eGain's (EGAN) CEO Ashu Roy on Q3 2014 Results - Earnings Call Transcript

May. 6.14 | About: eGain Communications (EGAN)

eGain Corporation (NASDAQ:EGAN)

Q3 2014 Earnings Conference Call

May 6, 2014 5:00 PM ET

Executives

Charles Messman – VP, Finance

Ashu Roy – Chairman and CEO

Eric Smit – CFO

Analysts

Michael Huang – Needham and Company

Jeff Van Rhee – Craig-Hallum

Raghaven Sarathy – Dougherty & Company

Jon Hickman – Ladenburg

Michael Latimore – Northland Capital

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the eGain Fiscal 2014 Third Quarter Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions]

I would now like to turn the conference over to Charles Messman, of eGain. Please go ahead, sir.

Charles Messman

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’d like to remind all listeners that this conference call contains forward-looking statements within the meaning of the Safe Harbor provisions of the U.S. 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 revenues, subscription and support revenue, license revenue and statements regarding our fiscal 2014 guidance and ACV metrics including sources of revenue and business mix.

The achievements and success of the matters covered by such forward-looking statements involve risks and uncertainties and assumptions. If any such risk or uncertainty materializes or Company’s assumptions prove incorrect, the Company’s results could differ materially from the results expressed or implied by the forward-looking statements we make. The risks and uncertainties refer to above include, but are not limited to, risks that our hybrid revenue model and inventory sales cycle may negatively affect our operating results which leads to our reliance in a relatively small number of customers for a substantial portion of our revenue, our ability to compete successfully and manage growth, our ability to develop and expand strategic and third-party distribution channels, risk associated with new product releases, risk related to our international operations, although the investment not just to improve our product and continue to innovate, and other risks detailed from time to time in eGain’s filings with the Securities and Exchange Commission including eGain’s annual report on Form 10-K filed on September 23, 2013 and eGain’s quarterly report 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 current expectations and speak only as of the day of this call. The Company 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. To begin the discussion, I’d now turn the call over to Ashu. Ashu?

Ashu Roy

Thank you, Charles and good afternoon everyone. Thank you for joining us today. So 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 U.S-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, two were direct.

So for us accurately forecasting these deals continues to be an area of focus, as we have mentioned before many of these deals have two partners were we are a component of larger project. 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 partnership and channels, it’s exciting to see significant deal closure in 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 sizeable fixed bigger 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 views with 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’ll 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 multi-channel contracts to market, in fact one of the larger deals we closed in April with Cisco was a significant IT knock off in the U.S.

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 fees have been jumping at this base for sometime. But 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 that the customer management market is changing from a pure cost base model to more value based and transformational proposition.

According to Gartner, the adoption rate and growth momentum experienced in non-voice multi-channel services, such as web chat, email, SMS, self-service and social PRM services are set to tilt the balance in favor of non-voice based services by 2016. So there is an inflexion 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 we named Concentrix with the global electronics manufacturer the one that I have 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 have made some key additions and changes. So we promoted A J 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 is on worldwide sales force and was the CEO of start-ups and a publicly traded company in the networking space. At eGain he has done a tremendous job developing our Cisco go-to-market and partnership. And so we are very excited that he is now taking on this U.S. sales leadership role and focus 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 Nike and prior to that at Cisco and Avaya has joined us to replace AJ in his role. She brings a wealth of experience in contacts at Cisco and its partner ecosystems. So we’re very excited about her joining on the Board as well.

And finally, we had last quarter talk about the fact that we had promoted Andrew McDonald to run EMEA sales. He is settling it quite nicely and building his team with experienced sales professionals and management folks from the contact center and BPO markets.

Overall, I’m feeling quite good about all these changes and I feel that this team now has the – both the ability and the ammunition to go out and develop our sales pipeline in a 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 these 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 incredibly [indiscernible] is LexisNexis, they are one of our customers who have built not just a strong multi-channel customer engagement capability on top of eGain, but also developed new product shareholder about how LexisNexis is leveraging the eGain platform. And that will be an exciting discussion.

On top of that, we are focusing on lot of our product investment 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 of improvements and innovation coming out in that area in the near future.

If you look at the landscape and step back from our product to look at where we are in the market, we see strong demand for the two areas that we have been focused on for quite sometime, which is the multi-channel area which is now being called the omni-channel area, 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 analytic 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 accesses to a tremendous amount of those channel data, as well as the knowledge that underpins those interaction. So we are adding to our focus on the analytic side as you all probably aware of, we introduced our integrated analytic capability last year and we have continued to improve that to the point where are increasingly closing the gap with the niche analytic vendors in the market. And now we believe that there is an opportunity for us to leverage our Cisco partnership and go out to extend the analytic data sources, we include the voice channel, not just the multi-channel, digital channel that we have had in the past.

So that’s 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 close loop of improvement in terms of the engagement of clients through that multi-channel journey.

To conclude, we are excited about the markets 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. And the three areas that we are focused on in this sales refinement effort and the 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 client, so that the expansion with that really becomes the big price and it is not over looked with our customers. And finally, to enable our partners better and better not just through training, but also through product improvements.

So given the three areas of focus, we feel that we have put in a good team with strengthened leadership and we look forward to sharing with you the update 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.

Eric Smit

Thank you, Ashu, and thanks for joining us today. I’ll start by reviewing our ACV and booking metrics for the quarter encouraging the details of our financial results and close with an updates on our guidance for fiscal 2014. As we announced last quarter, due to the hybrid delivery model that we currently offer, they have concluded that the gross bookings metrics provide a limited view to our business performance, as it does not detail the make-up of the booking between cloud and on-premise.

In addition, it does not provide a time-based view of when the recurring revenue booking 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 at this forward-looking and subject to change due to any possible cancellations with 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 $13 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 was 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 or 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 were 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. Cloud 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 of last year. For the first nine months cloud revenue was $19.8 million up 47% from the same period last year.

License revenue from perpetual 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 determine to have value to the customer on standalone basis as of July 1st, 2013 and therefore now accounting for separately.

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

Looking at the geographic mix of our revenue, total third quarter revenue comprised a 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 was $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 – 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 for 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 of last year. The Capital equipment purchases in the third quarter were approximately $523,000 deferred revenue on the 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 agreements. 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’ve also added a more significant revolving line of up to $7 million replacing a previous line of $1.5 million that has 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?

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] And our first question comes from the line of Michael Huang with Needham and Company. Please go ahead.

Michael Huang – Needham and Company

Thanks very much guys. First of all, first question, so in terms of the deals that actually slipped out in the quarter and we’re subsequently closed kind of early in Q4 was wondering, how these closed in Q3 and any sense for kind of what the recurring ACV growth would look like, if had everything gone right?

Eric Smit

Mike, we don’t actually have that detailed out at this point, I think it was a mixture of on-premise deals as well. So we don’t have that exact number.

Michael Huang – Needham and Company

Okay. Got you. For the kinds of the large Cisco deal that you guys got done, I was wondering if you could share with us, what products actually were sold and maybe you could just share with us the competition that you guys saw there?

Ashu Roy

Sure, Mike this is Ashu here. So, we – first of all in terms of product sold it was pretty much the multi-channel agent desktop, so all the capability that we have around the desktop of handling channels and the knowledge capability underlying, all that is part of the deal. This is what we know is the first phase of deal that we believe will become much more significant towards that.

And in terms of partnerships or competitive environment, we know that that we were actually 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 channel, 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 partnered with Cisco.

Michael Huang – Needham and Company

Okay. Got you. And just going back to, kind of the deal that slipped out of the quarter, I mean do you get the sense, I mean is that, is that driven in all, by or 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?

Ashu Roy

I think from – 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 and which we believe they are going to close that, because their end of quarter happens to be – their end of quarter happens to be a month out of step, so essentially their quarter closes they prevent, whereas April to July and so on.

So that is that element, a couple of deals were because of that delta where we were told and our sales team, sales that we had enough confidence that we could get the deal done, but just getting all the final bits of paperwork through in the Cisco partner channel and to 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 settled things out and 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.

Michael Huang – Needham and Company

Got you. Okay. And then the last question from 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 amount?

Eric Smit

So I think, when we look 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 and infrastructure which is something that we’ve done aggressively in this year. So I think where we had margins north of 80%, we’ve certainly hadn’t expected to maintain at those levels. So around the 79%, 80% range is certainly in the range where we expected to be sort of as a more sustainable number as oppose to that certainty being above that mark.

Ashu Roy

Mike, I can add a little bit to that just, we have marked about this I think in Q1, in our Q1 quarterly we talked about the fact that we have increased our investment on the datacenter side. So we opened up a new datacenter in the U.S. and it was call center of AT&T and so that’s been an increased investment for us. And as a result of that we are now offering higher levels of service, higher levels of SLAs and disaster recovery Petrobas, our high-end clients that asking for beyond the standards of the industry norms that you see in the cloud business.

But we are getting paid for that as well. So, I think there is a – there is that increase definitely an investment as well as some investment that is leading the returns that we should see coming out of those.

Michael Huang – Needham and Company

Thanks guys, I appreciate it.

Operator

And our next question comes from the line of Jeff Van Rhee with Craig-Hallum. Please go ahead.

Jeff Van Rhee – Craig-Hallum

Thank you. Ashu, could you update us on the – the sales leadership in general, you’ve made a change in the North American head promoting someone internal and then you’ve been, running a search for the head of worldwide for a while, just update us on both the process, because originally I think you are considering both internal and external on North American and then, also the progress on the worldwide position?

Ashu Roy

Sure. So first the North American sales leadership, yes we have – we looked at it external and internal options on that and we decided and mostly myself that at this time given the progress and the momentum we are seeing with our partner enabled sales traction that was an area where having someone like AJ who had tremendous context of what is working well and not working well in the partner side. As well as essentially a zero-learning curve on jumping into this role, because of his current set of role within eGain that hit the scales in his favor, against some of these external candidates that we’re looking at.

I mean he has done very senior leadership roles in sales and 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 from the on the North America sales.

On the worldwide sales, the search continues well, we are at a point where I think that we, this quarter which is what I have guided through 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.

Jeff Van Rhee – Craig-Hallum

Okay. And then I guess, if I guess if I just step back and sort of take the rolling look at the bookings, you’re certainly getting the benefit of some bookings that took place 6, 9, 12 months ago, but it relates to last several quarters on a rolling basis, very clear deceleration and just sort of step back the high level for getting the push this quarter and sort of the tough comparison 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’m going at with that is you’re not giving a guide for the out year. But, it’s pretty wide range as we think about that what that out year could look like based on sort of those answers?

Ashu Roy

Sure. So, as we have talked about this in the past, we’ve 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 a direct sales force. And so, that investment and we dramatically push on the Cisco and Cisco ecosystem as that reach enhance over us.

That’s 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 way that, 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 large deal closing through Cisco, with Cisco, we have seen the benefit of the fact that even though some deals 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 of the partner side.

This is the second bet 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, something we were hoping would happen, may would have happened say 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 you can sell both cloud and on-prem to the Cisco network. And the way that which we are getting partners off the Cisco ecosystem to join hands with eGain and the way that which we are seeing early pipeline built, 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 gap 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 slowdown in our bookings.

Jeff Van Rhee – Craig-Hallum

If you take a look at the success, I guess if your segment at Cisco and non-Cisco, how about the remainder of the sales efforts and the goal of Cisco was to be additive, as 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?

Ashu Roy

I would say that it has spread our sales efforts across direct and Cisco. So, Cisco is selling process is still very intensive on our direct team, it’s not as if we have a small group of sales people who are only selling Cisco and everyone else is not working with the Cisco and partners. And so, we looked at that carefully and 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 off, over shadows the distraction that we have suffered in the last couple of quarters that as a result of that, which 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.

Jeff Van Rhee – Craig-Hallum

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’re 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?

Ashu Roy

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 – it is very positive right now. We are being brought into a lot of early stage opportunity. 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, right. So, 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 sort of 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 the 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. As we, I think we shared with you an example of an expansion in the Cisco channel where we acquired customers three – in Q1 of fiscal 2014 and this is the U.S. And in Q3, we generated $0.5 million additional bookings from them, even though the first deal was 100k kind of deal. So, we are seeing that sort of knocking off of those, yes but we are seeing instance of that expansion. So, the new logo acquisition for us is an important metric for future opportunity.

Jeff Van Rhee – Craig-Hallum

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

Ashu Roy

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

Jeff Van Rhee – Craig-Hallum

Okay. Okay. Thank you.

Operator

And our next question comes from the line of Raghaven Sarathy. Please go ahead.

Raghaven Sarathy – Dougherty & Company

Good afternoon. Thanks for taking my questions. First question is for Ashu. So, you mentioned two of the direct deals list, they closed in the current quarter. And you looked at the reasons behind why those deals took longer?

Operator

Did we lose Mr…

Raghaven Sarathy – Dougherty & Company

Hello.

Operator

Hello, are you back?

Raghaven Sarathy – Dougherty & Company

Yeah.

Operator

Okay. Great. Please go ahead.

Raghaven Sarathy – Dougherty & Company

Well Ashu, Ashu you talked about two deals that slipped from last quarters, but you closed since then. One of the reasons behind those deals taking longer time to close, slipping from one quarter to another quarter?

Ashu Roy

Sure. So you’re talking about the direct deals and, one of them was a pilot that we had been running for a while. And we have to convert that and essentially I would say that was a sales execution issue. The second one was more of a company the clients timing, they just did not have the budget approvals and what we felt that we could get it done in time. But, it got done two weeks into the new quarter as suppose to the prior quarter. So, both of those if I remember correctly were cloud use, right.

Raghaven Sarathy – Dougherty & Company

Okay. So and you – in terms of the sales capacity, I know you had a lot of sales people, about this year this time last year. Can you talk about the product [indiscernible], the productivity you’re getting from them. And I know there is a lot of talk about Cisco on channel. So, I mean Cisco in your direct, how your direct sales efforts are going?

Ashu Roy

Sure. So 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, because 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 this Cisco SolutionsPlus. So, that’s one part. And at this time I would say, as I look at, I’m trying to see were the rough numbers are but, almost on average in the U.S. every sales rep would have a couple of deals through the Cisco Solution pipeline. So that sort of view give you an idea of the level of mixing it if you will, because it’s we’ve planned to gain when we go alongside that channel. So, we are pushing that across all direct sales reps as well.

As far as the number of sales reps than what quarter carrying capacity, I think we had talked earlier about number of 45 sales reps worldwide. And what we are finding is that with the new partner oriented sales sort of refinement that we continue to make and this is something that both AJ and Andy are very much on Board, which 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 sales person. So, moving forward, we will see that our capacity or our target don’t necessarily just map to number for sales reps and the number of sales reps. So, that’s an area that we will be adjusting our modeling and I’m sharing our thinking around as well.

Raghaven Sarathy – Dougherty & Company

Then just couple of questions for Eric. I guess based on Ashu’s comment, it seems like the deals that slipped and closed in cloud deals, we are seeing here on a decline in license revenue. I thought last quarter you had more of license bookings than cloud. I’m sort of – I’m just trying to figure out the flow flop that happened in the current quarter? And then the second question is, your professional service certainly was strong causing a strong for that made up for the license in a short fall. But, can you talk about the utilization of the group and what should we expect in terms of services revenue on margins for the current quarter? Thank you.

Eric Smit

So, I think first on the PS side. So, we still had some residual recognition relates into the change and returning of recognition on the cloud deals. And so, I would say that’s 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 range is sort of our expectation based upon our current view at this point.

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

Raghaven Sarathy – Dougherty & Company

Okay. Thank you.

Operator

And our next question comes from the line of Jon Hickman with Ladenburg. Please go ahead.

Jon Hickman – Ladenburg

Hello.

Eric Smit

Hi, Jon.

Jon Hickman – Ladenburg

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? Is that am I thinking about that right?

Ashu Roy

Not quite but I mean sort of at least more than a third.

Jon Hickman – Ladenburg

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

Eric Smit

They were on-prem.

Ashu Roy

They were on-premise Cisco.

Jon Hickman – Ladenburg

Okay. And 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 for the service of the support and the recurring revenue side, why the gross margins are somewhat lower this quarter?

Ashu Roy

So, it’s based upon the increased investments that we’ve made in the cloud infrastructure. So, as we’ve looking to increase and expand the reliability and service levels the investment of Cisco clients.

Jon Hickman – Ladenburg

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

Ashu Roy

So, 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.

Jon Hickman – Ladenburg

And then, because of your efforts to get the cloud platform up in running with Cisco, and your – to increase your capability for 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?

Ashu Roy

I’m not sure those are connected but I don’t see unusual jumps in our R&D. I think we would probably stay in line with our target levels as it relates to our overall business sites.

Jon Hickman – Ladenburg

Okay. And 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?

Ashu Roy

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

Jon Hickman – Ladenburg

Okay. That’s it from me. Thanks.

Operator

And our last question comes from the, it’s a follow-up question from the line of Michael Latimore with Northland Capital. Please go ahead.

Michael Latimore – Northland Capital

Hi. Just you may have mentioned it earlier, but have you seen any current customer with our maintenance willing to shift their cloud or what’s the prospect there? Have you give any sort of financial status to do that?

Ashu Roy

Sorry, could you repeat, I’m not sure if I caught the, just your question. Are you asking if we are providing incentives to them to move to the cloud, Mike?

Michael Latimore – Northland Capital

Yes, if there is any cloud wins that are basically maintenance customers converting the cloud? And then second, are there any incremental financial status for them to do that?

Ashu Roy

Okay. Got it. Thank you. So 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 the bunch of them. And there is active discussion in those areas. One of the things that we are doing is to put together sort of aggressive model incentives for these customers in the fiscal 2015 timeline. So, we 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. So, we are, so 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.

Michael Latimore – Northland Capital

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

Ashu Roy

That’s a fair question. So, 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, right to both of them, because the eGain cloud will connect seamlessly to either one of them.

Michael Latimore – Northland Capital

Okay. And then, how are the number or as you get demand for chat deals of the quarter and how does the chat pipeline work?

Ashu Roy

So, the two big areas for us continuing to be is that shall we say super chat, what we call super chat, which is chat we name not just standard chat, but proactive engagement with Cobrowse and video and click to call. So that part is still very strong. And then the second place where we’re 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 network tends to gravitate toward, because it’s more channel and interaction-oriented if you will.

Michael Latimore – Northland Capital

That make sense. And then just last one, in terms of your, it sounds like you’re getting closer on a head of sales. Can you give a little more color there, I mean how you focus on people with SaaS backgrounds or does it just sort of industry expertise or enterprise software, I guess, some of the key – the key things you are looking for with that itself?

Eric Smit

So, I think the key thing we’re looking for is someone who of course has strong sales performance that those things and all the individual characteristics. But the part that I’m interested in more is people who have source solutions before whether it’s in the cloud or on-premise 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 scenario that I am particularly keen on getting someone who can cultivate that sort of DNA and culture in the organization around solutioning.

Michael Latimore – Northland Capital

Okay. Great. Thank you.

Operator

And 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.

Ashu Roy

Thank you for joining us today. As always if you have any further questions or comments, please feel free to give us a call. And we look forward to talking to you again at our 2014 fiscal fourth quarter and year end conference call. And we’ll also be attending some upcoming investor conferences this summer. So if you happen to be out there, please stop by and say hello. Thanks and have a great day.

Operator

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

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