eGain Corporation
Q1 2014 Earnings Call Transcript

Published: 31 Oct 2013

[Operator:]

Good day, ladies and gentlemen and thank you for standing by. Welcome to the eGain Fiscal 2014 First Quarter Financial Results Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today October 30, 2013. I would now like to turn the conference over to Charles Messman, Vice President of Finance. Please go ahead, sir.

[Charles Messman:]

Good afternoon ladies and gentlemen and thank you for joining us today for eGain’s conference call to discuss results for our fiscal 2014 first quarter ended September 30, 2013. Please note that the call is being recorded and will be available for replay from the Investor Relations section of our website at www.egain.com for seven days following this call. Before I begin I’d like to remind all listeners that all statements in this release and conference call, that involve eGain’s forecast, included the above stated guidance, beliefs, projections, expectations, including but not limited to our financial performance and guidance, the anticipated growth of our business, market trends, plans to invest in our business and expectations regarding the market acceptance of our products are forward-looking statements within the meaning of the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which are based on information available to eGain at the time of this conference call are not guarantees of future results. Rather they are subject to risks and uncertainties that may cause actual results to differ materially from those set forth in this conference call. These risks include, but are not limited to the uncertainty of demand for eGain’s products, including our guidance regarding bookings and revenue, our expectations related to our operations, our ability to invest resources to improve our products and continue to innovate, our partnerships, our future market and other risks detailed from time to time in eGain’s filings with the Securities and Exchange Commission, including eGain’s Annual Report on Form 10-K filed on September 23, 2013, and eGain’s quarterly reports on Form 10-Q. eGain assumes no obligation to update these forward-looking statements. With me today are Ashu Roy, Chairman and Chief Executive Officer and Eric Smit, Chief Financial Officer of eGain. To begin management’s discussion, I’ll turn the call over to Ashu. Ashu?

[Ashutosh Roy:]

Thanks, Charles and good afternoon everyone. Thank you for joining us today. We are off to a good start in fiscal ’14. Total revenue for the quarter was up 46% over prior year. Quarterly cloud subscription revenue for the quarter was up 61% over prior year. Our total gross bookings for the quarter were $13.3 million, down 11% compared to prior year. However unlike in Q1 of last year when bookings were dominated by one large client order, bookings this quarter are better spread across customers and geographies. For instance we won two seven figure deals this quarter, one with a leading U.S. health insurance provider and the other with a large European BPO. We also closed two pilot deals with large enterprises in the U.S. through our recently launched Cisco Solutions Plus program. Our joint marketing and sales enablement activities with Cisco are progressing well in this regard. At eGain World in London earlier this month John Hernandez, General Manager of Cisco’s Customer Collaboration Business Unit delivered a keynote highlighting the need for and the benefits of our joint multi-channel solutions. It was quite well received by our clients, prospects and partners. On November 4th this coming Monday we will again be joined by more Cisco executives and partners at our eGain World in Las Vegas. Moving beyond our Cisco partnership, awareness of eGain and interest in our solution continues to build, thanks to growing need for customer engagement solutions, our product leadership and increased marketing investments. For instance, in-bound interest in eGain and our solutions is up over 50% sequentially this quarter compared Q4 of last year. On the sales front our direct sales team build out continues. At the end of September we had 42 direct sales reps on board with 32 of those with a tenure of one year or more with us. Since then we have had more reps joining us through the month of October. In parallel we are strengthening our sales management and operations capability to improve and maximize the ROI on our sales investments. On a not so positive note, our recognized services revenue fell short of plan this quarter, largely due to acceptance clauses and timing issues in a few client engagements. As we move forward and engage with larger clients we need to improve our client engagement model to better balance client preferences with our delivery capabilities. So we plan to tighten our process to minimize such surprises. On a brighter note though, our services team delivered several successful go-lives this quarter, especially in the health insurance sector where clients are using our SuperChat solution to help sign up customers on state health exchanges. Healthcare in the U.S. promises to be an important vertical for us over the coming quarters as the entire industry, payer and provider alike, gets retooled and reorganized to respond to and profit from ObamaCare. In addition, we see good demand in the retail sector where online businesses increasingly want to make real time personalized offers based on visitors browsing behavior and history. The goal is simple, increase average order value and improve conversion by dynamically launching and adjusting offers using a simple tool that can be operated by a business user, not a code jockey. We fit that bill quite nicely. On a broader note, installed check box multichannel offers from competitive voice vendors are increasingly being replaced because they do not deliver to the client's brand promise beyond the voice channel. A large U.S. retail brand for instance recently went live with eGain, integrated with an incumbent telephony platform from Avaya. Stepping back, there is a growing trend towards best-of-breed digital customers engagement platforms that can cooperate nicely with the traditional channel infrastructure. You many have seen this before that McKenzie recently came out with a report that digital customer engagement is the number one initiative type across all different types of digital initiatives among large enterprises. This report came out a month ago. Moreover, the sponsorship of such initiatives correlate quite strongly with the success of those initiatives. What we see is that digital customer engagement is becoming more and more critical to brand promise and differentiation among large companies. We also continue to see replacement opportunities in enterprises, stuck with expensive point products, these customers are looking to replace multiple products with a single platform like eGain. On the product front we continue to extend our leadership. Earlier this month we announced eGain Mobile, a unique speech-enabled solution that seamlessly extends our rich multichannel capabilities into the mobile world, allowing clients to easily offer engagement options like proactive offers, virtual assistance, self-service, chat and co-browse to their app users on Android and iOS platforms. We see mobile engagement as an emerging opportunity for us as our clients invest in building new mobile experiences. The power of our platform is quite evident in the way we rapidly develop these new solutions like eGain Mobile organically as part of our hub. With that, let me ask Eric Smit, our Chief Financial Officer to go into more details about our financial performance in the quarter. Eric?

[Eric Smit:]

Thank you Ashu, and thanks for joining us today. As Ashu mentioned, we are pleased with our overall start to fiscal 2014. For the quarter, total revenue was up 46% over the same quarter last year. Total gross bookings or revenue plus change in deferred for the quarter was $13.3 million, a decrease of 11% over the comparable year-ago quarter. Backlog as of September 30, 2013 or total deferred plus unbilled and uncollected revenue increased 27% to $42 million compared to $33 million reported last year. Now, turning to our financial results. Total revenue for the first quarter was $15.7 million, up 46% from $10.7 million in the comparable year-ago quarter. Our subscription and support revenue for the quarter was $9.5 million, an increase of 32% on a year-over-year basis. Looking at subscription and support revenue in more detail, cloud subscription revenue was $6 million, up 61% over the first quarter of last year and support revenue for the first quarter was $3.4 million, essentially flat. License revenue from perpetual sales came in for the quarter at $3.8 million, up from $700,000 in the comparable year-ago quarter. The increase in license revenue primarily came through partners. This included a seven figure deal with a leading European business process outsourcer and also sales through Cisco which again primarily came through the OEM agreements that as Ashu mentioned included initial sales from the SolutionsPlus agreement. Professional services revenue for the quarter was $2.4 million, a decrease of 16% over the comparable year-ago quarter. As Ashu mentioned there were certain contract with acceptance provisions on the work that had been performed but not accepted by the customer by the end of the quarter therefore we were unable to recognize the revenue. In addition to that we’ve also seen an increase in services delivered to our trial customers where the PS is recognized ratably over the term of the contract and not in a quarter billed. So actual PS billings in the quarter were $3.1 million compared to $2.9 million in the first quarter of last year. Looking at total deferred professional services revenue at the end of the quarter was approximately $4.8 million, up from $2 million as of September 30, 2012. Looking at the geographic mix of revenue, total first quarter revenue comprised 56% domestic revenue and 44% from international. Now looking at our gross profits and gross margins, gross profit for the quarter was $10.1 million or a gross margin of 65% compared to gross profit of $6.4 million or a gross margin of 59% in the comparable year-ago quarter. If you look at the breakout of gross margin by revenue type, subscription and support revenue gross margin for the quarter were 79%, down slightly from 81% in the comparable year ago quarter. Professional services margin was a negative 49% for the quarter compared to a negative 2% margin in the comparable year-ago quarter. The gross margin for professional services billings was a negative 16% for the quarter, compared to a negative 2% in the comparable year-ago quarter. Now turning to our operating costs, total operating expenses for the quarter were $11.7 million compared to $9 million in the comparable year-ago quarter. And looking at these expenses in more detail R&D expense for the quarter was $2.1 million, sales and marketing expense were $7.4 million, G&A expense was $2.2 million. Depreciation and amortization for the quarter was $463,000 and stock-based compensation expense was $346,000. Our GAAP loss from operations for the quarter was $1.6 million or a negative operating margin of 10% compared to a loss from operations of $2.6 million or a negative margin of 24% in the comparable year-ago quarter. Net loss for the quarter was $2 million or a loss $0.08 per share on a basic and diluted basis compared to a net loss of $2.9 million or a loss of $0.04 per share on a basic and diluted basis for the comparable year-ago quarter. Turning to our balance sheet and cash flows, total cash, cash equivalents and restricted cash was $15.7 million at September 30, 2013, compared to $11.3 million at September 30, 2012. The cash provided by operations for the quarter was $2.3 million compared to cash provided by operations of $824,000 for the first quarter of last year. During the quarter we paid out the outstanding related party debt balance of $2.9 million. Capital equipment purchases in the first quarter were approximately $608,000 and looking to our net accounts receivable was $9.8 million at September 30, 2013 compared to $6.3 million at September 30, 2012. DSOs for the first quarter was 56 days compared to 52 days for the comparable year-ago quarter. Total deferred revenue, which includes both deferred revenue on the balance sheet of $19.5 million and unbilled deferred revenues that remains off balance sheet at $22.5 million was $42 million at September 30, 2013 compared to $33 million at September 30, 2012. Looking at our debt obligations as of September 30, 2013 we had cumulative bank debt of $4 million and a capital lease of $363,000 and no related party debt. Now turning to our fiscal 2014 guidance. We are reiterating our guidance for fiscal 2014 of annual total revenue growth of between 20% and 25% and our annual cloud revenue growth of between 40% and 45%. I will now turn the call over to the operator for questions.

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Jeff Van Rhee with Craig-Hallum. Please go ahead.

[Jeff Van Rhee:]

Hi, guys, good, thank you. A couple of questions for you, first on the bookings front. Ashu you mentioned the tough year-over-year compare, could you put in context did the bookings number hit you and what kind of variance from your expectation that you had coming into the quarter did you see?

[Ashutosh Roy:]

So the year-over-year compare point is valid. We had a significantly large deal in the same quarter last year. And that’s sort of made that quarter seem like an unusually good quarter. Our first quarter in typical fiscal year tends to be seasonally slow because it’s sort of a summer season and Europe is somewhat down typically. So what we are seeing is just sort of looking at the annual number and looking at the deals on the pipeline. And we feel like we are making good progress on it. And some of those deals potentially could have closed end of September but then they did not but we feel comfortable that they will close in the timeframes that we are looking at. So I am comfortable with where we are with respect to the pipeline and some of that conversion that we saw in the first quarter.

[Jeff Van Rhee:]

I think you mentioned you are going to make some changes or some tweaks to the sales management process if I heard that right, that part correctly could you just expand on that?

[Ashutosh Roy:]

Sure, so one of the things we are looking to do is to strengthen our sales management and as we are bringing more and more sales talent and sales reps we feel that we want to also improve and keep investing on the management on the operation side. So one of the areas that we are looking to strengthen which today we have been running sort of with a combined oversight is the North American sales leadership. So that’s an area where we are looking to bring some additional firepower.

[Jeff Van Rhee:]

Any sense of timing there?

[Ashutosh Roy:]

We are active in the process, so I would say in the next couple of months.

[Jeff Van Rhee:]

Okay. And then just back to the services side in terms of the transactions that you had some delayed rev rec if you will. Can you just expand on that how many deals are we talking about, just a little more context there?

[Ashutosh Roy:]

Sure, we are talking about two or three engagements, bulk of the impact was because of two or three engagements. And I don't know do we have a sense Eric of the amount we are talking about here.

[Eric Smit:]

So I think probably we talked in the region of about $500,000, sort of the delay elements. Then I think just the other elements again as I mentioned is from a natural sort of recognition because of the -- we did see an increase in the amount of billings to pure cloud customers where that gets recognized ratably.

[Jeff Van Rhee:]

Okay. And last one and I'll let somebody else jump in, and you had said you reiterated the guide. I think when you gave the guide last time, you gave the revs and cloud as well as some thoughts on operating margins near breakeven is that operating margin part still intact as well?

[Eric Smit:]

Yeah, absolutely. I think we are still looking to be in that general area.

[Jeff Van Rhee:]

Okay, great. I will let somebody else jump on, thank you.

[Operator:]

Thank you. And our next question comes from the line of Michael Huang with Needham & Company. Please go ahead.

[Michael Huang:]

Thanks very much. Just another question kind of around the tough comp and don’t know whether or not you could provide this map for us but if you were to normalize or kind of a mega deal like you had done last year, could you give us a sense for kind of what the booking growth would’ve look like normalized for that mega deal? And then I know Ashu that you had kind of commented about that you are seeing some good transaction volumes. I was wondering if you could kind of speak to what are you seeing from a volume or transaction count standpoint versus last year or a maybe number of new customers, if that’s more appropriate?

[Ashutosh Roy:]

Okay. Not sure how best to normalize the first part of your question, how best to normalize that, so it would be a hard one for me to – I mean I’ll be making a guess. But the second part is interesting because what we are seeing and this is kind of symptomatic of some of the larger deals that we are getting into now is that the first deal tends to be what you would call a pilot size kind of deal in the $100,000 range. And so like I mentioned and we mentioned in the press release as well, we won two deals in large enterprises but they are pilot size. So they are like 100K, 150K kind of deals through the Cisco SolutionPlus program. And given how long we have been working at it which has been about five months, going on six now, we think that that’s actually quite good progress and also we are seeing more of that in the pipeline getting very appropriate named target companies or the right companies, we are seeing the right sort of engagement with them in terms of interest and projects. Now because these are somewhat larger engagements, they tend to have multi-stage evaluation process and other than [inaudible], that’s one of the things that I think we have to accommodate as we expand our business and we go more through some of the partners.

[Michael Huang:]

Okay. In terms of the larger, I think you’d called out two seven figures deals, I was wondering if you could share with us, were those with new or existing customers and maybe talk about who you competed with and why you were able to win that?

[Ashutosh Roy:]

Eric, you want to take that?

[Eric Smit:]

So I think that one of the deals was a large license transaction, it was with an existing BPO partner. The end customer is a large telco based in Europe. So and then the second deal was within the healthcare vertical, this was a cloud customer. So I think this is the area that we are focusing on the SuperChat so we are seeing increased traction there from the demand especially with the state health insurance exchanges where they are starting to look to use the eGain SuperChat product offering to assist in that customer acquisition. In fact the BPO that was more of a agent desktop offering where it was more of a complete platform as opposed to a specific product.

[Michael Huang:]

Okay. And so that healthcare customer that was a new customer for you guys?

[Ashutosh Roy:]

That’s correct. I think both of the end customers were new.

[Michael Huang:]

Okay, got you. And then just kind of the Cisco policy that they talked about they are nice wins there I guess. So, those are both in-license revenue and then what is kind of the time frame for when these products have a shot at sort of to get more substantial bookings?

[Ashutosh Roy:]

Hard to say but my sense is that they should scale in six to nine months. I would say that would be the cycle time. But it's not something that we have a commitment on but that’s the roll out plan that they all have based on the pilot.

[Michael Huang:]

Got it. And can you share kind of what are they buying, I mean what part of the solutions are?

[Ashutosh Roy:]

Sure. One of those which is a P&C Insurance company, they bought pretty much a little bit of everything. They bought a whole bunch of different capabilities but in small amounts. And other one which is a health insurance company that one, they bought the SuperChat element.

[Michael Huang:]

Okay. And got you and final question for you just in terms of that implementation revenue that didn’t get recognized in Q1 I mean is that is this something that get recognized in Q4 I guess as I am thinking about modeling how when does that, when do you think you will hit a resolution on that?

[Ashutosh Roy:]

Yeah, so I think for the 500K piece the expectation is that we’ll see that coming through in the Q4 timeframe I think the other difference from modeling standpoint is just the fact that we’ve got for these cloud customers that then becomes spread more ratably as opposed to all happening in the Q2 timeframe.

[Michael Huang:]

Okay, great. Thank you guys.

[Operator:]

Thank you. And our next question comes from the line of Raghaven Sarathy with Dougherty & Company. Please go ahead.

[Raghaven Sarathy:]

Yeah good afternoon thanks for taking my questions. I wanted to go back to the sort of the bookings. So you indicated that, I think Ashu had talked about this tough comparison from same quarter last year. Was there a multi-year deal that was booked in the same quarter last year, is there any way you can sort of normalize and look at it on a ATV basis so that we can get some sense about the business?

[Ashutosh Roy:]

Yeah certainly the large deal that we referred to was the multi-year deal. So again it’s as I actually indicated just sort of just trying to come up with the normalized numbers, there is little bit of challenges given the fact again that’s the bookings this quarter we had a mix of the license and the cloud. It certainly was a large multi-year deal.

[Raghaven Sarathy:]

Okay. And then in terms of the bookings $13.1 million or so what was the mix between new and existing customers and then how much was new cloud billings in that figure?

[Ashutosh Roy:]

So I think from a -- we’re still seeing a general roughly 60-40 split between existing and -- sorry for this quarter we saw more of a splits for new customers was based upon new two wins sort of roughly 60-40 split were coming from the new customers. And I think that the number that we’re providing at the moment we are looking at our total bookings number that roughly 50% of our booking was coming from recurring revenue, is the number that we’re providing.

[Raghaven Sarathy:]

Okay. And then just to be clear on the professional services did you say that the $500,000 that was delayed will come through in the December quarter?

[Ashutosh Roy:]

That’s the expectation, yes.

[Raghaven Sarathy:]

And then the rest of the services, the deferred in cloud how much was that, both and how should we think about both this revenue run rate going forward and the margins?

[Ashutosh Roy:]

Yeah so you can see that we recognize roughly $2.4 million where we had booked $3.1 million so I think there was roughly another 500K or so that’s would then be split over sort of on average a two-year period.

[Raghaven Sarathy:]

All right. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Jon Hickman with Ladenburg. Please go ahead.

[Jon Hickman:]

Hi, Eric could you just talk about the competition has anything changed?

[Eric Smit:]

In terms of competition I would say we’re seeing the same sort of players. We are seeing -- the primary competition around multi channel still tends to be the right now and the Oracle offering. On the SuperChat side the sales and customer acquisition side tends to be still more often than not the [inaudible] of the world. And we are seeing some more because we are for the most working in partnership with Cisco getting into more of the true contact center end-to-end multi channels kind of capabilities which has voice and the multi channel width, so there we are seeing some of the voice vendors that are typically more Cisco competitors but we are seeing them because now we are going alongside Cisco into those opportunities. So, the Avaya and to some degree the Interactives of the world. I guess there is the change, that’s probably the last bit is the change.

[Jon Hickman:]

Is there any like the sales cycle or is that change at all with Cisco or your partners?

[Ashutosh Roy:]

So, the Cisco I think like earlier I said to Michael’s question, I think we are recognizing and adjusting our thinking because Cisco goes into these deals and opportunities which tend to be in a more multi-year project and bigger transformation technology refresh if you will, initiatives. And so some of the roll out plans tend to be more linked. So that’s something we have to adjust to and accommodate and understand better we can align our sales process and forecasting properly. What we are seeing on the positive is that they are much larger engagements, we are seeing many more deals than we saw before. So we are getting into accounts which we didn't know there were projects going on, exactly as we believe is the case and that we are not as direct eGain not necessarily invited enough to your dances. So, those two are quite interesting for us and then the joint proposition is resonating quite well. I thing that as a whole Cisco plus eGain end-to-end multi-channel with voice and the digital capability, pre-integrated, that’s resonating quite well. So we will see how that translates into business but early feedback is positive.

[Jon Hickman:]

Okay, thank you. The rest of my questions were answered. Thank you.

[Ashutosh Roy:]

Thanks.

[Operator:]

Thank you. (Operator Instructions). And there are no further questions at this time. Please continue with any closing remarks. We do have a late question, this is a follow-up question from the line of Jeff Van Rhee with Craig-Hallum. Please go ahead.

[Jeff Van Rhee:]

Just under the wire there, just two quick follow ups to wrap things up. You commented, just wanted to be clear, you said activity levels I think you set up sequentially 50% in terms of interest and I missed what that data point was measuring?

[Ashutosh Roy:]

So what it measures Jeff is people we are calling in to eGain, people meaning the right kind of people, calling into eGain or chatting with us or sending us an email saying we are interested in talking to you and therefore we then set up appointments for our field guys to conduct, so that’s what we track that. We see that as a good surrogate for just awareness and for the mix of awareness and interest both.

[Jeff Van Rhee:]

And so obviously you had growing awareness overtime but to see that as a serious step, what do you see is the driver?

[Ashutosh Roy:]

I think the big stair step sales driver is probably some of the marketing investments we are doing. We are doing some campaigns and we are doing some things that are resonating and also that’s one bucket. The other is just of the partnership with Cisco and getting the word into the partners ecosystem of Cisco and I think that’s the other key. So those are the two big changes I would say.

[Jeff Van Rhee:]

Okay. And then just one last one obviously the bookings is little difficult to decide for you this quarter. Can you take a swing on the pipeline just in terms of size, scope or scale, or I mean is there any quantification you can give us there that gives us sort of secondary measure of the magnitude of the build here?

[Ashutosh Roy:]

I think we had this, maybe a question along these lines last quarter as well. I think there are more bigger deals bigger defined as million dollar plus kind of deals in the pipeline. They are little harder to pin down just because they are developing in a way some of these are with partners like Cisco, some of them are direct as well because they are larger, they are going through some more evaluation. So we’ve got some verbal that still will take a couple of months of diligence and contracting. Some of the larger financial services organizations in the U.S. that are engaged with us where we know that they are going to do something in the next six to nine months, it’s just very hard for us to pin down whether it's going to be in the next two months. Those kinds of deals are more in the pipeline than before and that’s the reason why you see us not necessarily either saying, yeah we are sure we can nail it down for this quarter or saying we think that this is really not going to happen. We are progressing these deals properly I think the timeline which is this fiscal year is a reasonable timeline. I think that we’ll be able to bring those in home in that timeframe. Short of that I would be giving you answers that I wouldn’t be very sure of.

[Jeff Van Rhee:]

All right, got it. Thank you.

[Ashutosh Roy:]

Okay.

[Operator:]

Thank you. And we have another follow up question from the line of Raghaven Sarathy with Dougherty & Company. Please go ahead.

[Raghaven Sarathy:]

Yeah, thanks for taking my questions. So in terms of the bookings it looks like you were up against sort of a tough compare to the December quarter and so Eric can you give us any color on how many big deals are included in the December quarter of last year? And sort of maybe instead of looking at quarter-to-quarter what sort of expectation we should have for booking in growth for the year I think Ash commented on this earlier.

[Eric Smit:]

No, I think that there was one very large deal that sort of drove the bookings comp to previous year. So I think it’s more of the same but I think historically this has been certainly for us generally more business so it wasn’t -- I mean it was substantially there is one deal so I think there was still one stand up deal that drove the number. I think we’ll definitely have similar comparisons I think from an overall on an annualized basis having the growth rates sort of come very close to our revenue run rates is and that sort of 20% to 25% numbers certainly that we are looking to grow the business definitely at the minimum.

[Raghaven Sarathy:]

This is the booking you mean?

[Eric Smit:]

That’s correct.

[Raghaven Sarathy:]

Okay. All right, thank you.

[Operator:]

Thank you and there are no other questions at this time. I would like to hand it back to management for closing remarks.

[Ashutosh Roy:]

Okay, I'd like to thank everyone for joining us today on our conference call. I also would like to mention that we are having eGain World event in Las Vegas next week. If anyone is interested please reach out to us and we can help you get registered. We’ll be doing Analyst Day at the same time so I think it will be quite informative and then of course if you have any other questions please feel free to give us a call here and we look forward to talking to you on our next conference call. Thank you.

[Operator:]

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.