Eric Smit – CFO
Ashu Roy – Chairman & CEO
eGain Communications (EGAN) Q4 2008 Earnings Call September 15, 2008 5:00 PM ET
Good day ladies and gentlemen and welcome to the eGain Communications press release conference call. (Operator Instructions) I would now like to introduce your host for today’s conference, Mr. Eric Smit, Chief Financial Officer for eGain Communications; sir you may begin.
Good afternoon ladies and gentlemen and thank you for joining us for eGain’s conference call. Today eGain will discuss the results for the fourth quarter and fiscal year ended June 30, 2008.
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.
I will start by reading a Safe Harbor Statement.
All statements on this call that involve eGain's plans, forecasts, including the guidance provided on this call, beliefs, projections, expectations, strategies and intentions are forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements, which are based on information available to eGain at the time of this call, are not guarantees of future results; rather, they are subject to risks and uncertainties that may cause actual results to differ materially from those set forth on this call.
These risks include, but are not limited to, the uncertainty of demand for eGain products including our guidance regarding bookings and revenue; the actual mix in new business between hosting and license transactions when compared with management's projections; the increased complexity of certain transactions and the timing of revenue recognition on such transactions; and other risks detailed from time to time in the company's filings with the Securities and Exchange Commission, including the company's Annual Report on Form 10-K filed on September 28, 2007, and the company's Quarterly Reports on Form 10-Q. eGain assumes no obligations to update these forward-looking statements.
The company also believes that it is useful to disclose new hosting and license bookings details on this call in addition to the information contained in the GAAP presentation of financial information. We internally use this metric to focus management on the productivity of the sales teams and period-to-period changes in the company’s core business.
Therefore we believe that this information is meaningful and helpful in allowing individuals to better assess the ongoing nature of our core operations. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.
With me today is Ashu Roy, Chairman and Chief Executive Officer of eGain Communications. To begin management’s discussion, I would now like to turn the call over Ashu Roy.
Thank you Eric, good afternoon everyone. Overall we are pleased with our growth in fiscal 2008. Our total revenue was up 34% from the prior year, license revenue was up 93% from the prior year, professional services revenue was up 40% from the prior year, and hosting revenue was up 34% from the prior year.
That was good, on the other hand new licensed and hosted bookings in the fourth quarter suffered due to several large deals slipping. Given our focus on the enterprise market, fluctuation in quarterly bookings because of the timing of a few large deals is natural, as long as the deals do materialize. So we are happy to report that most of the large deals that slipped in the fourth quarter have now closed.
Turning to the significant milestones and industry recognition during fiscal 2008, eGain marked its 10th anniversary of delivering on-demand customer service software for the enterprise. eGain is the only company in the market to have offered both on-demand and on-premise deployment of customer service software to enterprises for over a decade.
The company conducted a unique state of customer service study that included a holistic measurement of single channel and cross channel customer service offered by leading North American companies. The study strongly validated the need for a robust customer service solution such as eGain's.
The company introduced powerful multilingual capabilities to the eGain Service suite including user interface and content support for Dutch, German, French, Italian, and Spanish languages.
eGain Service was ranked the #1 customer service software in the annual survey of the top 500 US-based web retailers conducted by Internet Retailer magazine in 2007.
eGain Service was selected as a Product of the Year for 2007 by Customer Interaction magazine.
eGain was named to the Software 500 list for the fifth year in a row. The Software 500 is the Software magazine list of the world's premier software and services providers.
eGain was included in the 2008 list of 100 Companies that Matter in Knowledge Management by KMWorld magazine.
And finally the company was named as the One to Watch for 2008 by CRM magazine in the web interaction management category in recognition of its comprehensive, innovative, and unified solution for multichannel interaction management.
Building and developing partnerships to expand our market reach has been a focus for over the past fiscal year and we are making steady progress in this regard. Specifically eGain delivered the second phase of its multi-phase OEM product delivery agreement with Cisco in December 2007.
Early customer response to Cisco's multichannel offering based on eGain technology is encouraging. Based on strong customer feedback and demand for specific industry-leading capabilities, Cisco and eGain have expanded the scope of the integrated product capabilities, resulting in a delay in the third and final deliverable that is now targeted for the second half of fiscal year 2009, as opposed to the earlier target of the end of fiscal year 2008.
Next, eGain signed up several new reseller and system integrator partnerships worldwide, including Cystelcom in Spain, CUBE in Poland, and PlanNet21 in Ireland. The company trained solution implementation professionals from 23 partner organizations in its partner ecosystem during the fiscal year.
Finally, the company also expanded its Partner EcoNet portal to provide comprehensive sales, support and services information for channel partners while enabling them to collaborate with one another through an online forum.
On the customer front, we continue to acquire marquee enterprise customers in fiscal 2008. Notable acquisitions included: a leading fortune 50 pharmaceutical company; a leading fortune 500 consumer electronics company; an international financial services organization; one of the leading global services providers in insurance, banking and asset management; a global leader in benefits outsourcing; a leading European catalogue retailer; and finally one of the UK's largest online fashion and beauty stores.
Looking ahead to fiscal 2009 and beyond leading analysts believe that the customer interaction hub market continues to be a viable one within the larger enterprise business application space. Further, in an economic slowdown efficiencies generated by self-service and agent productivity solutions are increasingly in demand.
Moreover, much of the arbitrage benefit from off-shoring and outsourcing is being eroded by wage inflation in emerging economies, leading businesses to tilt their investments more towards technology.
Finally, the business case for retaining existing customers through differentiated service is even more compelling in a slow economy as businesses struggle to acquire new customers.
Om fiscal 2009 the company plans to balance growth and profitability goals. Given the economic slowdown, we believe that it is prudent to invest in specific, well-developed and relatively short-term opportunities this year.
We plan to continue to invest in our Cisco OEM partnership to expand our global market reach. This channel promises to deliver meaningful bookings impact for us in fiscal year 2009. Next, we are systematically investing in developing our partner ecosystem. It is already showing good promise in our European business.
Finally, we plan to invest in our global customer care infrastructure as our enterprise clients increasingly want us to offer responsive 7x24 support for their global, mission-critical eGain deployments. This investment will help us further strengthen our customer loyalty.
As a result of these targeted investments we expect to steadily grow our top-line in a tough environment by successfully acquiring and serving new global enterprise clients who trust eGain as a long-term supplier of top-rated, innovative customer interaction hub solutions.
On that note, I would like to ask Eric Smit, our Chief Financial Officer, to discuss in more detail our financial performance for the quarter.
Thank you Ashu. I’ll walk you through the key financial details and then outline our guidance for fiscal year 2009.
Total new bookings of license and hosting were $1 million for the quarter, a decrease of 78% from the year-ago quarter. Total new bookings for the year were $8.1 million, a decrease of 20% from the prior year.
As Ashu indicated our bookings for the fourth quarter suffered due to several large deals slipping, of which most of them have now closed in the first quarter of fiscal 2009.
Approximately 24% of the new bookings in the quarter were from new hosting contracts and 76% from new license contracts. This compared to 42% hosting and 58% license bookings in the year-ago quarter. New hosting contracts for the year accounted for approximately 43% of the new bookings compared to 45% last year.
Now turning to our financial results, total revenue for the quarter was $6.7 million, an increase of $1.3 million or 24% from the year-ago quarter. Total revenue for the year was $30.1 million, and increase of $7.6 million or 34% from last year and the highest annual revenue we have achieved in the last six years.
There was an increase in all revenue types. License revenue for the quarter increased 124% to $721,000 from $322,000 in the comparable year-ago quarter. This represents 11% of total revenue for the quarter, up from 6% in the year-ago quarter.
License revenue for the year increased 93% to $6.6 million from $3.4 million last year. This represented 22% of total revenue for the year, up from 15% in the prior year. While our support and services revenue increased 18% to $6 million from $5.1 million in the comparable year-ago quarter. This represents 89% of total revenue for the quarter, down from 94% in the year-ago quarter.
Support and services revenue for the year increased 23% to $23.5 million from $19.1 million last year. This represents 78% of total revenue for the year down from 85% last year. Of particular note, hosting revenue increased 24% quarter-over-quarter and 34% year-over-year.
The year-over-year increase in our occurring hosting revenue is primarily driven by the increased size of new hosting contracts we have closed over the last 18 months and our high renewal rates. Professional services revenue increased 35% quarter-over-quarter and 40% year-over-year. This increase was driven by larger [inaudible] engagements due to multi application sales and larger customer deployments.
As of June 30, 2008, we had approximately $800,000 of deferred professional services revenue compared to approximately $700,000 as of June 30, 2007. The majority f this deferred professional services revenue is from hosting deployments we have delivered the professional services but are recognizing the revenue over the estimated life of the hosting arrangements.
Looking at our gross profits and gross margins, gross profit for the quarter were $3.8million or a gross margin of 57% compared to $2.8 million or a gross margin of 51% in the comparable year-ago quarter.
Gross profit for the year was $18.5 million or a gross margin of 61% compared to $13.2 million or a gross margin of 59% last year. Turning to our operating costs, research and development expense for the quarter was $1.4 million, an increase of 21% from the comparable year-ago quarter and up 13% from last quarter.
Research and development expense for the year was $5.1 million, an increase of 28% from last year. The increase was primarily due to the increase in personnel costs and outside consulting expenses. Total research and development expense as a percentage of total revenues were 21% in the quarter, a slight decrease from 22% in the comparable year-ago quarter.
Total research and development expense as a percentage of total revenues were 17% for the year compared to 18% last year. Sales and marketing expense for the quarter was $2.8 million, a decrease of 18% from the comparable year-ago quarter and up 3% from last quarter.
Sales and marketing expense for the year was $11.8 million, a decrease of 9% from last year. The year-to-date decrease consisted primarily of the decrease in personnel related expenses.
Total sales and marketing expense as a percentage of total revenues was 42% in the quarter, compared to 65% in the comparable year-ago quarter. Total sales and marketing expense as a percentage of total revenue for the year was 39% compared to 57% last year.
General and administrative expense for the quarter was $912,000, an increase of 38% from the comparable year-ago quarter and down 3% from last quarter. General and administrative expense for the year was $4.2 million, an increase of 47% from last year.
The increase was primarily due to the increase in legal expense, auditing fees, outside consulting expenses, and personnel expenses. The year-over-year increase of more than $470,000 in legal expenses primarily related to the patent lawsuit that was settled in September, 2007.
At this time we do not expect any material legal expenses in future quarters. We also incurred additional consulting costs in the second half of the year associated with our SOX for our full compliance requirements.
Total general and administrative expenses as a percentage of total revenues was 14% in the quarter compared to 12% in the same quarter a year ago. Total general and administrative expense as a percentage of total revenues was 14% for the year compared to 13% last year.
Included in the total costs and expenses were stock-based compensation expense of $77,000 for the quarter and $53,000 for the comparable year-ago quarter. Stock-based compensation expense for the year was $318,000 compared to $273,000 last year.
Looking at other income and expense, interest expense for the quarter was $432,000, an increase of 31% from the comparable year-ago quarter. Interest expense for the year was $1.2 million, an increase of 42% from last year.
The increase was primarily due to the increase in accrued interest on related party debt that had no impact on cash in the current period. GAAP loss from operations for the quarter, that is before interest, tax, and other non-operating income and expenses, was $1.4 million compared to a loss of $2.6 million in the comparable year-ago quarter.
GAAP loss from operations for the year was $2.6 million compared to a loss of $6.5 million last year. Net loss for the quarter was $1.9 million or $0.12 per share compared to a net loss of $2.9 million or $0.19 per share in the comparable year-ago quarter.
Net loss for the year was $4.1 million or $0.27 per share compared to a net loss of $7.7 million or $0.50 per share last year. I would now like to turn to our balance sheet, total cash and cash equivalents were $3.8 million on June 30, 2008 compared to $4 million at March 31, 2008.
Day sales outstanding or DSOs for the quarter ended June 30, 2008 were 37 days compared to 30 days for the comparable year-ago quarter. Now turning to our guidance, as Ashu outlined we plan to balance our growth and profitability goals in fiscal year 2009 and accordingly we are providing the following guidance for fiscal year 2009.
The company currently expects new hosting and license bookings for fiscal year 2009 to be in the range of $12.1 million to $14.2 million or a 50% to 75% increase over fiscal year 2008.
The company currently expects total revenue for fiscal year 2009 to be in the range of $33.1 million to $34.6 million or a 10% to 15% increase over fiscal year 2008.
The company currently expects to be profitable on an operating basis and generate positive cash flows from operations in fiscal year 2009.
This ends the eGain fourth quarter and fiscal year ended June 30, 2008 conference call. Thank you for listening and we look forward to providing you an update after our first quarter of fiscal 2009 financial release.
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