eGain Corporation (NASDAQ:EGAN) Q3 2020 Earnings Conference Call May 7, 2020 5:00 PM ET
Jim Byers – MKR Investor Relations
Ashu Roy – Chief Executive Officer
Eric Smit – Chief Financial Officer
Conference Call Participants
Koji Ikeda – Oppenheimer
Ryan MacDonald – Needham
Mark Schappel – Benchmark
Richard Baldry – Roth Capital
Good day, and welcome to the eGain Fiscal 2020 Third Quarter Financial Results Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Jim Byers of MKR Investor Relations. Please go ahead, sir.
Thank you, operator. And good afternoon, everyone. Welcome to eGain’s Third Quarter Fiscal 2020 Financial Results Conference Call. On the call today are eGain’s Chief Executive Officer, Ashu Roy; and Chief Financial Officer, Eric Smit.
Before we begin, I would like to remind everyone that during this conference call, management will make certain forward-looking statements which convey management’s expectations, beliefs, plans and objectives regarding future financial and operational performance. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate or similar expressions. Forward-looking statements are protected by safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to a wide range of risks and uncertainties and could cause actual results to differ in material respects. 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, May 7, 2020, and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call.
In addition to GAAP results, we will discuss certain non-GAAP financial measures such as non-GAAP operating income. Our earnings press release can be found in the News Release link on the Investor Relations page at eGain’s website at 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.
In addition, a replay of this conference call will also be available in the Investor Relations section of eGain’s website.
And now with that said, I’d like to turn the call over to eGain’s CEO, Ashu Roy.
Thank you, Jim. And hello, everyone. We are pleased to report solid financial results for the third quarter. But before I go there, let me share a quick update on COVID-19 with respect to our business. As the pandemic unfolded in March, we adjusted our business and, within days, we successfully transitioned our worldwide teams to a 100% work-from-home operation with no business interruption and no material impact to our service delivery capabilities. In short, our business continuity plan worked as expected, that was good.
Turning to the business impact of COVID-19. Some of our deals, especially new logos slipped in March, as purchasing decisions stalled. Some of those stalled deals have since closed in April and most others remain engaged and they look to resume once lockdown restrictions ease. At the same time, we saw a positive increase in business from our customers looking to deflect more phone interactions to digital and drive more automation. Many of our clients successfully handled customer contact surges with our solutions, driving more self service and more digital engagement.
In addition, they also enabled workforces and reconfigured them with our knowledge and guidance solutions. In fact, some of clients who were impacted by the sudden shutdown of their global operations, especially on BPOs managed to use our knowledge and guidance solutions to empower their field and store staff who are not contact center folks to resolve customer queries in the interim. So very agile and flexible responses enabled by our solutions.
Some other customers activated our virtual assistant to ask for conversational self service, reducing pressure on their contact centers. For example, a European insurance client handled a 700% increase in customer contact. They’re a life insurance provider; you can imagine that concern from customers. Using our self-service solution and mounted solution. A North America teleco client reconfigured thousands of field personnel and store staff to handle a double increase in their digital customer contacts, 100% increase. A financial services plant in North America also doubled their user virtual assistance and digital service from us as their customers look for more help.
Faced with this disruption now we see most businesses recognizing that digital engagement is no longer an add-on to voice; in fact, digital is the new voice. Once the lockdowns relax, we expect to see acceleration in demand for our solution. In fact, in the last month, in April, we’re already seeing growing interest from prospects in our solutions.
Having said that, we do anticipate some negative impact in the short term as investment decisions get delayed and project stalls because of the COVID-19 situation, and those will take some time to spin back up.
Like most technology providers, we will be subject to the economic slowdown. However, we believe that our exposure should be limited, because, first, roughly 90% of our existing clients are large enterprises; that is businesses with over $1 billion in annual revenue. This includes government organizations as well.
Second, 75% of our total business is in the verticals of banking, financial, insurance, teleco, government and healthcare, and we expect that these verticals should not be significantly impacted, though there will be some impact. 9% of our business comes from retail, which we think will be impacted. And finally 2% comes from travel and hospitality, which has been severely impacted as we know, and we can see that that will result in reduced demand as well as customer churn and reduction in the travel and hospitality sector.
So our view on the whole COVID-19 situation with respect to our business is that while in the short term we are seeing deal slippage, we have been able to deliver strong results with healthy bookings in the March quarter.
And now let’s turn to the outlook for the near future and the medium term. So before I go there, let me talk about business performance for the quarter. We saw healthy bookings, new bookings, with a mixture of new logos and strong expansion in existing clients. Some notable wins. We had a new logo which was a financial services Fortune 500 company in the U.S., another new logo which is an insurance provider in Europe and the third one which is notable, a new logo which is a large utility company in the U.S.
On the expansion side, we had some strong expansion with a health services and insurance provider in the U.S. We had good expansion on knowledge and guidance solutions with a large teleco in Europe and we had good omnichannel desktop expansion with a large insurance company in Europe. So all-in-all, a balanced, good booking environment, but we did have some new logo slippage, as I mentioned, in March. But those, not all of them, but roughly half of them we managed to close in April.
Turning to our field and our partners. In the last quarter, we announced our OEM agreement with Avaya. This was followed by the announcement of general availability of the product in March. I have to say that this is a significant milestone in our strategic partnership with Avaya. It is early days, but now we are on the runway, jointly executing our go-to-market plan with them to roll this compelling digital solution out to the global customer base of Avaya, Avaya Elite customers, to be precise. And we’re working with their field and partners to do so. We expect this partnership to favorably impact our top line in fiscal 2021.
Looking ahead, we are quite bullish about our business, despite the short-term COVID uncertainty. Our digital customer engagement platform has increasingly become [indiscernible] organizations making the urgent shift to digital. And it’s not just about digital connection with customers, which is the foundation, but it’s equally about solving the problems and having intelligent automated conversations through those digital channels. And then finally, it’s about optimization and learning from those conversations.
So with our solution and our product leadership, which includes all these three components of digital connectivity, conversational automation and guidance, and analytics and learning, we believe that our leadership, which is corroborated by the field and market analyst, is second-to-none. In fact, Forrester Research, in their recent Digital Customer Service Wave rated eGain number one in current product offerings. In the current product offerings, we were number one.
Much of what analysts consider a vision for the future, we deliver today. So we are accelerating in the term. Thanks to our healthy balance sheet and business performance, we continue to increase our investment in products and partnerships to where it is where we see significant opportunities in the medium term.
With that, I’ll ask Eric Smit, our Chief Financial Officer, to add more color on our financial performance. Eric?
Great. Thanks, Ashu. And thanks, everybody, for joining us today. As Ashu mentioned, we had solid third quarter results all around with top and bottom line results that exceeded our guidance and were ahead of Street consensus. And we delivered these results while transitioning our business to a work-from-home operation without missing a beat.
As I noted last quarter, as we have shifted to 100% SaaS business, substantially all of our professional services are now for our SaaS customers. So we believe the combination of SaaS revenue and professional services as a useful measure to value our business on a forward-looking basis.
Looking at the financial highlights from Q3, SaaS revenue was up 26% year-over-year and 5% sequentially. Non-GAAP net income was $2.4 million or $0.08 per share on a basic and $0.07 per share on a diluted basis. And cash provided by operations for the quarter was $415,000, and that puts us at $8.5 million cash from operations year-to-date. And finally, we ended the quarter with $40.7 million in cash, with no debt.
Now looking at our quarterly results in more detail, starting with revenue. For Q3, our SaaS and professional services revenue was $16.3 million and comprised 89% of our total revenue, up 20% year-over-year. This highlights our progress towards our long-term target model of total revenue growth of between 20% and 25%.
SaaS revenue was $14.8 million, up 26% year-over-year and accounted for 81% of our total revenue in Q3. On a sequential basis, SaaS revenue grew 5% over Q2, and year-to-date SaaS revenue was up 24% year-over-year.
Our renewals and retentions continued to be in line during the quarter and the trailing 12-month SaaS retention rates remain healthy with gross retention in the low 90% range and our net retention, which includes upsell and uplift, continues to be above 100%.
Legacy revenue was $2.1 million, down 40% from the year ago quarter and down 9% sequentially from Q2, driven by the continued migration of our legacy customers and some increased terminations. The legacy accounted for 11% of our total revenue in the quarter, which puts us ahead of our plan to reduce legacy revenue to below 10% of total revenue on a quarterly basis by the end of calendar 2020.
Professional services revenue was $1.4 million or 8% of total revenue. This was down 15% from $1.7 million in the year ago quarter. As we’ve noted before, our goal was to get PS revenue into the high single digits as a percentage of total revenue. So this is in line. However, the timing of the completion of certain engagements resulted in the sequential decline this quarter. But when I look at it for the fiscal year, we are still tracking to our internal target for PS revenue.
Now looking at non-GAAP gross profits and gross margins. Gross profit for the third quarter was $13 million or a gross margin of 71% compared to gross profit of $11.9 million or a gross margin of 70% a year ago. Our subscription gross margin was 78% in Q3, up 100 basis points from the prior year. PS margin was negatively impacted in the quarter, in part due to the timing issue I just mentioned. In addition, we ramped hiring to support the increased demand we are seeing for the business and around the PS. And so margins, we expect to continue to be impacted while these new members ramp up their productivity in the upcoming quarter.
Now turning to operations. Non-GAAP operating costs for the third quarter came in at $10.7 million compared to $9.5 million in the year ago quarter. For the first 2 months of the quarter, we continued to ramp our sales in marketing spend. But this was obviously impacted as travel restrictions were put in place in March. As Ashu mentioned, we have and will continue to ramp our investments in the delivery and production innovation side, but will, of course, be very prudent in this current environment.
Our non-GAAP operating income in the third quarter was $2.3 million or an operating margin of 12%, which was significantly ahead of our guidance.
Now looking at net income. Non-GAAP net income for the third quarter was $2.4 million or $0.08 per share on a basic and $0.07 per share on a diluted basis. This compares to non-GAAP net income of $2 million or $0.07 per share on a basic and $0.06 per share on a diluted basis in the year ago quarter. GAAP net income for the third quarter was $1.9 million or $0.06 per share compared to $1.4 million or $0.05 per share in the year ago quarter.
Turning to our balance sheet and cash flows. Total cash and cash equivalents as of March 31, was $40.7 million compared to $31.9 million at June 30, 2019. And cash provided by operations during the quarter was $415,000. And year-to-date, cash provided by operations was $8.5 million or an operating cash flow margin of 16%.
Now turning to our financial outlook and guidance. Before providing revenue guidance, a few points to highlight. We have spent the last 60 days or so assessing the potential impact that COVID-19 could have on our customer base and our business going forward. As Ashu mentioned, approximately 90% of our ARR is with customers that have $1 billion in revenue or are large government organizations. And then drilling down into the spread by vertical, banking, financial services, insurance, teleco, healthcare and government make up close to 75% of our total ARR, with retail following at 9% and finally travel and hospitality at 2%.
So this customer distribution has resulted in limited impact to our business in the short term, but again, as Ashu indicated, regardless of size of vertical, we don’t expect any business to be completely immune from the disruption and are, therefore, looking at making adjustments accordingly.
Again, as Ashu indicated, we have seen a few deals slip as businesses deal with the impact of COVID-19. And certainly from a new logo acquisition standpoint, until business normalizes, we’ll expect to see challenges in that area. And we’ve reflected this in our updated fiscal ‘20 guidance.
Some other points I want to highlight as it pertains to our guidance. As I mentioned earlier, SaaS revenue plus professional services is a metric that is becoming increasingly relevant for us. We believe it is the best measure of the overall growth rates of our core business going forward, as our total revenue growth has been negatively impacted this year by the declining legacy business that has been faster than originally planned with our accelerated push to migrate our remaining on-premise customers to the cloud.
And finally, as the guidance we have previously provided and will be updating today is in constant currency, here is an update on the FX impact year-to-date, which we have factored into this guidance. For our SaaS revenue the negative impact for the year is $416,000 and for total revenue it’s a negative $686,000. Looking to Q4, if the U.S. dollar-to-British pound exchange rate remains at the current levels, we don’t anticipate a significant further impact on the revenue for the remainder of the fiscal year.
Now on to our guidance. For fiscal 2020 year, we provide updated guidance for SaaS revenue of between $56 million up to $56.5 million on a constant currency basis, which would represent growth between 25% and 26% year-over-year. SaaS and professional services revenue of between $62.3 million and $63 million on a constant currency basis, which would represent growth of between 20% and 21% year-over-year. Total revenue for the fiscal 2020 full year of between $71.7 million to $72.4 million on a constant currency basis, which would represent growth of between 7% and 8% year-over-year. And finally, non-GAAP net income of between $6.5 million to $7.5 million or $0.20 to $0.23 per diluted share.
Before my closing remarks, just a couple of Investor Relations updates. We again will be participating in 3 virtual investor conferences later this month. We will be participating in the Oppenheimer Virtual Emerging Growth Conference taking place 12 of May. We will be presenting at the Needham & Company Virtual Company Technology and Media Conference on May 20. And we’ll be participating in the Craig-Hallum Virtual Institutional Investor Conference taking place May 27. We hope to see some of you virtually at these conferences.
So in closing, as we navigate through these uncertain times, it’s become increasingly clear to us that our digital customer engagement platform is becoming a necessity for organizations making the urgent shift to digital. Our product leadership is corroborated by clients, partners and market analysts. As Ashu stated, Forrester Research, their new digital Customer Service Wave rated eGain number one in the current product offering. Much of what analysts consider vision, we deliver today. So we are accelerating in this time. Thanks to our balance sheet and business performance, we are increasing our investments in products and partnerships, two areas where we see significant opportunities in the medium term.
This concludes our prepared remarks. Operator, we will now open the call for questions.
[Operator Instructions] We will take our first question. This comes from Koji Ikeda with Oppenheimer.
Ashu and Eric, nice to hear your voices and hope you and your family and friends are all safe out there in these weird times.
First question here is on the guidance for SaaS revenue for the fourth quarter. It calls for growth to accelerate, I think. So what’s giving you that confidence? How much of that acceleration is being driven by pushed deals that already closed? And I guess is there anything else in there that we should be aware of?
Thanks, Koji. Thanks for the words. Yes, I think everything is doing well and hopefully the same for you. So I think when you look at the actual numbers, the SaaS numbers on a sequential basis are going to be flat to declining is what we’ve guided. So although that has resulted in the strong results for Q3 combined with the Q4 numbers give us the increased overall guidance for the year. But certainly we factored some impact of the slipped deals into the guidance that we’ve provided that provides the numbers that we’ve outlined.
Eric, that’s super helpful. Thank you. And maybe a big picture question on the go-to-market for either you or Ashu is, how are you guys thinking about the ability to close the split between new deals and execute upsells here over the next six to nine months? And then I have just one more follow-up.
Ashu here. Hi, Koji. Yes. So I do think that new logo acquisition will be slower in the next six to nine months. It will happen. We are seeing new deals close even in this quarter. But we do see sales cycles getting a little longer, especially on some of the larger deals that are new logos.
On the expansion opportunities, I believe that the pickup or the kind of recycle will be faster. And we’re already seeing some of those larger deals which are in the expansion market starting to spin back up. So I think that the expansion side will recover faster. The new logo side is going to be slower to recover.
Got it. Got it. Thank you. And then just my last question here is, thinking about the 25% of the companies that are in, I guess you could call it troubled industries today, what is eGain doing to work with those customers that could be negatively impacted in that 25% bucket? Thank you for taking my questions.
Sure. So couple of things. One, we are trying to understand what the nature of their challenge is. I mean, for instance, if I take an example of a few clients in the travel and hospitality sector, their businesses, the bottom has fallen out under it. So what we are saying is, can we reduce the commitment that they have, because their need has certainly gone down. So try to reduce that and then build back up as their business picks up. And in all this, it’s about making sure we are helping the customer through the tough time, and hopefully then, as business picks back up, we get back to a better place with them.
And then the second thing we’re seeing is making sure that if there are any concerns around particular aspects of applications that a user has where the demand may have shifted into other channels. For instance, tel customers who maybe have agent-based applications from us certainly feel like their agent utilization has gone down, but they would like to drive more self service. And we are providing that licensing flexibility on our platform. That’s something that our customers appreciate and that’s another thing we are doing for them.
Our next question comes from Ryan MacDonald with Needham.
I guess first, you mentioned that you obviously have started to see some of the deals that slipped close in April. I’m just curious to see what you’re seeing in terms of pipeline and conversion outside of those slipped deals. Are you starting to see sort of an increase back in activity or maybe a little bit more disruption than you expected?
Hey, Ryan. It is Ashu here. So yes, it’s a good question. What we are seeing so far is that deals that are large and in the pipe for let’s say one or two months out, they are likely going to shift by another couple of months before they get to the same stage of imminent closure, right? So you’re seeing that shift. I think a quarter shift is what we think we are anticipating in many of those cases.
The priorities are not changing; we don’t sense that. But we are definitely seeing a quarter or so shift in that buying pattern. On the other hand, interestingly, we are seeing early stage pipeline building surprisingly well in April and in May. And it’s – well, it’s not surprising. But it’s good to see because what we are seeing is a lot of companies are actually stocking up engagements, saying we need to get better at our digital customer engagements, capabilities. So that’s what we have seen so far.
Excellent. Thanks. And then in terms of the customers that are sort of potentially struggling right now, are you offering anything around the flex – like flexible billing terms as a part of assisting them and trying to understand the needs that they have right now, given that their businesses have slowed down?
It’s a good question. It’s something that we have an open mind toward. But what we are seeing and given our customers are very large businesses, as we mentioned, 90% of our customers net revenue are $1 billion-plus companies or government organizations, we have not seen that pressure yet, except in like 1 case that I have heard of and that was a smaller business. So I think we will have that kind of activity in that 10% zone, but not the other 90%.
But Eric, any other comments on that?
No, I think that’s accurate, Ashu. It’s a very small number of customers have reached out to us. And if anything, it may be delaying, moving to a quarterly billing cycle from an annual one, that type of delay, but nothing significant for us to date.
Got it. And then just one more follow-up. In terms of implementations and those in process or in the pipeline, have you been able to complete those or work through those 100% remotely? Or is there any aspect where you need to be on premise? That’s it for me.
Right. So there are two parts to that; one is what we can do and the second is what the customer can and is willing to do. So on our end, we’re able to do 100% of our work remotely. So that is good. On the other hand, we have had quite a few cases where the customer project teams have gotten disrupted or they have been pulled into taking are of other business continuity kind of priorities within their business. And so that has paused some of these projects because of lack of resources on their side. But that, we are starting to see that starting to pick back up, but that, that we have seen.
Our next question will comes from Richard Baldry with Roth Capital. Excuse me. Our next question will come from Mark Schappel with Benchmark. One moment, please. Caller, please go ahead.
Nice job on the quarter. Ashu, starting with you. Healthcare has been one of your target verticals, maybe not your largest, but definitely one of interest. And I was wondering if you could talk a little bit about what areas of healthcare you have been seeing your solutions deployed historically.
Okay. So in healthcare what we’re seeing is more and more seeing these providers are starting to adopt our digital engagement capability. And that’s an area where we see even through our partners more interest. That’s something we are pushing on. And then the other area is the payer side, which you could put into insurance or you could put it into healthcare. But we see the healthcare aspect.
So for instance, providers like the Blues, we are seeing some good success in them. Those are larger opportunities where they’re, again, looking toward more and more digitalization of their customer engagement. So in both areas we are seeing demand. But I would say the size of opportunities are larger on the payer side. But there are a number of opportunity that is larger on the provider side.
Okay. Great. And in healthcare, there’s been a lot of talk of late just because of what’s going on with respect to telehealth. And it strikes me that messaging could play a large role there. And I know it’s early days. But I was just wondering if any healthcare providers have been approaching you or you’re in any discussions with healthcare providers regarding possibly helping out in the telehealth front.
Well, we have had a few of our customers who are in the health space asking for messaging-based solutions. We have engaged with them. But broadly what we see is our sweet spot is in digital-plus automation and that’s the area where we are looking. For instance, with one of our healthcare providers, we started with agent-side knowledge and guidance solution and now we are working with them on virtual assistance through messaging. So it’s a combination of messaging plus automation.
Great. Thank you. And then, Eric, a question for you. Guidance implies basically a low single-digit operating margin, which is much lower than the prior quarters at least this fiscal year. And is this just being conservative? Or do you expect investments to pick up in the current quarter?
I think, Mark, I think in this environment, this would be an element of conservatism built in, but this historically it’s our fiscal year-end so there’s year-end bonuses and comp adjustments and the like that have to be factored into the step-up of the expenses. So those are elements that we’ve considered here as well.
Our next question comes from Richard Baldry with Roth Capital.
Can you hear me?
Yes, we can.
Okay. Thanks. Not sure what happened last time. So can you walk us through on the partner side, if we were to look out a couple, one quarter or two, and client demand shifted pretty dramatically in favor of cloud-based solutions and they were to see their legacy installed bases start to, I guess recognize because of COVID’s issues a need to move faster, how quickly can you ramp or what type of resources would you need to ramp? Is there any gating factor there to respond to an increase in demand that it could be challenging if you’re trying to be careful about the additions you’re making internally in the interim?
Good question, Rich. So two areas. That’s why I mentioned that we are going to continue to steadily increase our investment in product and partnerships. In the partnership area, the part we are investing is on enabling the partner as well as boosting our delivery service capability, the professional service capability, which is the point that Eric mentioned where we are still increasing our investment.
So those are areas we are anticipating more increased demand in and we believe that preparing for that will give us early advantage in a couple of quarters. As we ramp up and train our new team members and we start getting more demand, we can deliver that nicely. On the cloud side, we don’t see much of a concern. Our public cloud architecture that we built on, can scale very nicely and easy to do so, that is less of a worry for us.
And it may be too early, I guess to much feedback on this. But have you noticed any change in body language from partners who, again, seeing this type of disruption, possibly understanding what their clients are going to shift their demand going forward? Any change in their discussions or what type of resources they want to allocate in partnership with you? Or do you feel they’re probably bogged in their own issues right now and too soon to get to that?
No. In fact, like I mentioned in response to another question, we have seen and it seems like a lot of collaboration over the last 30 days. We have seen a steady increase in interest through partners from prospects. And so I think that there is definitely a change in mindset and, like you said, body language and it is reflecting in those early deal registrations, which we build, that’s the way we track these early opportunities through partners. We’ve seen a distinct jump in that in the last 30 days. Now, if we see that sustained over the next couple of months, then, clearly, then that should be a good pattern to capitalize on.
I now show no further questions and turn back the call to Ashu and Eric. Thank you.
Well, thanks, everybody, again for listening on the call. And hopefully I’ll get an opportunity to interact with some of you at some of the virtual events scheduled for later in the month. Thank you.
This concludes today’s conference. Thank you for your participation. You may now disconnect.