eGain Communications' (EGAN) CEO Ashu Roy on F2Q 2017 Results - Earnings Call Transcript

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eGain Communications Corp. (NASDAQ:EGAN) F2Q 2017 Earnings Conference Call February 9, 2017 5:00 PM ET

Executives

Jim Byers - MKR Group

Ashu Roy - CEO

Eric Smit - CFO

Analysts

Jeff Van Rhee - Craig-Hallum

Mark Schappel - Benchmark Company

Nick Altmann - Northland Capital Markets

Operator

Good day and welcome to this eGain Fiscal 2017 Second Quarter Financial Results Conference Call. Today's conference is being recorded.

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

Jim Byers

Thank you, operator, and good afternoon everyone. Welcome to you eGains' fiscal 2017 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 contains management 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 the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a wide range of risks and uncertainties that could cause actual results to differ in material respects. Including those relating to our belief that we are seeing and will continue to see the benefits of the company's transition to a cloud-based business, and we'll continue to see success in implementing the land-and-expand sales model.

Actual results could differ materially from those described in this conference call and presentation. Information on various factors that could affect eGains' results are detailed in the reports filed with the Securities and Exchange Commission. eGain is making statements, as of today, February 9, 2017 and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call.

In addition to GAAP result, we will also discuss certain non-GAAP financial measures such as adjusted EBITDA and non-GAAP net income. Our earnings press release can be found on the news release link on the Investor Relations page of eGains website at www.egain.com. The tables included with the earnings press release include a reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. A replay of this conference call will also be available at the Investor Relations section of the eGain website.

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

Ashu Roy

Thank you, Jim and good afternoon everyone. We have made very good progress in the quarter towards completing our SaaS transition. Our software and subscription revenue was roughly 73% of our total revenue in the quarter, compared to our perpetual license revenue which was around 10% of the total revenue, the rest was professional services.

Critical to sustaining this progress moving forward will be our new resale agreement with Cisco which we have talked to you all about in the past, where all eGain products sells through Cisco SolutionsPlus part of the program for us is going to be subscription based beginning of this month, and so that is already in effect, which means that we can now look forward to building a nice operational cadence and develop our confidence as a team in our SaaS oriented business metrics.

So over the next two quarters as we do that, we’ll be in a much better place to forecast managed plan and report on our business, and you can compare that with the challenges we have had and you have seen in doing the same during those volatile transition that we have undergone over the last two and a half years.

As a team, we are really excited about the business model transition and the fact that we are done with it substantially. It’s so much easier to scale one model than to juggle a hybrid one. Of course we still need to and will continue to support our legacy clients for a long period of time, guiding and occasionally enticing them towards a better way in the eGain cloud.

So that’s great. Turning to bookings, we did well in the quarter, growing our new subscription and support ACV bookings by 13% in constant currency terms over the same quarter last year. At the same time, we’ve built a strong pipeline going in the second half of the year, something that I’m feeling good about.

In the market that we are in, which is very target rich, one of the things we keep doing is focusing our sales execution on the sweet spot of the target market that we want to go after and win, and that is large B2C customer service opportunities. I do believe that our biggest challenge continues to be brand awareness and that translates in to just getting on the long list of target buyers early in the buying cycle. In fact the continued success of our Cisco partnership supports this hypothesis.

To this end, we are increasing our investment in expanding and strengthening our strategic partnerships, so we want to do a few more and we want to strengthen the ones that we have now. Joe Brown, who has been running our world-wide sales so far, he is now going to move away from his current role starting the middle of this month, and focus on systematically building and drawing out our strategic partnerships.

As I look for his replacement, I will take on running the sales team and the interim. Of course I’ll benefit from Joe’s continued presence on my executive team.

Turning to the market, I see that the need for approvals scalable, digital, customer engagement solutions continue to grow, especially as we see large clients suffering through bitter experience, the huge gap between marketing claims and real delivery capabilities from bigger providers who claim to do, for instance, everything CRM. Not to mention, the sticker shop.

What I also see in my meetings with senior execs in these client organizations is that digital transformation leaders are really hungry for a platform that will enable easy consumption of innovation. They want loaded models, they want proven solutions and they want best practice gadgets. In fact the follow-up from our Digital and AI Day in Chicago last October has been quite encouraging.

Initiated by conversations during our Chicago event, we now have a half a dozen strategic engagements with all of these being Fortune 500 existing clients, but now initiated as a C level, where we are now their preferred partner for digital transformation program that they are in the middle of around customer engagement.

So the way we see it, this recipe that we have been building for some time and proving out, is increasingly defeatable, our claims demonstrable and our opposition which is easy consumption of innovation is unique. In fact what started as their try and buy and we’ve told you about this over the last several quarters was started as try and buy a year and a half ago, has evolved in to a bigger umbrella of what we call quick value services.

And quick value services encompass four different types of services. Try and Buy, implementation, managed services and digital transformation. And we see this as a lifecycle of helping customers try our solutions without risk. If they like it, then they purchase it, we help them implement it quickly and we put together a managed program, service program to make sure they can sustain that benefit and the value they have seen early in the lifecycle and then bring back the digital transformation team to talk about the next set of programs to turn in to projects.

Our job now is to intersect this new whole product we have put together, which is software, cloud and other quick value services with the leveraged distribution that we are looking to grow and extend and make sure that that channel is well trained and supported by our sales and solution experts.

Our upcoming digital NAI Day in London on March 14 is already trending well ahead of our last year’s registration count, and we still have more than a month to go. Just to give you a sense of the type of presenters that we will have execs from four clients from eGain, one from retail, branded manufacturing, financial services, and telco, and all these by the way are multi-billion dollar revenue companies. They will present eGain success story at the event. Along with Gartner analyst, Brian Manusama and our own eGain expert, [Smit].

We will also be announcing at the event some really nice product capabilities. So if you are in the area, join us at the event. You can see for self why we are so excited about our future, now that the business model transition is substantially behind us. By the way, our London event is complimentary for qualified attendees. So all you have to do is register at our website.

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

Eric Smit

Thank you Ashu and thanks for joining us today. Before I begin my prepared remarks, I’d like to note that the P&L numbers I’ll be sharing are non-GAAP unless otherwise noted. Included with the press release is a supplemental table that provides a reconciliation of the non-GAAP to GAAP numbers. I’ll start by reviewing our ACV and booking metrics for the quarter and then go in to details of our second quarter financial results.

As Ashu mentioned we are very pleased with our shift to our SaaS business model. We believe this is will provide more predictability in our quarterly results and we are already seeing significant business benefits from the simplified operations of not having to manage a hybrid model.

Our new subscription and support ACV for the quarter was 3.1 million, up 27% sequentially and 5% year-over-year or 13% in constant currency. Our total subscription and support ACV at the end of the quarter was 43.3 million, up 5% year-over-year and 14% in constant currency. Backlog as of December 31, 2016 or total deferred revenue plus unbilled and uncollected orders was 46.4 million, up 13% year-over-year and up 23% in constant currency.

When reviewing our backlog, I want to highlight the 750,000 ACV contracts we signed in Q1 with an existing customer who’s moved to legislation with our product in the cloud with the migration effort. He is still likely to take our record projected nine months and that’s still on track. As a result of revenue recognition for this deal, it is only expected to start sometime next fiscal year.

Typically, we do not see such complex migration projects, but when we do, we do our best to accelerate the migration efforts. We continue to standardize our terms of our cloud migration projects for existing clients, so we can transparently model our ACV bookings in to revenue.

Turning to our revenue, total revenue for the second quarter was 15 million or 16.6 million in constant currency compared to 14.8 million in the first quarter and 19 million in the comparable year-ago quarter.

For the six months, total revenue was 29.8 million compared to 35.5 million in the same year-ago period. Our subscription and support revenue for the second quarter was 11 million or 12 million in constant currency compared to 10.9 million in the first quarter and 10.8 million in the comparable year ago quarter.

Subscription and support revenue for the quarter accounted for 73% of total revenue, up from 57% in the comparable year-ago quarter. For the six months, subscription and support revenue was 21.9 million compared to 21.7 million in the same period last year. License revenue for the second quarter was 1.4 million compared to 1.7 million in the first quarter and 5.1 million in the comparable year ago quarter. This decrease is due to the accelerated business mix shift to our SaaS business model.

Professional services revenue for the second quarter was 2.6 million up from 2.2 million in the first quarter and down from 3.1 million in the comparable year-ago quarter. For the six months, licensed revenue was 3.1 million compared to 7.5 million for the same period last year. All professional services revenue for the six months was 4.8 million compared to 6.3 million for the same period a year ago.

As I’ve stated on previous calls, the improvements of our product have simplified our deployment process resulting in a reduction in time and cost for the average implementation projects and as a result peers models have improved even though the revenue has declined year-over-year.

Now looking at our gross profits and gross margins, gross profit for the second quarter was 10.3 million or gross margin of 69%, compared to a gross profit of 13.6 million or gross margin of 71% in the comparable year ago quarter. If you look at the breakout gross margin by revenue type, subscription and support revenue gross margin for the quarter was 77% compared to 75% from the comparable year ago quarter.

Professional services gross margin was 15% for the quarter, compared to 13% in the comparable year ago quarter. For the six months, gross profit was 20.4 million or a gross margin of 68%, compared to a gross profit of 24.1 million or a gross margin of 68% for the same period last year. Subscription and support revenue gross margin was 76% for the first six months, compared to 75% last year. And professional services gross margin for the six months was 12% compared to [16%] in the comparable year ago period.

Now turning to our operations, operating cost for the second quarter came in at 9.5 million, a 23% decrease from 12.4 million in the comparable year ago quarter. For the six months, total operating costs were 19.6 million, an 18% decrease from 24 million in the prior year. Adjusted EBITDA for the quarter was 684,000 compared to adjusted EBITDA of 1 million in the comparable year ago quarter.

For the six months, adjusted EBITDA was 759,000 compared to adjusted EBITDA of 274,000 in the same period last year. By streamlining our business operations we’ve been able to deliver this improvement in adjusted EBITDA even while our revenues have declined.

GAAP net loss for the second quarter improved to 1 million or a loss of $0.04 per share compared to a net loss of 1.4 million or a loss of $0.05 per share in the comparable year ago quarter. For the six months GAAP net loss improved to 3.5 million or a loss of $0.13 per share compared to a net loss of 4.6 million or a loss of $0.17 per share for the same period last year.

Now turning to our balance sheet and cash flows; cash and cash equivalents was 9.7 million as of December 31, 2016 compared to 11.8 million as of June 30, 2016. Cash flow used in operations for the quarter was 3.8 million compared to cash flow provided by operations of 2.4 million in the second quarter a year ago.

For the six months, cash flow used in operations was 1.3 million compared to cash flow used in operations of 3.2 million in the same period last year. The negative cash flow this quarter was primarily due to timing of working capital adjustments and our plan is still for positive cash flow from operations for FY’17.

To assist with managing and working capital fluctuations, like we experienced this quarter. I’m pleased to report the recent [laws] for the loan amendment produced a previous liquidity requirement from 10 million to 4 million affectively increasing our borrowing availability by 6 million.

Total net accounts receivable was 8.5 million at December 31, 2016 compared to 10.8 million at December 31, 2015. Total deferred revenue which includes both deferred revenue on the balance sheet of 16.5 million and unbilled deferred revenue that remains off balance sheet of 29.5 million was 46.4 million as of December 31, 2016, compared to 41 million as of December 31, 2015.

In summary, we are very pleased that we have completed our shift to a SaaS business model. While the shifts negatively impacts our licensed revenue and our total revenue in the short term, we believe it will provide less lumpiness and more predictability in our future financial results. We have focused our efforts on the alignment of cost during this business transformation and are very pleased with the significant progress we have made.

For the six months of fiscal year ‘17, total operating cost and expenses decreased by 6.3 million more than accommodating the decline in revenue and resulting in an improvement in our adjusted EBITDA for the comparable year ago period.

Looking forward, as Ashu mentioned, we are very excited about entering this post transition phase of the SaaS world and over the coming two quarters, we look forward to building up an operational cadence and develop a confidence in our SaaS oriented business metrics that we can plan to begin providing guidance for fiscal year ’18 and beyond.

With that said, we look forward to updating you on our continued focus when we report our Q3 results. And this concludes our prepared remarks, and I’ll now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we’ll take our first next question today from Jeff Van Rhee with Craig-Hallum.

Jeff Van Rhee

A couple of question from me guys. First I just missed it, the subscription, the support, ACVs, both acquired support and total could you give those again.

Eric Smit

So I think Jeff now that we have made this transition to the SaaS business we will be reporting just the subscription and support as the combined number. So what that is, the total number was - 3.1 million is the combined number and that’s a new number and then the total number is 43.3 million.

Jeff Van Rhee

43.3, okay, alright. So that compares to 43.3 and the year earlier, just want to make sure we are talking the same time series.

Eric Smit

The 43.3 compared was up 5% from a year ago.

Jeff Van Rhee

I have to back track on that. I guess from a sales standpoint it sounds like you’re making an adjustment there. Maybe Ashu how will the sales approach vary going forward on the direct side. I guess Joe is going to focus on additional partnerships which obviously take time to ramp. So in the near term in terms of being able to drive new bookings tell me what’s going on in the direct sales team and kind of what you see changing?

Ashu Roy

Sure. So three things, first of all, there’s not a major change in what we are going to be doing on the sales side. We’re going to be executing the same game plan. So the game plan is three parts, one, we are seeing that we are able to get new logos in the target market and the target opportunity that we want to go after. We are able to get those big logos easier when we are partnering with fiscal and for instance than when we are going at it ourselves. Not surprising right, given the advantage of lots of time with someone who has (inaudible) and insider status in many of these accounts.

So the first thing here we want to do is for Joe to kind of continue to drive the operationalization and scale of the Cisco partnership, so that’s number one. He will continue to do that. But more at an enablement and strategic level, rather than working the field deals. So that’s the difference.

And the second thing that he’ll focus on after this one is, to build additional partnerships of which we are in conversations but we don’t have anything to announce yet. So that’s the second bit that he’s doing. So those are the top two things he’s working on.

Coming back to what we’re doing on the sale side. It’s still the same three step plan, which is, on the direct side we are being opportunistic and focusing on our direct marketing efforts to drive qualified leads and then go after closing new logos that way. So that’s one set of land reps we have, the second set of land reps are the ones that are working with Cisco and the channel. And then we have the third group which is the expand group, that’s focusing on renewal first and then expanding any [counts]. So that’s still the game plan no big change there, and that’s the approach going forward.

Jeff Van Rhee

And then if you touched on cash, but I missed a part of it. How do you expect the year to come in from cash from ops and a free cash flow standpoint?

Eric Smit

So still expect to be positive on a cash flow from operations basis for the year.

Jeff Van Rhee

And how about free cash flow or ask differently what is CapEx and other look like?

Eric Smit

So at this stage we aren’t providing specifics in to that. I think focusing on the cash flow from operations, but given the transition we are now seeing a significant expenditure on the CapEx side. And Jeff I looked back at the previous number, I apologize, but you are correct, the number for subscription and support ACV is 45.4 compared to the 43.3.

Jeff Van Rhee

And then also just from a balance sheet standpoint, what is the available liquidity at this point?

Eric Smit

We had about a couple of million dollars at the end of the -.

Jeff Van Rhee

I can grab it offline.

Eric Smit

A couple of million dollars or so.

Jeff Van Rhee

Maybe while you’re grabbing that, just Ashu talk to me about just sort of your satisfaction with the positioning of the product, you certainly are solving - the customer care issues that you solve is a pretty hot space right now, lot of activity. And understanding you’ve transitioning going on from license to recurring, but given you had enough focus on recurring for some time, just how do you feel about execution thus far in capturing new subscription and just talk to me about sort of market dynamics there.

Ashu Roy

So we are signing up a good number of new deals, that’s to me quite encouraging. The part that we are working through and we will continue to, as you have seen is, the migration of existing customers in to the SaaS model and in that process we’ve had some attrition and so that’s something that we have to keep working.

So on the top end of the growth end our gross ACV, new gross ACV bookings have continued work, reasonably Q2 was better than Q1 and also it was sequentially and marginally better than the prior year Q2 on new subscription and support ACV bookings. And so that part is good.

Like I said, our ability to get large enterprise logos, new logos, it’s easier to get those logos when we are alongside a partner like Cisco than when it is without that, when we are going direct. So that’s another dynamic that we are mindful of.

Jeff Van Rhee

Last one from me then just with respect to licenses, obviously I think you called it out in the script that you’re at this point all in on subscriptions. Can you give us some bounds around licenses either for the year or sort of some sense of how quickly that piece falls off? You’ve been running 1.5 million or so each a last few quarters, do we tail off that half million and then zeros for ’18 or how should we think about that?

Ashu Roy

I think for the rest of fiscal ’17 I feel for the remaining two quarters I feel Jeff we are going to be around 10% of the total revenue, around the same place we are now, but it’s not going to be more than that. And then ’18 I think it’s going to whittle down from there Jeff, but let us get back to you on that with some more thoughts around fiscal ’18. But it will come down from that 10%, it aint going to go up, that’s for sure.

Operator

We’ll take our next question from Mark Schappel with Benchmark.

Mark Schappel

Ash one of the sales initiatives you were working on or the company has been working on over the past year or so, was concentrating on certain vertical market. So I was wondering if you could just talk about what you saw in that area this quarter and what markets are performing well and maybe which ones weren’t.

Ashu Roy

Sure. So we continue to focus on the top five verticals that we have been talking about some time, and that is working well for us. And I’ll give you some color on them. They are all in D to C and the top five are banking financial services, retail, telco, government, and the last one is utilities. I would say the utilities, the first top four are the big ones. Across the top four about over 70% of our bookings are in those top four.

Mark Schappel

Like which.

Ashu Roy

Banking and financial services being the biggest. So that continues to be the case and that’s an area where we are increasingly sharpening our marketing targeting not necessarily the product or sales virtualization yet. The other thing that we are starting to do which we’ll be talking more about in London is things that we are doing around these verticals from our solutions standpoint. So that’s something that is forth coming.

Mark Schappel

And then kind of building on one of the earlier questions here, I was wondering if you could just go into a little bit more detail on your decision to move Joe Brown out of the entire sales org and to moving him in to the partnered channel. Did you foresee that the partner channel kind of being your principle go-to-market mechanism or channel if you will over the direct overtime is that one of the reasons for the move or are you seeing --.

Ashu Roy

I think the biggest reason for us to make the change now are two things, one was we believe just as a team that that’s where the biggest needle movement is going to come from in the next year to two years for us in terms of getting new logos. I think that in that large enterprise segment that we know we have the best fixed (inaudible) and where the need is strong and the alternatives are much worse than and not as good as. So that’s sort of the first reason for it. It doesn’t mean that our direct push is not going to be there. But we believe that incremental dollar investment for us on sales and marketing we want to put it more on the partner side than on the direct side. So I don’t know if that answers your question clearly or not, but that’s the driver.

Operator

We’ll take our next question from Mike Latimore with Northland Capital Markets.

Nick Altmann

Hey guys this is Nick Altmann, I’m for Mike thanks for taking my question. First, just kind of going back to the Cisco partnership, were any bookings this quarter or did any bookings this quarter come from Cisco? And then just a follow-up on that, if you could just give us an update on the pipeline there that would be really helpful too.

Ashu Roy

Sure. Yes, we did have bookings through Cisco absolutely, and that continues to be a good percentage of our total business and bookings. So that is very encouraging. Mind you a lot of the - all the bookings we’re talking about here from Cisco is still based on the older partnership that we - partnership meaning the older contract that we had with Cisco, the new contract which was put in place in October but has officially taken affect in the field through the price book changes and contract changes etcetera is taking affect beginning of February roughly a couple of days before that. So just to kind of put it out there.

And then the second comment is, you asked about Cisco pipeline. So that’s an area where I would say that the pipeline continues to get stronger and the part that is interesting to me though, I don’t want to quantify the pipeline yet, but the thought that’s very interesting to me is that the adoption of cloud seems to be getting better and better in Cisco channel and that’s very encouraging for us and that’s one of the big things that we want to see how we can drive even more and I’m sure you’re aware even Cisco internally is moving its business model more and more towards the SaaS model.

Nick Altmann

And then if you could, what kind of effect will - there’s been some things around Avaya filing Chapter 11 bankruptcy. Can you just talk about the affects there?

Ashu Roy

It’s not a direct effect on us, however when I’m talking to clients in prospects and I’m talking to many, I do see that as a conversation topic quite often, which means that, that brings the two viable vendors especially in the US markets are seen as Cisco and Genesys and therefore that has a positive impact on our potential business just because we are working with Cisco. But that’s sort of an indirect effect for us.

Operator

[Operator Instructions] And with no further questions in the queue at this time, I’d like to turn the call back over to Ashu Roy for any additional or closing remarks.

Ashu Roy

Sure. So thank you all for joining us and we look forward to updating you on the next quarter’s call. Thanks a lot. Bye, bye.

Operator

And that will conclude todays’ conference. Thank you for your participation and you may now disconnect.

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