eGain Communications' (EGAN) CEO Ashutosh Roy on Q4 2017 Results - Earnings Call Transcript

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About: eGain Communications Corp. (EGAN)
by: SA Transcripts

eGain Communications Corp. (NASDAQ:EGAN) Q4 2017 Earnings Conference Call September 6, 2017 5:00 PM ET

Executives

Jim Byers - Investor Relations, MKR Group

Ashutosh Roy - Chairman and CEO

Eric Smit - CFO

Analysts

Austin Williams - Craig-Hallum Capital Group

Nick Altmann - Northland Capital Markets

Operator

Good day and welcome to the eGain Fiscal 2017 Fourth Quarter and Full-Year Financial Results Conference Call. Today's call is being recorded. And at this time, I'd like to turn the conference over to Jim Byers of MKR Group. Please go ahead, sir.

Jim Byers

Thank you, operator, and good afternoon, everyone. Welcome to eGain's fiscal 2017 fourth quarter and full-year 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'd like to remind everyone that during this conference call management will make certain forward-looking statements which contain management's expectations, beliefs, plans and objectives, regarding future financial and operational performance. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect anticipate or similar expressions.

Forward-looking statements are protected by Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a wide range of risks and uncertainties that could cause actual results to differ in material respect. Information on various factors that could affect eGain's results are detailed in the company's reports filed with the Securities and Exchange Commission. eGain is making these statements, as of today, September 6, 2017 and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call.

In addition to GAAP results, we will also discuss certain non-GAAP financial measures in this conference call such as non-GAAP operating income. Our earnings press release can be found on the news release link in the Investor Relations page of eGain's Web site at www.egain.com. The tables included with the earnings press release include 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 eGain's Web site.

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

Ashutosh Roy

Thank you, Jim, and hello, everyone. I’ve been waiting to say these words for a while. We successfully completed our transition to a SaaS business in the fourth quarter of fiscal 2017. To put it in perspective, we went from $14.5 million of perpetual license revenue in fiscal 2016 to $4.5 million of perpetual license revenue in fiscal 2017, to an expected less than a $1 million of perpetual legacy license revenue in fiscal 2018.

Looking back at the last couple of years, I’m proud of my team and the manner in which they’ve executed the transition in the public eye, while driving customer success, accelerating product innovation and through it all, generating operating cash.

As far as I know, we are the only public company of our scale to successfully complete such a business model transition without requiring significant cash infusion. We live dangerously. We executed tenaciously through this transition, but that is all behind us now.

Moving forward, we are singularly focused on SaaS growth, even as we guide our legacy perpetual license clients to a better innovation consumption model in the eGain Cloud. As a result, our quarterly financial performance comparisons will be more meaningful sequentially with Q3 of fiscal 2017 as a baseline which had minimal perpetual license revenue rather than against year-over-year quarter comparisons because as you all know our revenue model in fiscal 2016 were still very much influx.

With that said, let me turn to financial highlights for the fourth quarter. Our SaaS revenue was up 33% sequentially over the third quarter. We generated $3.9 million in operating cash flow in the fourth quarter, up 39% from the third quarter, and we improved our non-GAAP operating income to $250,000 from a loss of $1.2 million in the third quarter.

Looking at our business, we continue to acquire new enterprise clients, especially those looking to digitally transform their customer engagement capability. In the U.S., we saw good new logo wins in healthcare. Our customer success team meanwhile is systematically engaging our clients to help them consume innovation better in the eGain Cloud.

One such example is a large bank client of ours. They’ve moved to the eGain Cloud in Q4, and in the process they added a bunch of new digital capabilities from the eGain suite to accelerate their transformation program. Overall, our investment in customer success is showing measurable results in improved customer facts, better retention, and broader expansion opportunities.

Turning to products, our new product version 17 is being received very well in the market. In particular, our new Advisor Desktop is a new way of looking at the customer engagement advisor workspace. This desktop is digital first, knowledge powered, and A1 enabled, and we have brought together the best of our traditional strength in these areas.

As you can imagine, this is a radically different approach from what has been a universally adopted phone centric desktop design for the last 25 years in the market, starting with the first generation of agent desktop providers like Scopus and Vantive and Clarify, names that may not be even familiar to many of you.

The Advisor Desktop in eGain 17 is designed round up for the digital world. In the eGain desktop; digital, mobile, and social interactions are primary. Voice is important, but it is a component of digital and omni-channel experiences are optimized out-of-the-box. The audience for our Advisor Desktop is the millennial associate who grew up texting more than talking.

With our new product version, we also successfully debuted in the Gartner CRM customer engagement Magic Quadrant this year. In the past as you all know, we were the leader in the web customer service Magic Quadrant for five straight years until 2013 when Gartner stopped that Magic Quadrant.

Now, this new Magic Quadrant recognition from Gartner debuts us nicely in a much larger market of Agent Desktop, where we are especially attractive to early adopters in the market S-curve, those who are aggressive driving digital first strategies across their customer engagement stack.

Turning to the team, we announced last month our new Head of Global Sales, Todd Woodstra. Todd is a talented sales leader with a successful track record at small and large technology companies, notably at Nuance where he ended up leading the worldwide channels and alliances. At eGain, Todd will drive all direct and channel sales, develop new routes to market, optimize sales operations and drive accountable execution. He will also lead the charge in scaling our Cisco partnership in the field, something he successfully did at Nuance. I’m very excited to have him on board and he is in the third week on the job now. He is already drinking from the fire hose as we speak, and we are all looking forward to working as a team supporting him in his leadership.

So with that, I will ask Eric Smit, our Chief Financial Officer to add more color around the finance and operations. Eric?

Eric Smit

Thank you, Ashu, and thanks for joining us today. As Ashu noted, we are pleased to report solid sequential growth in our recurring revenue as well as sequential growth in total revenue for the fourth quarter, our first quarter since completing our transition to a recurring revenue business model.

In addition, we generated $3.9 million in operating cash flow during the quarter and non-GAAP operating income of $250,000 in Q4 versus a loss last quarter. Our overall sequential improvements in the fourth quarter revenues also reflects the benefit from the timing of several items, some of which has been headwinds for us in the past, but now favorably impacted us in Q4.

With the shift to a SaaS model, there has been a lag between new bookings as they convert to revenue. This quarter, we saw the benefit from a good job in shortening the time between bookings closed in the preceding quarter to revenue starts, and in addition we began recognizing revenue from one of the large bookings that had closed almost a year-ago.

The other point of note is that in this quarter there was no significant foreign currency impact whereas certainly in the past we’ve seen that, in particular with the impact of the pound and the euro against the dollar. Also before I continue with the review of our financials, I’d like to note that with the completion of our transition to a SaaS business model behind us, we are going to start providing some new metrics that we believe are relevant in highlighting our progress in building a growing and profitable recurring business -- revenue business.

Going forward, instead of subscription and support revenue, we will disclose recurring revenue in our financial statements. We will break down our recurring revenue into two components, SaaS revenue and legacy support revenue. The SaaS revenue will include all forward recurring revenue streams for the business whereas the legacy support revenue is comprised of the maintenance contracts that are associated with the legacy on premise perpetual licenses, which we are no longer selling.

With our ongoing efforts to move all legacy, on-prem customers to our SaaS model, we expect the legacy support revenue to decline. In addition, because we see Q3 as the starting point for this next chapter in eGain's business, I will discuss sequential changes in addition to the standard year-over-year comparisons, which we do not believe are as applicable given the model change.

Starting with our results for the fourth quarter, total revenue for the fourth quarter was $14.6 million, up 6% sequentially from $13.9 million in the third quarter. This is down from $17.6 million in the fourth quarter a year ago, reflecting our expected decline in legacy perpetual license revenue as a result of our transition to a recurring revenue business model.

Our recurring revenue was $11.6 million for the fourth quarter, up 14% sequentially from $10.1 million in the third quarter, and up 7% from $10.8 million in the year-ago quarter. Included in the recurring revenue was approximately $600,000 of catch up items and therefore not part of the recurring revenue stream going forward.

Examples of these catch-up items include back revenue from first year accounts that were reinstated in the quarter and volume charges from customers with seasonal reverse licenses. This catch up was split evenly between SaaS and legacy support.

Recurring revenue accounted for 79% of total revenue in Q4, up from 73% in the third quarter and 61% in the year-ago quarter. Breaking up these components, SaaS revenue of $6.8 million was 33% sequentially from Q3, or it was up 33%. Excluding the one-time catch up items, SaaS revenue was $6.5 million, up 27% sequentially.

License revenue in the fourth quarter was $333,000, down 71% sequentially from $1.2 million in the third quarter and down 91% from $3.8 million in the year-ago quarter. License revenue accounted for only 2% of total revenue in Q4, down from 22% in the year-ago quarter. Professional services revenue for the fourth quarter was $2.7 million, up 5% sequentially from Q3 and down from $3 million in the year-ago quarter.

Now looking at our non-GAAP gross profits and gross margins, gross profit for the fourth quarter was $9.3 million or a gross margin of 64%, up sequentially from $8.3 million or a gross margin of 60% in Q3. This compared to gross profit of $12.2 million or a gross margin of 69% in the year ago quarter.

If you look at the breakout of gross margin by revenue type, our recurring revenue gross margin for the fourth quarter improved to 74%, up sequentially from 70% in the third quarter and up from 72% in the year-ago quarter. Professional services gross margin was 14% for the quarter, up sequentially from 4% in the third quarter and down from 19% in the comparable year-ago quarter.

Now turning to operations, non-GAAP operating costs for the fourth quarter came in at $9 million, down 5% sequentially and a 19% decrease from $11.2 million in the year-ago quarter. On a non-GAAP basis, operating income improved to $250,000 in the fourth quarter compared to non-GAAP operating loss of $1.2 million in the third quarter of 2017, and operating income of $1 million in the year-ago quarter.

Just looking at our -- the interest and taxes, interest expense decreased $379,000, down 19% sequentially and a 13% decrease from $437,000 in the year ago quarter, primarily due to the reduction in bank borrowings.

And on the taxes, we reported a tax benefit of $744,000 in the fourth quarter compared to a tax provision of $226,000 in the third quarter and a tax benefit of $1.5 million in the year-ago quarter. The benefits reported in the quarter was an adjustment to the provision primarily due to our European operations.

GAAP net loss for the fourth quarter improved to $45,000 or $0.00 per share on a basic and diluted basis compared to a GAAP net loss of $2.5 million or $0.09 per share on a basic and diluted basis for the third quarter and GAAP net income of $1.4 million in the year-ago quarter.

We generated improved cash flow from operations of $3.5 million in the fourth quarter, a 39% sequential increase compared to $2.8 million in the third quarter and compared to $2.2 million in the fourth quarter a year-ago.

Total revenue was $60.2 million as of June 30, 2017, up 13% from $53.5 million as of March 31, 2017. Deferred revenue includes both deferred revenue on the balance sheet of $23.2 million and unbilled deferred revenue that remains off balance sheet of $37.0 million. And collectively this represents contractual commitments that have not been recognized as revenues.

Now turning to our full-year results, total revenue for fiscal 2017 was $58.2 million, down 16% from $69.4 million in fiscal 2016, with the decrease primarily due to the expected decline in our legacy license revenue, reflecting our transition to the recurring revenue model.

Our recurring revenue was $43.6 million, up 10% on a constant currency basis from $42.8 million in fiscal 2016. Breaking out these components, SaaS revenue was $23.9 million for the year, up 6% year-over-year and 4% in constant currency. Legacy support revenue was $19.7 million, down 3% year-over-year.

License revenue was $4.6 million, down substantially from $14.5 million last year, again reflecting our transition from a potential license model to a recurring revenue model. Professional services revenue was $10.1 million, down from $12.1 million in fiscal 2016. The decrease is consistent with our strategic direction as we’ve stated on previous calls, the improvements to our product to simplify our deployment process resulting in a reduction in time and cost for average implementation projects, we've adjusted our cost accordingly and have been able to maintain our margins.

Now looking at gross profits and gross margin for the fiscal year, gross profit for our fiscal 2017 was $37.4 million, or a gross margin of 64% compared to gross profit of $46.2 million or a gross margin of 67% in the prior fiscal year.

Looking at the breakout of gross margin by revenue type, our recurring revenue gross margin improved to 73%, up from 72% in the prior fiscal year. Professional services gross margin was 10% for fiscal 2017 compared to 9% in the prior fiscal year.

Now turning to operating results for the full-year, operating costs for fiscal 2017 were $38.4 million, a 20% decrease from $48.1 million in the prior fiscal year, reflecting our improved operating efficiencies. Non-GAAP operating loss was $968,000 compared to a non-GAAP operating loss of $1.9 million for fiscal 2016.

Interest expense of fiscal year -- for the fiscal year was $1.7 million, down 12% from $2 million in fiscal year 2016. Tax expenses for the fiscal year was $533,000 compared to a tax benefit of $863,000 in fiscal year 2016. GAAP net loss for the fiscal year was $6 million or $0.22 per share on a basic and diluted basis compared to GAAP net loss of $6.2 million or $0.23 per share on a basic and diluted basis for fiscal 2016.

Now turning to our balance sheet and cash flows, total cash, cash equivalents and restricted cash as of June 30, 2017 was $10.6 million compared to $11.8 million as of June 30, 2016. During the year, we generated cash flow from operations of $5.4 million, up substantially from $1.9 million in fiscal 2016.

With our improved cash flow, we paid down approximately $5.6 million in debt during fiscal 2017, which reduced our net position -- our net debt position to $5.1 million from $9.8 million at the end of fiscal 2016.

Total net accounts receivable were $7.2 million as of June 30, 2017 compared to $11.9 million of June 30, 2016 and our DSOs improved to 44 days for Q4 compared to 61 days in Q4 last year.

In summary, we are pleased with the start of this new chapter. The model shift was driven by customer demand that we believe will provide less lumpiness and more predictability in our future financial results. And with this in mind, we are providing the following guidance for fiscal 2018 full-year.

Well, in fiscal 2018, we expect to report SaaS revenue annual growth of between 15% and 25% and total revenue, but excluding the legacy perpetual license annual growth of between 5% and 10%. We’ve excluded the legacy license from this calculation as we expect it to be less than 1% of total revenue in fiscal '18, reflecting the business model transition.

On the investor relations front, eGain will be presenting at the upcoming Dougherty & Company Institutional Investor Conference taking place in Minneapolis on September 19, which will include one-on-one and small group meetings. We hope to see some of you there. We look forward to updating you on our continued progress when we report our fiscal 2018 first quarter results.

This concludes our prepared remarks and we will now open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] At this time, we will hear from Jeff Van Rhee with Craig-Hallum Capital Group.

Austin Williams

Hey, guys. This is Austin on for Jeff, Austin Williams. Could you maybe talk about the competitive landscape and maybe how its changed over the past year?

Ashutosh Roy

Sure. Hey, Jeff. This is Ashu here. I have a bad throat, so I apologize for my voice. So competitively, I think the set of -- broadly, there are three sets of competitors that we’ve talked about and maybe give you a little color on trends on those. So the first is when we’re selling direct and we are selling sort of a knowledge management solution as the front of the wedge, then we’re competing mostly with Oracle on Knowledge and competing with people like Verint on Knowledge. Those tend to be the primary competitors on the direct sales side. When we are selling the digital first capabilities in the direct channel, then nowadays it's primarily LivePerson, though Salesforce and Oracle also compete, but LivePerson is probably the primary competitor because digital has turned much more into real-time messaging and that makes it more of a direct competition for them and us. And then when we are selling alongside the contact center partners like Cisco, at that point because it's a bigger proposition, the competition is, say, Genesys and Avaya, and in the enterprise, those are the primary competitors.

Austin Williams

Okay, great. Thanks. And second question, just kind of about churn. What is the rate of customer churn look like? Are there any major customers you’re seeing right now that you're concerned about, maybe customers that over 5% or so?

Ashutosh Roy

Well, over the past year and a half, we’ve -- as you know, we've invested quite systematically and significantly on the customer success side and that’s shown good results. Our customer retention has improved and we feel very good about where we are for fiscal '18. We have disclosed the big churn of our significant customer in the end of December of 2016. Since then we’ve had churn, but nothing that is outside of the band of what we expect. So we are feeling comfortable about our retention rates in fiscal '18. Eric, you want to add to that?

Eric Smit

No, I will agree with that. Certainly nothing in that 5% category that we have aware of that’s in front of us.

Ashutosh Roy

Yes. One other thing that I would add is that we are also systematically migrating our customers in the renewal cycle to multiyear contracts. That is also an important factor for us to ensure more visibility and predictability.

Austin Williams

Okay, great. Thank you.

Operator

At this time, we will hear from Nick Altmann with Northland Capital Markets.

Nick Altmann

Hey, guys. This is Nick on for Mike Latimore. Thanks for taking our questions. Just kind of staying on that topic, you guys mentioned retention rates have gotten better, they’ve gotten better year-over-year and sequentially, correct?

Eric Smit

I guess, absolutely. So I think that obviously if we look at the drop we have in Q3, Q4 was significantly improved, but then overall especially if you took that one outlier out, we’ve definitely seen improvement year-over-year.

Nick Altmann

Okay. Got it. Good. And then, you guys mentioned you had some good wins in healthcare. Are there any other verticals that are particularly strong in the fourth quarter or maybe you guys have any visibility in the next year, any verticals that you think might be stronger than others?

Ashutosh Roy

In the U.S., I think BFSI, the sort of banking and financials, is quite active in fiscal '18, in addition to healthcare.

Nick Altmann

Got it. Okay. And then, the SaaS growth margins have been improving, 73% this year, I guess just looking ahead maybe at the end of next year, can we still see some improvement there or is 73% kind of the ceiling, do you think in the near-term or any thoughts there would be helpful?

Ashutosh Roy

No, I think we can still expect to see slight improvements to that as we continue to build the scale and obviously shift more of our business to the SaaS model.

Nick Altmann

Okay, got it. Thank you.

Operator

That will conclude the Q&A session at this time. I will turn it back over to management for any additional remarks.

Ashutosh Roy

Well, thanks again everybody. Again, as I’ve stated, we are excited to enter this next stage for the company and look forward to providing you an update when we release our Q1 results. Thank you.

Operator

Once again, that does conclude today’s conference call. Thank you all for your participation.