eGain Corporation
Q2 2021 Earnings Call Transcript

Published: 10 Feb 2021

[Operator:]

Good day, and welcome to the eGain Fiscal 2021 Second 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.

[Jim Byers:]

Thank you, operator and good afternoon, everyone. Welcome to eGain's second quarter fiscal 2021 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.

[Ashu Roy:]

Thank you, Jim, and good afternoon, everyone. Sorry for a little late start there. So we are very pleased with our performance in the second quarter. Our top and bottom line results exceeded our guidance, and we're ahead of three consensus. On SaaS revenue grew 15% year-over-year and 21% year-to-date. On the gross margins, we improved by 500 basis points over the prior year quarter. We were GAAP profitable with net income of $1.6 million and we were again cash flow positive in the quarter. So good financial results ahead of guidance. As we have noted on our last call, we are continuing to increase our investment in sales and marketing. Halfway through the year, it's good to see that we are seeing positive indicators from that investment. Let me share some metrics. At the funnel level, firstly, looking at brand awareness. Our Web site traffic is a good metric for it. So that Web site traffic at the end of Q2 and through January is up more than 90% year-over-year, thanks to significant marketing investment increases we have particularly focused on scalable digital channels. Next, retracking our marketing generated lead and that in Q2 was up 60% year-over-year. Then our sales pipeline, at the end of Q2, our sales pipeline in dollar terms has more than twice as large as it was a year ago. Our total number of opportunities is also up, in fact a little more than twice so the average deal size in the pipe is a little lower than it was before, because we're getting more new logos in the opportunity bucket. Which brings me to our number one focus for the year from a sales perspective, in addition to scaling our team and executing the change programs. Number one focus this year for us is adding new SaaS logos in the enterprise market. And we are seeing that trend continue to be at a pace which is about twice the number of new logos. So in Q2 and Q1 put together, we acquired 20 new SaaS logos in fiscal '21 compared to seven in the same time period last year. So we have more than doubled our pace and we hope to increase this SaaS logo acquisition base even further in the second half of the fiscal year.

[Eric Smit:]

Thanks, Ashu and thanks, everyone for joining us today. As Ashu noted, we are pleased to report another good quarter with solid SaaS revenue growth year-over-year, expanding gross margins and positive EPS and cash flow. Our top and bottom line results were ahead of our guidance and street consensus for the quarter. In addition, as Ashu highlighted, we also saw significant improvement in our new SaaS loaders and our pipeline build.

[Operator:]

Thank you . And we'll take our first question today from Ryan McDonald with Needham.

[Alex Narum:]

This is Alex on for Ryan. As you lean into the digital go to market strategy from an investment perspective, and that's begun to bear fruit early in the quarter with brand awareness and digital leads generated. Can you talk about the incremental progress that's been made on this front, and what you're seeing in terms of digital leads, working their way through the pipeline, as well as if there's any conversions to bookings that have occurred ahead of schedule?

[AshuRoy:]

So our digital marketing is probably running at 2 to 3 times what we have been doing last fiscal year, so it’s really amped it up, that both in terms of, for candid marketing, remarketing, as well as a lot more virtual conferences. So we have increased that a lot, that’s reflecting in the significant increase, and 90% increase in brand awareness as measured by Web site traffic is significant. That's also translated into the 60% increase in marketing generated leads to sales, which is quite significant. So that's sort of the early pipeline build. Most of those opportunities would not turn into deals yet, because our sales cycle is in the nine month range but they’re certainly moving along in the pipeline actively.

[Alex Narum:]

And how has the adoption of the messaging hub trended? Has there been any large increases in messaging volumes as there's been on increase in demand?

[AshuRoy:]

Yes, messaging is clearly very active. Messaging what we see is messaging is a critical push by many companies to offer back connect option to their customers. At the same time, a lot of these companies are keen to put in a layer of conversational automation in front of that messaging to make sure that they don't get overwhelmed by the messaging that's been coming. So messaging bundled with conversational automation or virtual assistance is something we are seeing have good demand for.

[Operator:]

Next we'll hear from Jeff Van Rhee with Craig-Hallum.

[JeffVanRhee:]

So a couple of questions. The churned out customers that you talked about you were expecting, I think you said $750,000 sequential headwind? How did that play out relative to expectations?

[EricSmit:]

Yes, I think pretty much as we had expected, not a dramatic change from that.

[JeffVanRhee:]

And then the RPOs, I mean that's obviously something I think we've talked a lot about it. And it's a break from a long trajectory of sort of flattish RPOs with the magnitude of it, I don't know, can you explain a little more about the RPOs considering it short term? I'm assuming it's not contract duration, so that's a big jump. And at the same time sort of square with the deferred revenues, which sequentially looks like they were just down modestly. So I know these two lines particularly for eGain have been lumpy and hard to discern meaning from. But can you sort of reconcile those two?

[EricSmit:]

I think, Jeff, we’re still working through that. So I think as I prefaced on the call, these things are subject to these variations. But I think just in light of the questions raised around the renewals, especially last quarter we thought it’s appropriate timing wise just to highlight this point given the strength in renewals. I mean, I think that's really what we saw an element of just, as you know, we do have renewals that's fine duration, one, two, three years in duration. And so I think it was a function maybe of the convergence in this particular quarter, where as I've mentioned, there was, I would believe, more activity than what I’ve normally would have expected in one particular quarter. So that's what drove it I would say.

[JeffVanRhee:]

Obviously, from an operational standpoint, you’ve got pretty good feel for COVID at this point and in how the customer base is behaving. Certainly the transition to cloud is done at this point, when you think about guidance now that certainly is maybe lack of clarity from COVID is clearing. How do you think about the guidance in terms of when you would get back to giving a quarter and an annual outlook, did you do that this quarter and just how are you thinking about that?

[JeffVanRhee:]

We did think about it. I think, Jeff, to your point certainly the clarity around COVID, and there's no question that we’re still seeing some elements of deal elongation or shipping. I think people are still generally cautious even though the demand is high. That combined with the increased investments that we're seeing, Ashu mentioned, our focus now is getting this new cohort productive before we ramp the next team. I would say that, hopefully, by the beginning of fiscal '22, we'd be in a position to put out that annual guidance. So that's our current thinking here at this point.

[JeffVanRhee:]

And then just one last quick one, as it relates then to the SaaS. I mean, obviously, that's the focus, you know, layering a lot of reps in. I guess two questions. One, any sort of accrued sense of when that SaaS line gets to the 20% growth rate you know in the out year? And then secondly, on the cohort hiring, I know you had, I think originally said sort of April-ish and if I heard you Ashu, it sounds like maybe more like a May-June? I know it's hard to find talent. So I mean just assume you took maybe a little longer to get those guys in, but maybe just those two questions and I'll let somebody else jump on.

[EricSmit:]

So I think with regard to the growth rates, obviously, given the significant impact that we talked about with those two losses, that'll obviously have a drag against the year over year comparisons through Q2 of next year. But obviously with the ramping of these sales reps, hopefully, that'll come sooner than that. But you know, obviously, that's something that we’ll have to, I guess, manage through the next couple of quarters. Ashu?

[AshuRoy:]

So you're right about the fact that talent is hard to find it. So yes, it does take a month or two more than we thought it would. But I think the next cohort will be clearly a function of how we quickly get the first cohort ramped up and productive. So we’re watching that closely. We first started the conversations but we'll start pulling the trigger on it once we’re comfortable that this quarter is underway.

[Operator:]

We’ll now hear from Richard Baldry with ROTH Capital.

[RichardBaldry:]

With some of the new logos coming in sort of on the smaller side, I'm curious the time to go live maybe as different from just the sales cycle being nine months. How soon or how quickly do you think that typical new logo win can be turned on and it start to impact the current revenues? Is it two quarters in a row of that up 100% it feels like, you know, if we know how fast they come on and gives us an idea of how quick that acceleration comes?

[EricSmit:]

So I think that typically for us we’ve continued to shorten that cycle. So for most of these accounts that would be within the month following the signature. I mean, there are some instances, especially when we’re dealing with our partners that there maybe other factors that would delay it longer than that. But certainly it's within -- we strive to get it done within the 30 day window.

[RichardBaldry:]

And then maybe could you do a little more broader discussion around sales cohort. Number one, how quickly you think those people kind of can take over eityer geographic territories, will they be split around more of the US market? Will it be broader than that? And sort of what the gating factors to cohort number two, you know, how fast you can get your marketing qualified leads up to give them adequate coverage, or are there other factors we have to think about? Thanks.

[AshuRoy:]

So our current expectation is six months, that’s our current expectation right now. Some will ramp faster than others, but so far that’s what it seems like.

[RichardBaldry:]

And presuming that that works out, would you think you'd keep up this sort of pace of hiring in out years as well, or do you view this sort of really as sort of a one time surge and then back to a more normalized growth after that?

[AshuRoy:]

I would like to keep the cadence going. But I think once we do on the second cohort, we'll have a better feel for it.

[Operator:]

We’ll now hear from Mark Schappel with Benchmark.

[Mark Schappel:]

Just a couple here around the new logo wins. Ashu, could you just speak to whether generally these are partner led deals, or whether they're being led directly from your sales efforts, your direct sales efforts?

[AshuRoy:]

I’d say right now that is trending about 50-50, which is a good place. And both the direct and the channel side we’re trying to increase that velocity and then volume. But right now, it's running at about half and half for the six month…

[Mark Schappel:]

Okay, great, so 50-50. And are these new logo wins, so they -- I assume they are generally competitive wins. And if so, is there any one or two people you're seeing in these deals more than others?

[AshuRoy:]

They are competitive wins. No, I think the usual cost of characters in the sense that we see -- because of the installed base platform kind of attributes we see in Salesforce, because Salesforce is in many of these accounts already. So there's always that option. We see LIV posting on the messaging side and we see Oracle and Variant on the knowledge side. So we do see -- occasionally, we see Zendesk in the lower end of the enterprise, but that would be further round up.

[Mark Schappel:]

And then finally here on the new logo wins. Maybe just talk a little bit about what solutions your sales teams are leading with to get those wins?

[AshuRoy:]

Two primarily, one is on the digital side, it’s messaging plus VA, that combination seems to be very much in demand, so that's one we're seeing good pull for. The other one is knowledge management list either for contact center, mostly for contact center and then sometimes for self service but mostly contact center knowledge hub. But what we see happening when we get into these conversations is the fact that we bring the three capabilities together then that stands us in a good place, messaging, knowledge and analytics, that becomes a differentiator for us.

[Operator:]

Philip Rigby with D.A. Davidson.

[PhilipRigby:]

I want to dive into customer migrations a bit. So you mentioned accelerating that push a bit last quarter. Can you talk about what you're doing to drive or maybe even incentivize customer migrations to the cloud? And then could you just give us an update of what you're seeing in terms of spend uplift from customers that have migrated to the cloud?

[AshuRoy:]

So on the incentives for moving to the cloud, we've been in conversation with almost all our customers around cloud migration. And what we have done now is to increase the incentive as they sign up by the end of the fiscal year for us in terms of a better commercial view. And we already give them a huge incentive by doing that, move from on premise to the cloud essentially for no charge as they sign up quickly a deal. So that's in itself is a incentive but we have increased the additional discount levels, not to a point where we lose money but certainly to be very attractive to them. So many of our customers, I'd say pretty much all our significant customers in the on prem world, when I say significant, I mean, anyone who's in the on prem world paying us over $100,000 a year in support payments on prem, pretty much all of them are in conversation effectively on moving. It's not a question of if but when. But that's one part of a response. And then the second part is, we are seeing -- it takes about six months for customers to move to the cloud and get used to the idea that they can activate new capabilities very quickly. And that part we are seeing good traction with. So number of our expansion opportunities that we are now benefiting from are in the pipeline, are follow up sales into those accounts. So yes, that is playing out to form.

[Operator:]

We'll hear from Brett Knoblauch with Berenberg Capital Markets.

[BrettKnoblauch:]

Congrats on the strong quarter in terms of new SaaS customer adds. I don't know if I missed this, but did you provide an update to the total customer account, or SaaS customer account?

[EricSmit:]

Not at this point. No, we just -- I mean we’re talking generally in that 150 range. So we’ll have kind of detailed update.

[BrettKnoblauch:]

And then the seasonal revenues that you said benefited this quarter that won't continue. What are you actually referring to? I don't recall a similar benefit when I look at last year's Q2? So just curious if you could provide a little more color on that.

[EricSmit:]

So I think there are two -- generally what we've seen is where customers are divided two elements at that time to this increase in volume either they're unclear of the requirements and they get into a situation where they're using more than they purchase, which drives an average where there is typically the premium that has to be paid. And so for those customers, we encourage them over time to increase their base level usage so the amount gets spread out over time. So we definitely saw some aspects of that where customer increase their usage and now working with them to increase their base level consumption going forward. And then the other piece is really around certainly about retail customers or customers that have e-commerce activities that would look to increase their usage or saw increased activity around the holiday season. So that's sort of contributed. We saw several customers that sort of saw the pick up in their business in the quarter where that drove increased volume.

[BrettKnoblauch:]

And then maybe just last question on kind of Cisco. They made a couple of big announcements in December kind of revamping Webex and their contact center solution, as well as acquiring IMImobile, which has, I guess, you know, chat and email capability. So how do you view those announcements relative to your relationship with Cisco?

[AshuRoy:]

Yes, that's a fair point, because Cisco has acquired IMImobile, they do have digital messaging solution. What we see today is that this is a multiyear journey for someone like Cisco to go from the installed base of enterprise contact center, which is where they mostly are at today to get to where it would be a pure cloud solution. So we believe that on two fronts, one here and now for the next 12 to 24 months, we see a tremendous opportunity partnering, continuing our partnership with them and making sure that their customers are successful with our solutions, both on the OEM basis as well as on the resell basis, and we are continuing to do very well there. In parallel, we continue to have conversations as partners do it to how we can help them in their active strategic direction. And that's something that we continue to work on.

[Operator:]

I see no further questions in the queue. I will now turn the conference over to management for any additional or closing remarks.

[Eric Smit:]

Thanks, operator. Thanks again everybody for listening, and look forward to providing you an update when we finish up our Q3. Thanks.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.