eGain Corporation
Q3 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Good day and welcome to the eGain Fiscal 2018 Third Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference call over to Jim Byers with MKR Group. Please go ahead.

[Jim Byers:]

Thank you, operator and good afternoon everyone. Welcome to eGain's Fiscal 2018 third quarter financial results conference call. On the call today are eGain's Chief Executive Officer, Ashu Roy; and Chief Financial Officer, Eric Smit. Before we begin, I would like to remind everyone that during this conference call, management will make certain forward-looking statements, which 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 7th, 2018, and assumes no obligation to publicly update or revise any forward-looking information in this conference call. In addition to GAAP results, we will 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 with the earnings press release include reconciliation of the historical non-GAAP financial measures to the 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.

[Ashu Roy:]

Thank you, Jim. Hello, everyone. We have now been operating for four quarters as a SaaS business. Our team has done a good job, and as a result, we are seeing the right kind of momentum based on customer satisfaction, partner leverage, and platform innovation. In the fiscal third quarter, our SaaS revenue was up 16% sequentially and 74% year-over-year. Our recording revenue grew by 30% year-over-year. And with growing revenue, our focus on operating efficiencies improved bottom-line performance, which was at about 8% on a non-GAAP basis, our operating margin for the third quarter. Finally, our cash flow for the first nine months was roughly at about 18% cash flow from operations as a margin of revenue and that's well ahead of our previously stated expectations of being cash flow positive for the fiscal year. So, that's good. Turning to business in the quarter. We acquired some nice new logos. The first one I want to mention is a large telco in the U.S. They will be using our connected analytics capability to manage and optimize their nationwide contact center operations. Another good win that I want to mention is a European branded manufacturing business that selected eGain for AI+Knowledge after a successful Try & Buy. Now, not coincidentally, both these logos came to us through partners. As we mentioned before, we are increasingly investing more in partners. And so I want to mention that in April, which is the current quarter, we now launched a new developer portal which is available at https

[Eric Smit:]

Great. Thanks Ashu and thanks for joining us today. As Ashu noted, we continue to execute well under our new SaaS revenue model and are pleased with our continued positive momentum. Looking at the financial highlights for the quarter

[Operator:]

Thank you. [Operator Instructions] And we'll take our first question from Mark Schappel with Benchmark. Please go ahead.

[Mark Schappel:]

Hi, nice job in the quarter and thank you for taking my question. Ashu, in your prepared remarks and also in the past, you've noted that GDPR was a driver for your business. I was wondering if you could just provide additional details on how exactly GDPR is a growth driver for you.

[Ashu Roy:]

Sure. So, this happens to be, Mark, relevant because, as you know, you still have a significant number of our customers who are on-premise. And those who are on-premise are on a version, typically, which is one or two versions behind our latest version, which is in the cloud. So, what we had announced over six months, maybe even eight months ago, to our customers was that we will provide guaranteed GDPR compliance around all the interaction. Whatever interaction, data gets generated between customers and the business, that's what is subject to GDPR, as you know. So, that part, we said that if you come into our cloud, we will ensure that the new version of the software will allow you to do the three things that GDPR requires you to do. And that is the driver for moving some customer over to the eGain cloud, which then gives us some incremental revenue, as you know, when they move to the cloud.

[Mark Schappel:]

Great. Thank you. And then an additional question. Could you just provide an example or two of how your customers are actually using your AI capabilities in the call center?

[Ashu Roy:]

Sure. So, the primary way that the AI capability is used is in two forms. One is for agents/advisers who are on the phone or on any channel, now it could be chat or it could be messaging or could be e-mail, when they are responding to customers, they are using our AI-based guided help, what we call guided help, to ask questions. And based on the customers' answers, then they get guided to the next set of things they want to be able to -- next best action or next best step. And through an interactive series of these steps and actions, eventually get to a resolution or recommendation. So, that's the primary use case. This is the eGain AI tool that enables that. And then the flip side of it is enabling digital self-service for customers to self-serve themselves using the same capability, perhaps with a reduced level of sophistication and context.

[Mark Schappel:]

Okay, great. And then one question for Eric. Eric, in your prepared remarks, you mentioned $400,000 of volume billings in Q3. I was wondering if you could run through that one more time.

[Eric Smit:]

Sure. So, I think in this particular instance, we have customer that committed to a minimum level of messages that, for a particular year. And once they exceeded that minimum usage, then that triggered additional billing for this additional usage. And so as I've mentioned, this is a multiyear contract and they have now started the second year of that contract. And therefore, again, there's just standard levels of billing take will place until they -- again, as I indicated, likely towards the end of the period, based upon their current usage, that there would be an element that there would be a sort of a pickup from the sort of the standard level that we're getting from them on a monthly and quarterly basis.

[Mark Schappel:]

Thank you.

[Operator:]

And we'll take our next question from Richard Baldry with ROTH Capital. Please go ahead.

[Rich Baldry:]

Thanks. So, I'm curious, going back to the overage question. Do you allow -- or are there times when customers renegotiates sort of mid-contract to a larger and maybe extended the terms out, so it's a win for everybody? Or is it a pretty standard play on the contract terms until it runs out?

[Ashu Roy:]

It's a bit of both, as you can imagine. If someone is willing to commit to a much higher level of volume in the middle of the contract, I mean, we think that it's better to bank it than to bet on the up, then we will do it. But what we see mostly is that customers will live with that overage and then renegotiate on the renewal and sign up for a higher level.

[Rich Baldry:]

Okay. And then the sequential dollar growth on the SaaS side was one of your best ever, and I know they're still the upside for the $400,000 in the quarter. But when we looked back to last year, was it the Q4 quarter sequential growth is actually your all-time high. Are there similar sort of upsides were built into that a year ago? How should we think about the sequential comparison this year versus last year? Thanks.

[Eric Smit:]

Sure. So, I think that just to recap, if you look at the type of businesses that we sell to, there is -- a lot of it is a function of when the new customers end up going live and what the system really states. And so there's that element of timing. This quarter, in addition to the volume overages, we also benefited from the pickup in the one large customer migration that we had discussed in the U.K. And so I think at this point, it's more a function of the timing of when we do these deals and when that translates to revenue as opposed to their being sort of a clear cut seasonality. So, I wouldn't lead into anything to say that we would see similar sequential improvements just because it happened last year.

[Rich Baldry:]

Great. Thank you.

[Operator:]

And we'll take our last question from Jeff Van Rhee with Craig-Hallum. Please go ahead.

[Jeff Van Rhee:]

Great. Thanks guys. Congrats on the quarter. So, a couple for me. I guess as you're pushing into this migration, for a first year customer that was an existing maintenance-paying customer that moves to the cloud, what's the impact, the net impact on the revenue line? How should we think about each of these migrations impacting in year one?

[Eric Smit:]

So, Jeff, so I think that, for us, again, obviously, this does not -- this doesn't happen every instance. But for the most part, we see a 2

[Jeff Van Rhee:]

Okay. And then if you looked at the base now, where are you in migrating the installed base? What percent of customers, I don't know how you best look at it, percent of seats, have moved to the cloud? And how do you think about a reasonable benchmark to that migration over the next, say, two, three years?

[Eric Smit:]

So, Jeff, this is Ashu here. So, I mean, you -- obviously, you know the numbers in terms of dollars, that's pretty obvious because we break it down. So, that is known. That number is coming down, as you can see, the quarterly support revenue number is coming down. My sense is that in three years, we will pretty much complete the migration or if the migration hasn't happened, then it's probably termination.

[Jeff Van Rhee:]

And you had referenced the churn. And obviously, this is a big shift that you're trying to make as fluid as you can for your customers, but it's also an opportunity for them to go out and shop and make other decisions. When you go through this, how are you benchmarking what percent of the base that you expect will be here in -- when you reach that end of the line? Or asked differently, you said you're comfortable with churn rates now. Can you just give a little more quantification there?

[Ashu Roy:]

Yes. So, that is -- what we see with customers is that we pretty much know once a customer is getting value from our software, then given that we are -- as you know, the offer that we make to the customer includes a zero cost for them, a one-time zero cost for migrating the on-premise to eGain Cloud. We take on that investment. So, the cost of replacing us is still non-trivial for the customer. Now, if the customer is not happy, then we are subject to the problem anyway. So, I don't -- I mean, what I'm seeing now is that the process of trying to bring people over to the cloud is not necessarily a big instigator of an RFP process. If the RFP process is happening, it is happening anyway.

[Jeff Van Rhee:]

Okay. All right. And then just, I guess, two questions related to pipeline. First, I guess, overall size, scope, breadth, depth to the pipeline. I know you're focused on migrating customers and also equipping and enabling this much broader partner ecosystem. But just can you talk about the breadth and depth and visibility into the pipeline? And alongside that, how that translates for 2019? And realize you don't have the guide out there. But can you give some semblance of where you see that recurring or SaaS next year or the total revenue numbers? Just a little more color along those lines.

[Ashu Roy:]

So, I'll give you qualitative comments because I don't think we have thought through and are not necessarily sharing that quantitative elements. But what I will say is that the -- we are seeing more and more partner-sourced opportunities that our enterprise sales guys are working. And so that is creating more qualified opportunities early in the funnel. That's the change that I'm noticing. Because when we go direct -- we still go direct, obviously. But when we go direct, the time it takes to qualify something, to become a deal, is significant, just like any other direct channel -- sorry, direct engagement. But now that we -- with Todd's focus, we are getting more qualified opportunities in the pipeline through partners. So, that's the change that I'm noticing, which is quite encouraging from my standpoint. So, the second thing is that in terms of, I think that in this next 12 months, my feeling is that a larger percentage of our new bookings are going to come from existing customer expansions than they did in the last rounds. Because with all the investment that we have made on the customer side, I think that, that's another qualitative shift I see. So, those are the two changes that I would comment on.

[Jeff Van Rhee:]

Okay, great. Thanks. Congrats.

[Operator:]

And that concludes our question-and-answer session for today. At this time, I would like to turn the conference call back over to management for any additional or closing comments.

[Ashu Roy:]

I think that's it. Thanks, again, everybody. I look forward to providing you the updates when we release our end of year results. And again, if anybody is going to be in London next week, I'm happy to have you attend the event, just reach out to me. Thank you.

[Operator:]

And that includes today's conference call. We thank you all for your participation. And you may now disconnect.