eGain Corporation
Q1 2019 Earnings Call Transcript

Published: 11 Nov 2018

[Operator:]

Good day, and welcome to the eGain Fiscal 2019 First 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 with MKR group. Please go ahead, sir.

[Jim Byers:]

Thank you, operator, and good afternoon, everyone. Welcome to eGain's First Quarter Fiscal 2019 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 that 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, November 8, 2018, 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 on the Investor Relations page at eGain's website at www.egain.com. The tables included in the earnings press release include reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. And lastly, a replay of this conference call will also be available at 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.

[Ashu Roy:]

Thank you, Jim. Good afternoon, everyone. We are executing well under our new SaaS model, good momentum in the first quarter. Let me share some financial highlights. Note that I will use our 605 revenue numbers for consistent year-over-year comparison. For the SaaS revenue growth over the quarter, on a year-over-year basis, it was 46%. Subscription revenue growth year-over-year was 19%. Gross margin in the quarter was at 68%, which was up from 64% last quarter same -- last year same quarter. And we generated $3.3 million operating cash in dollars in the quarter. And a nice kind of artifact of this quarter was also that we were GAAP profitable for this quarter, not a bad start. So that's kind of good. And let's move to the quarter in terms of actual wins and some of the notable wins that we had. So one of the ones that I want to mention is a large U.S. financial services provider that we won and new logo, that specialize in consumer loan portfolio management. That's a good win for us. Another one was a fast-growing digital brand retailer. They decided to switch from, as it turns out, Zendesk to eGain for a richer, more comprehensive and scalable alternative. What we saw there was that they ran out of gas on Zendesk as their business grew, and in less than 30 days from contract signature since then, we have now helped them go live on our platform and away from the competitive option. Another win worth mentioning, which is more of an expansion, is a large U.S. banking client who are migrating to the eGain Cloud from an on-premise model that they used to be in. And in the process, they are also significantly expanding the use of eGain. One last one I want to bring out, even though that was not in the Q1 quarter, per se, but was in the first part of Q2, but it highlights some of the exciting opportunities we are seeing, is a win with a household brand name in the U.S. It's another financial services provider. This one highlights the interest we're seeing in our virtual assistant offering, the AI powered VA. And this client, we're going to be implementing a virtual assistant for them for their customers. And it will deliver a connected smart automated experience with seamless escalation to human expertise and that associated assurance through messaging and chat and co-browse, all in one platform. That connected automation and AI-powered virtual assistance is something that we're seeing increasing interest in, and we're very excited about it. So let's talk a little bit about our partners. We continue to focus on building these complementary partnerships to reach more markets. To begin with, obviously, Cisco, for us, a strategic partner, continue to deepen that partnership. The thing we're doing there is we're clearly identifying and clarifying the 2 lines of engagement and partnership that we have with Cisco. One is the OEM partnership that we have with them, where our chat and e-mail product, our technology is embedded inside the Cisco enterprise contact center solution. And on the resale partnerships side, where Cisco and their partners are reselling eGain-branded products, we are focusing on knowledge in AI and analytics. So that clearly differentiates the two broad set of capabilities that we deliver into the Cisco ecosystem. And that is starting to help us create more clarity around when Cisco's customers should be going with the Cisco-branded omnichannel platform for contact centers, which includes our OEM technology, and when they should snap on the eGain-branded knowledge AI and analytics in the cloud into that contact center omnichannel platform. So that's going in the right direction for us. The next one I want to mention is Altitude Software, and this is a new partner we signed up. Good one, I believe, because it kind of shows the templates that we want to replicate more and more. They are a midsized European provider of contact center technologies. They will integrate our AI and knowledge solution into their suite to offer agents or their clients the right kind of guidance and personalized answers on their platform, all from the eGain Cloud. And that's critical in all these partnerships now, everything that eGain offers which is eGain branded is all being served from the eGain Cloud. Then I want to kind of bring out the continued work we're doing with 2 other partners that we have mentioned before, Avaya and Amazon Connect. We are now executing go-to-market campaigns with them to build demand. And we continue to believe that these partnerships will become business relevant in terms of scale in the latter half of this fiscal year for us. So that's good. Also, we're seeing more partner-leveraged marketing opportunities that we are executing. For instance, last month, even though that was not in Q1, but in last month, we executed a very successful partner -- joint partner marketing event in Central Europe, in Hungary and Budapest. And over 75 large enterprise clients were in attendance for a full day of eGain partnered with a consulting digital transformation outfit called Pattern Digital. And those sorts of opportunities create that leverage that we are trying to drive more and more. Overall, I believe now that we are in a good rhythm of Saas model execution, something that we've been talking about for some time, saying that we'd like to get there. I believe that we are in a good place and I'll kind of point out what I see as working better than before. First of all, our focus on what opportunities we go after and where, that's really sharp now. So the target market is very clear; it's the enterprise B2C companies. The regions are clear; it's U.S. and Western Europe. And so by creating that intense focus on the intersection of these 2 geography focus and the type of companies that we're going after, we are working on fewer non-sweet spot opportunities than ever before, which is really important for us. The second thing that we're seeing is just growing demand in the market for what I call our rich, scalable and secure solutions for customer engagement automation. You need to have all 3. We are seeing a lot of interest, just like everyone else is, in AI and virtual assistants. But increasingly, we see that it's not just for the technology, not just for the point solution, clients want connected proven solutions. They want solutions that can be easily configured, deployed and scaled. They don't want to connect all the dots themselves. That's one of the big changes we're seeing in the market and something that we feel we're in a very good position to take advantage of. Because, if we look at the market, there are literally 100s of providers, literally, in this market all the way from CRM through to contact centers to pure plays to you name that, and everyone seems to claim everything, including eGain. So the prospects, it's a dizzying challenge trying to find the right partner. And in this environment, we feel that our newly sort of rebranded Try+ Buy, which we're calling AI Value in 30 Days, because it can -- shows the real proposition much better, now we've rebranded it and we're pushing that program, which is an AI Value in 30 Days. So same promise of no cost, no risk, no commitment and 30 days of production pilot with best practice in the eGain Cloud, that's getting good traction. So that's something we want to push harder. And then, what we're seeing in the pipeline is, thanks to our proven product superiority, also better customer engagement, a more programmatic approach to delivering the actual implementation and value to the customer, and finally, much stronger attention to quality in our sales execution, much stronger than before. Those 3 things put together, our win rate is moving up. So that is giving us more confidence. And the last piece of the environment we have now is, we seem to be able to tap into more demand pools through these partner marketing events and go-to-market campaigns that I mentioned. [Technical Difficulty] So let me just try to summarize the go-forward plans, and I feel like we are now in a good rhythm of our SaaS model execution with our focus on the enterprise B2C market and the regional or geographic focus on the U.S. and Western Europe. With the demand for our solutions where we see good interest, not just in our point solution or technology, but also moreover -- more than that, interest in a connected platform capability that has the richness of applications as well as the end-to-end customer experience automation. So if we are starting with the virtual assistant, we see people looking for something that connects seamlessly on the same platform into escalation into the knowledge base or into process guidance with AI and eventually into human escalation if needed into chat and messaging and co-browse. So with our rebranded Try+ Buy offer, which we call the AI Value in 30 Days, it's something that we are very comfortable that we are increasingly differentiating our proposition because of that capability to show results with our AI technology without any customer commitment on the other side. And then based on that, hopefully, turn that into a real business engagement. So with all that in place, I feel like we are ready to ramp up our sales and marketing investment, and we're doing that this quarter under Todd and Anand's leadership, respectively, on sales and marketing. Of course, we'll continue to be very diligent even as we aggressively scale in proportion to our pipeline strength. So it's an exciting time for us, an inflection point in our business, something that we have been working toward for 6 quarters now since we announced our migration to completion to SaaS. And so before I hand over the call to Eric, I want to mention one more thing, which is our upcoming U.S. event for customers, DX18, and that's taking place next week in Chicago on November 13 and 14. We'll be showcasing a lot of cool innovation on our platform at scale. We'll have many customer success stories, 3 to be precise, our customers including British Telecom and Assurant and Paylocity. And then, we'll also have Rick Parrish, who is a principal customer experience analyst for Forrester, and Nadine LeBlanc, who is the Research Director for CRM and customer experience in Gartner. Both of them will share their perspectives with attendees and mostly our clients who are driving digital transformation in their organization. So it'll be an exciting and informative event. And I hope to see many of you there. If you've not already signed up, please do and go to our website and sign up, it's free. With that, I'll hand over the mic to Eric Smit, our Chief Financial Officer. Eric?

[Eric Smit:]

Thanks, Ashu, and thanks, everybody. Before I review our quarterly results, I'd like to note that eGain adopted the new revenue recognition accounting standard known as ASC 606 effective July 1, 2018, the start of our fiscal first quarter. We adopted ASC 606 using a modified retrospect method, under which we are not required to restate our prior period financial statements. The Q1 results I will discuss today are presented in compliance with the new ASC 606 revenue recognition standard. For purposes of comparison to prior year results, in some cases, I will also share Q1 results that are presented in conformity with the amounts previously disclosed under the prior recognition standard, ASC 605. In conjunction with the adoption of this accounting standard, I'd also like to note the change in the way we are classifying our revenue going forward. Through June 30, 2018, eGain revenue was classified in three categories on our income statement

[Operator:]

[Operator Instructions] We'll take our first question from Richard Baldry with Roth Capital.

[Richard Baldry:]

Could you talk about your expectation for sort of a typical time to productivity for new sales hires? We're trying to gauge, as you accelerate your spending there, when we would expect to see that sort of inflect on the bookings, maybe and/or the revenue side of the table.

[Ashu Roy:]

So we think that, Rich, right now, we see about 6 months ramp. So that's our current thinking, that for the first 6 months, I think, it's a ramp-up and after that, we expect the reps to be productive.

[Richard Baldry:]

And then can you talk at all the thoughts around the magnitude of increase you're sort of looking there, either on a dollar basis, a headcount basis, percent versus headcount you have in place today?

[Ashu Roy:]

The headcount might be a little harder, but my guess -- we're going to be incremental in our increase here. But I do think that over the next -- through the end of fiscal '19, we would like to grow our capacity by 50% more than where it is now on the sales front.

[Richard Baldry:]

And then in terms of the legacy maintenance that's left, you talk about any trends you sort of see in terms of the dollars you get when they move over to the SaaS platform versus sort of the maintenance levels of spending they've seeing prior and any contrast that to your retention rate on that? So do you think that's a good field to farm for increased revenues? Or you sort of see that static as you kind of move from one side to the other?

[Ashu Roy:]

So I'll give you the qualitative and maybe a little bit of quantitative. So for the customers who move to the cloud, what we're seeing now is roughly, roughly a 75% and up to a 100% uplift on the annuity stream that they would have had on the on-premise support side. That's kind of -- that's -- I think the 75% is probably a good number to think about as an uplift. Eric, you want to add to that?

[Eric Smit:]

No, I think that's consistent. But then, I think, Ashu, as you were saying, in talking about the opportunity that it presents for the expansion is an interesting one.

[Ashu Roy:]

Yes, which is layered on top.

[Richard Baldry:]

And I got cut off in the beginning, so not sure if you already addressed this, but could you talk a little bit about your successes and trending with the partner sales model?

[Ashu Roy:]

So that -- the model that Todd has put in place is working well. It's an overlay model where the partner team -- the partner sales team is working hand-in-hand with the enterprise sales team, and both of them get credit for any sales generated through those partner. So that part is, I'd say, on the margin maybe a little more expensive for us, but certainly more collaborative and more effective from a booking standpoint. So we are going to stay with that and continue to have that overlay. And likely, as we scale the enterprise -- the sales team, we're going to make sure that the partner overlays also our accordingly resource turn and enhanced.

[Operator:]

We'll take our next question from Ryan MacDonald with Needham & Company.

[Alex Narum:]

This is Alex Narum. I'm on for Ryan. Last quarter you spoke about increasing your focus on the mid-market. Can you provide some color on the progress that you're making there? And what have you learned thus far? I know you are starting to see mid-market contributions to the pipeline.

[Ashu Roy:]

Sure. Yes. So the mid-market continues to be an area of investment for us. On the margin, it's still a small percentage of our total investment in sales and marketing. But that's an area where we are adding more sales capacity incrementally, and making sure that we can scale that in a replicable way. So, so far we are seeing that as a good place for us to drive more growth.

[Operator:]

We'll take our next question from Jeff Van Rhee with Craig-Hallum Capital.

[Rudy Kessinger:]

This is Rudy on for Jeff. Just a couple of quick questions. Building off of, sorry, the analyst with Roth Capital, with regards to the migration from the legacy over to the cloud, you said you're getting about 75% uplift on that? So say, roughly, $1 up to $1.75 translation?

[Ashu Roy:]

Yes. That is correct.

[Rudy Kessinger:]

Okay. Then roughly what percent total have you migrated over at this point?

[Eric Smit:]

So I think for us, we've -- the total count is not a number that we focus on just because the part we've taken is target the higher ARR customers. And so we've done, I think, a good job working on a number of these larger accounts. And that continues to be our focus. I think we are -- we've now got a good handle on, I would say, most of the accounts that are paying us north of $50,000 annually. And certainly, in some instances, these accounts have got factors at play that have resulted in them thinking in almost all cases, saying that there is a level of interest, but then they have internal drivers that are delaying the transition process. So from our perspective, this is an ongoing activity. We've obviously seen this number come down quite a bit over the years. But I think we've got a good handle, at least, on the larger accounts that we're working through.

[Rudy Kessinger:]

Okay, got it. Then another question, in regards to bookings that you guys had this quarter, if you could give some color on what percent of those came from new customers? And what percent of new bookings came from migrations?

[Ashu Roy:]

I think -- okay, so say that number -- there are not just two categories. There is actually -- broadly, at a high level, I think the way to think about is about 50% of the business came from new logos. And the rest, half of it, came from existing customers. Some of those existing customer new bookings were from migration and some were just expansion in those accounts that were cloud customers to begin with.

[Rudy Kessinger:]

You couldn't give any quantitative as to, of that 50%, what percentage of those were from the migration, or no?

[Eric Smit:]

I don't think we have that.

[Ashu Roy:]

We don't have that data right here.

[Rudy Kessinger:]

Then just lastly real quick. In regards to the new bookings you guys are driving right now, just which modules and capabilities, I know you touched a lot on the virtual assistant, the AI and everything any other modules or capabilities that are really driving the new bookings right now?

[Ashu Roy:]

So we are seeing two things. One is the whole VA, virtual assistant front and digital engagement. That's an area where we're seeing very good demand. And the other is knowledge and AI in the contact centers, just broadly across all of the contact centers. Those are two big areas we see in terms of demand drivers.

[Operator:]

[Operator Instructions] At this time, I'm showing no further questions in the queue. I will now turn the call over back to management.

[Ashu Roy:]

Great. Okay, thanks, everybody, for listening. And look forward to providing you an update when we report our Q2 results, and hopefully we'll see some of you at the upcoming Investor Relations events. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.