learn from the interaction for the future using machine learning. Second, we announced our developer central portal for partners and customers to use our cloud APIs to develop new solutions, extend existing capabilities and integrate with third-party systems. To showcase this portal, we demonstrated our integration using APIs with Facebook Messenger for digital messaging. This messaging-everywhere theme was very well perceived. We now offer messaging connectivity through SMS and Facebook Messenger, and in future, we'll connect with other emerging business messaging platforms.

In summary, we are executing well across our business with focus and speed, and we look forward to further improving our business performance. With that, I'll ask Eric Smith, our Chief Financial Officer, to add more color. Eric?

Thank you, Ashu, and thanks for joining us today. As Ashu noted, we continued to execute well under our new SaaS revenue model and are very pleased with our continued positive momentum. Looking at the financial highlights for the quarter, we delivered solid results across our 3 key metrics. SaaS revenue was up 24% year-over-year, non-GAAP operating income of $843,000 was up 97% year-over-year, and cash flow from operations was $2.6 million, which brings our operating cash flow for the trailing 4 months to $15.2 million or a cash flow from -- or a cash flow margin of 26%.

This improved financial performance strengthened our balance sheet, resulting in a net cash position of $3.5 million at the end of the quarter, a significant improvement from net debt position of $11.6 million a year ago. And our increased SaaS bookings resulted in a 47% year-over-year increase in our non-GAAP deferred revenue. Financially, this puts us in a solid position to continue to execute to our strategic business plan.

Now turning to our financial results in more detail. Total revenue, excluding legacy license, was $15.3 million for Q2, up 13% year-over-year. For the 6-months period, total revenue, excluding legacy license, was $29.7 million, up 11% from the same period a year ago. Our recurring revenue was $12.6 million in Q2, up 14% from the year ago quarter. For the first 6 months, recurring revenue was $24.2 million, up 11% from the same period a year ago. Recurring revenue accounted for 82% of total revenue in Q2, up from 73% in the year-ago quarter.

Breaking out the revenue components in Q2, SaaS revenue was $7.7 million, up 24% from the year ago quarter and up 14% sequentially. Legacy license revenue was $64,000, down from $1.4 million a year ago and professional services revenue was $2.8 million, up 7% from the year ago quarter. For the 6 months, SaaS revenue was $14.4 million, up 20% year-over-year, legacy license revenue was $252,000, down from $3.1 million in the same period a year ago, and professional services revenue was $5.5 million, up 14% from a year ago.

Now looking at our non-GAAP gross profits and gross margins. Gross profit for the second quarter was $10 million or a gross margin of 65%. This compares to a gross profit of $10 million or a gross margin of 67% a year ago. If you look at the breakout of gross margin by revenue type in Q2, our recurring revenue gross margin was 75%, unchanged from the year ago quarter. Professional services gross margin was 19%, up from 14% a year ago. For the 6 months, gross profit was $19.3 million or a gross margin of 64%, compared to a gross profit of $19.8 million or a gross margin of 67% a year ago. Recurring revenue gross margin for the 6 months was 75% compared to 74% in the same period a year ago. Professional services gross margin was 17% for the 6 months, up from 11% a year ago.

Now turning to operations. Non-GAAP operating costs for the second quarter came in at $9.2 million, a 4% decrease from the year ago quarter. For the 6 months, non-GAAP operating costs were $17.9 million, a 10% decrease from a year ago. Non-GAAP operating income in the second quarter improved to $843,000, a 97% increase from the year ago quarter. For the 6 months, non-GAAP operating income improved to $1.4 million from a non-GAAP operating loss of $21,000 in the same period a year ago. Looking at our interest and taxes for the second quarter, interest expense was $239,000, down from $459,000 in the year ago quarter. And on taxes, we reported a tax expense of $123,000 for Q2 compared to $219,000 a year ago. For the 6 months, interest expense was $583,000 down from $881,000 in the same period a year ago, and we reported a tax benefit of $38,000 compared to a tax expense of $1.1 million in the same period a year ago.

Looking at net income, non-GAAP net income for the second quarter was $451,000, or $0.02 per share, compared to a non-GAAP net loss of $322,000, or $0.01, in the year ago quarter. GAAP net loss for the second quarter was $788,000, or $0.03 per share, compared to GAAP net loss of $1 million, or $0.04, in the year ago quarter. The GAAP net loss for Q2 reflects the impact of a onetime pickup of about $350,000 of stock-based compensation as a result of the repricing we had completed at the end of last quarter.

For the 6 months, non-GAAP net income improved to $706,000, or $0.03 per share, compared to a non-GAAP net loss of $1.9 million, or $0.07, in the year ago period. For the 6 months, GAAP net loss improved to $1.4 million, or $0.05 per share, compared to a GAAP net loss of $3.5 million, or $0.13, in the year ago period.

Now turning to our balance sheet and cash flows. Total cash and cash equivalents, as of December 31, 2017, was $10.8 million compared to $10.6 million as of June 30, 2017. We generated cash flow from operations of $2.6 million in the second quarter, compared to cash flow used in operations of $3.8 million in the same quarter a year ago. For the 6-month period, cash flow from operations was $8.5 million compared to cash flow used in operations of $1.3 million in the same period a year ago. Total net accounts receivable was $6.5 million at December 31, 2017, compared to $7.2 million at June 30, 2017. And our DSOs improved to 46 days for Q2 compared to 51 days in the second quarter of last year.

Total deferred revenue was $68.4 million, as of December 31, 2017, up 47% from $46.4 million as of December 31, 2016. Deferred revenue includes both deferred revenue on the balance sheet of $29.1 million and unbilled deferred revenue that remains off balance sheet of $39.3 million, collectively representing contractual commitments that have not yet been recognized as revenue.

Looking at our outstanding debt, we paid down approximately $2.6 million in debt during the quarter and total debt, as of December 31, 2017, was $7.3 million, down 66% from $21.3 million as of December 31, 2016.

Now turning to our guidance for fiscal 2018. We are reiterating our previously provided expectations for fiscal 2018 with SaaS revenue annual growth of between 15% and 25% and total revenue annual growth, excluding our legacy perpetual license revenue, of between 5% and 10%. We've excluded the legacy license from this calculation, as we expect it to be less than 1% of total revenue in fiscal 2018, reflecting our business model transition.

Lastly, on the Investor Relations front, eGain will be participating at the 30th Annual ROTH Conference taking place next month in Orange County, California. We hope to see some of you there, and we look forward to updating you on our continued progress when we report our fiscal 2018 third quarter results. This concludes our prepared remarks, and we will now open the call for questions. Operator?

(Operator Instructions) And we'll go first to Mark Schappel at Benchmark.

So Ashu, let's start with you. Last quarter, I believe you mentioned that you were seeing a steady improvement in your renewal rates and your retention rates. I was wondering if it's fair to assume that those trends continued this quarter.

Yes. They are at a good level. I would say that we improved reasonably. We made good progress in 6 months, and now we are at a steady level, which is a good level. So that's where we are. Yes.

Okay, good. And then with respect to your relatively new Avaya partnership, I get it, it's early days here, but does that partnership progress to the point where it's generating any revenue yet?

Not yet, no. We have some opportunities we are working with them. We have some joint customers, but those did not come through the partnership. They just happened to intersect. So right now it's really about pipeline.

Okay, great. And then next question here a quarter or 2 ago, you brought on a new Head of Sales and I was just wondering if, maybe, you could go through in a little bit more detail, some of the initiatives that he's put in place here?

So I would say broadly 2 things. One is he -- we discussed and agreed that we were going to focus on the enterprise completely. In other words, not go too much out for the smaller end of the mid-market, and that meant that we reorganized the sales team such that before Todd came on board, we had organized a model where we had a direct sales team, and we had a channel sales team, and the 2 teams worked in parallel, but the channel folks sold through the channel and the direct guy sold without partner involvement. What he has done is made it a classic enterprise model which is, the direct sales team has been reclassified as enterprise sales and the partner -- the channel sales guys have become now partner managers who were feeding opportunities into enterprise sales, and enterprise sales carries the entire number, so it's an overlay model now, which we felt was more appropriate for the enterprise opportunities that we were going after and what we saw was working and not working.

And we'll go next to Rich Baldry at Roth Capital.

If we look at your implied bookings, is in the revenue and delta deferred model was awfully strong in the quarter. Could you talk about how much of that was really partner-driven versus direct-sale-driven? And then, sort of, the balance across geographies whether you felt that was concentrated in some geographies or spread around fairly evenly?

Okay. I'll break it up into a couple of buckets here, Rich. First of all, let me start with the renewals. Because as you know, we do have some large accounts that we service, and so when those renewals come up, that tends to shoot up the deferred significantly at that time. So that's one thing to keep in mind. The second is on the expansion and new logo opportunities, I'd say it's relatively well balanced across enterprise and -- meaning new and expansion, about 50-50 for the quarter, roughly. Although we don't disclose the number, specifically, but that's where it roughly sits. And in terms of geography, I think again, it's fairly well-balanced between U.S. and Europe.

And then in terms of the changes, or any changes you might want to see under new sales leadership? How do you feel about how that's gelling now? Do you think the pace of hiring is going to change materially? How do you feel about the tenure of the team? Anything, any color on that'd be helpful.

Sure, I think this fiscal year, I expect for the remainder of remaining Q3 and Q4, I expect Todd to really get the operational cadence working well, because he has made some changes there, significant changes as I mentioned. So working that through the team, with the team, making sure everyone understands and is executing according to the new model in a collaborative, sort of, overlay way, that's really what he's doing a lot of, and he is starting to do some targeted hiring, and I expect that, that is the model he will have for the remainder of the fiscal year. I do think that assuming that things do work as we believe they should, we can start to scale up in the new fiscal year which is July onwards.

Lasting thing would be, as we've seen the legacy license really fall to essentially zero, you talked about sales cycles now, because there's no distraction in the customers, essentially thinking they can choose one versus -- a versus b, one or the other. Do you feel like sales cycles have a potential to accelerate without that distraction now?

I'm not sure. I think the sales cycles are not materially different, best as I can tell. What I can say is that we are -- perhaps our win rate, once we qualify things should go up. That I think was one of the bigger challenges, that early on we get all confused, and the customer would be confused and that part is, I think, not an issue anymore. We are qualifying things out, if there are -- in the U.S., I would say, it's a very small minority of customers who are still insisting on, on-prem, very small. Internationally, I think it's still there, but at least, we qualify them out quickly and move forward.

And we'll move next to Jeff Van Rhee at Craig-Hallum.

So a couple from me. Ashu, on the pipeline, just with respect to the net new rate, not the migrations but just the new customers, just give us, kind of, little walk-through of how you've seen the market progress over the last 5, 6 quarters? I'm just curious on the flat-out new deals, I mean, I know you had some distractions with prem cloud, but just walk just specifically over the focus on that net new in a little bit more detail, if you would?

Okay. So I think that the way I would characterize it is as the net new adds are still about at the same rate as they were 3,4 quarters ago, that has not changed significantly, yet. What we do see is that we are able to sell more sweet spot deals. So we're not going after the very, sort of, off-the-main-track opportunity. So the, kind of, the quality of the new logos we are winning are much better, even though the numbers may be in the same range that they were before, and that I think is very important for us, because when you get a sweet spot opportunity then we do a good job of it initially, and that then will grab more business for us, so that's the positive I see in the last 4 quarters.

Okay, all right, great. And then shifting gears, just over to Cisco. Can you also just give us a little update on how that's progressed last 3, 6 months? And if you're able, quantify the revenue impact or percent of bookings coming from that channel? Just a little update there would be great.

So I would say that on the Cisco front, overall, things are in a much better place, because we are much more focused on what is the real value add that eGain is bringing to the Cisco ecosystem from our, sort of, resell prospective, the Solution Plus, which is the Cisco resell model. I think we have a much better feel for that, and the Cisco ecosystem is much more aligned with that. That's one change for the positive. If you were to call a negative, which I don't think is negative in the long run but certainly could seem like a negative in the short-term, is that we are guiding more and more of Cisco customers toward their Cisco-branded platform of voice chat and e-mail. Now remember that we are also the OEM suppliers of that e-mail and chat, but that's not eGain branded, right. So but we are -- because that product is solid, it then -- we've rebuilt that with Cisco working over a number of quarters. So that in the short term probably has had a negative impact on digital applications that we're selling through Cisco, and we are keen to continue to drive that way, because we think that the big prize for us together is all the knowledge and AI and analytics on top of Cisco, rather than the digital add-ons in the Cisco ecosystem.

And from a percentage revenue standpoint, it's been pretty consistent. So a close to 15% or thereabouts.

Okay. Consistent. Got it. And then just one last for me. With respect to OpEx and headcount, just your thoughts as we're getting a little bit into '18 here, you certainly come a long, long way to improve the balance sheet. Cash flow has been strong. As you look at the business here, how do you feel about headcount? Any particular areas you see, maybe, even accelerated hiring or increase staffing? Either based on pipeline or just delayed means, if you will?

I think that the investments will start to look up now whether it happens this quarter or next but it certainly will start to look up. So yes, I think we're going to start to ramp investments starting with the field facing folks but also then looking at areas like service and support. But more on the field facing side. Yes.

And what is -- just a follow up, what is headcount as of this quarter? And any thoughts, I guess as of December? And then, kind of, even a crude swing at what you think you'll be at end of year?

Do you have that data Eric, by any chance?

Yes, I think the headcount numbers are close to 470.

Yes. That number is a little hard to parse as you know, Jeff, because of the whole global model, but let us think about that a little and maybe we can share some thoughts. Yes.

And we'll go next to Ryan MacDonald at Dougherty & Company.

Can you go -- dive a little bit deeper into some of the customer wins in the quarter. You talked about a Top 10 European bank, I mean to the extent that you can, what was the, sort of, competitive dynamics of that deal? And was this something that was led or driven by the Cisco channel? Or was it more of a direct sales opportunity?

So this one was a direct sales opportunity but through a partner but not through Cisco. However, as it turns out, that bank is also a big Cisco customer, and so it's quite possible and likely that we will partner with Cisco, as we expand in our footprint. This was a case of digital a group that was looking to drive new ways of customer engagement in a business unit that was -- that is expressly set up for a new, sort of, direct digital banking operation. So we were competing with all the usual cast of characters, but the big thing for us was we have the Try+Buy, which worked very well for us. We, kind of, go in early, and we shaped the agenda, and so that was a nice entry, and now it's about figuring out and working through, getting more of an enterprise-wide mandate.

Got it. Got it. And in terms of this new partnership with the Avaya, I guess, as we look at this partnership starting to ramp, should we expect a similar type of -- or amount of investment that you have done with Cisco and, sort of, developing and building that relationship as well as, perhaps, bringing on new heads in the sales department also directly focused on Avaya?

I would say Avaya is extremely early days right now. The only reason I mentioned it is that we have been talking about developing other partnerships that are going to increase our, sort of, market access, and so we wanted to make sure we are keeping everyone up to date on it, but at this point, I would say it's very early days. And we'll watch it closely. We're obviously investing as appropriate, but it's nowhere close to where we are with Cisco, nowhere close. But on the other hand, you can look at the fact that Avaya does have a significant install base. Coming out of the restructuring, they seem to be very agile and very focused now, and so we're optimistic, but it's very early days.

Got it. And then just one final one, I guess, for Eric here. Eric, obviously with the third quarter here, I know you've obviously reiterated guidance for the full year on the top line, but should we be expecting any, sort of, impact from ASC 606 in terms of -- on the expense side of the business here?

At this stage, probably, this is something that perhaps becomes effective in the September quarter for us, so this was the June year-end, so we won't anticipate anything in Q3 because we will be adopting the modified retrospective approach to it, so don't anticipate any changes certainly in Q3.

(Operator Instructions) And gentlemen, I have no additional questions at this time. I'll turn the program back over to you for any additional or concluding remarks.

Okay, well thanks everybody. Look forward to updating you when we announce our Q3 results. Thank you.

And ladies and gentleman, that does conclude today's conference and again I'd like to thank everyone for joining us today.