EGAN - NASDAQ

Good day, and welcome to the eGain Fiscal 2023 Third Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jim Byers of MKR Investor Relations. Please go ahead.

Thank you, operator, and good afternoon everyone. Welcome to eGain's fiscal 2023 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. And these 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 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, May 11, 2023, 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 such as non-GAAP operating income. The tables included with the earnings press release include a reconciliation of the historical non-GAAP financial measures to the most recently comparable GAAP financial measures. In addition, our earnings press release can be found by clicking the press release link on the Investor Relations page of eGain's website at egain.com. Along with the earnings press release, we will post an updated investor presentation to the Investor Relations page of the website. And lastly, a phone replay of this conference call will be available for one week. And now with that said, I'd like to turn the call over to eGain's CEO, Ashu Roy.

Thank you. Thank you, Jim, and hello everyone. We are pleased with our overall performance this quarter. Revenue came within our guidance range and bottom line was ahead of guidance and consensus. We also initiated our stock buyback program and we still reported an increase in our cash balance due to positive cash flow in the quarter. Looking at our financial results, total revenue for the quarter was $23 million, within our guidance range. We implemented expense controls to align with current market conditions to deliver non-GAAP EPS of $0.30 that exceeded our guidance and consensus. And we were cash flow positive ending the quarter with more than $81 million in cash. Turning to business highlights, interest in our knowledge powered customer engagement platform continues to be strong. Decision making on new logo deals is still a challenge; however, we did sign several new deals toward the end of the quarter. And in the last month or so we have seen several enterprises now re-engaging on paused opportunities in our pipeline, after what seems like the dust settling after the internal reorganization and business adjustment. This leads us to believe that market conditions may be stabilizing. Our U.S. customer base continues to show resilience in the quarter, with healthy renewal and expansion rates. Our European customer base stabilized with no additional significant churn and some nice expansion business. As I noted, we signed several new customers near the end of the quarter. Let me share some notable ones. The first one is a major health insurance provider in the Midwest. The next one I want to bring out is a top 10 credit union in the U.S., and then another one is a U.S. based commercial insurance business. In terms of mentioned expansion wins, let me highlight a few. A multi-billion dollar BPO in the human capital management space; a fortune 500 energy company, large multinational provider of general insurance services, a top 10 global airline and a global 500 telecom holding company. Looking at the market and our overall business, we remain very excited about the opportunity. Recent findings from a KMWorld survey revealed that content silos and legacy technologies continue to be major obstacles to improve customer and employee experiences using effective knowledge. As a result, Gartner has continued to highlight that knowledge management is the number one technology that can simultaneously improve CX employee experience and operating performance in customer service organizations. With our solution, we believe we have the best offering and we are confident that the need for knowledge management will become increasingly mission critical for enterprises as they look to employ more AI powered automation. Speaking of which, as we shared in the last quarterly call, if you recall we announced the eGain Instant Answers capability powered by generative AI. This was in February. Since then we rolled out a successful marketing campaign around generative AI applied to knowledge, highlighting compelling use cases for agent and author performance and automation improvements. Interest has been quite strong and we are now engaging in Instant Answers pilots with customers and prospects. Looking back, we see that the excitement around generative AI in enterprises has highlighted the need for a modern knowledge hub, one that serves as a reliable and compliant source of consistent correct content for the generative AI tools to learn from. As a result, we are seeing renewed interest among enterprises to refresh their knowledge management tech stacks. Effectively deliver operational value in customer engagement automation, generative AI needs a modern knowledge platform to experiment within and to scale on. As we look ahead, our strong North American subscription renewal and expansion rates are evidence of the fact that our existing customers continue to find increasing value in our industry leading customer engagement solutions. We continue to build our new business pipeline in parallel as new bound interest remains steady and we are pleased to have closed multiple new logos in the quarter. We will continue to assess our sales capacity to optimize our sales performance, even as we diligently nurture our new business pipeline. And lastly, with our strong balance sheet and positive cash flow, we intend to execute a balanced growth and profitability plan in fiscal 2024. With that, I'll ask Eric Smit, our Chief Financial Officer to add more color around our financial operations. Eric.

Thanks, Ashu, and thanks everyone for joining us today. Let me share some financial highlights for the quarter before getting into our outlook and guidance for Q4 and the full year fiscal 2023. Total revenue for Q3 was $23 million, down 4% year-over-year or down 1% in constant currency, coming in within our guidance range despite the shift in our focus to profitability and balanced growth. Contribution from our Cisco OEM business sequentially declined, which we believe was due to a timing issue on revenue recognition, as Cisco has indicated that they continue to see good momentum in the business. Had the contribution from the Cisco OEM business been in line with our internal forecast, our top line results would have been ahead of our guidance and consensus. For the first nine months, total revenue was $73.4 million, up 7% year-over-year. SaaS revenue for Q3 was $20.9 million, up 1% year-over-year or up 3% in constant currency. For the first nine months, SaaS revenue was $66.9 million, up 11% year-over-year. Legacy revenue in Q3 was down to just 126,000 and accounts for less than 1% of total revenue. When looking at revenue by region, North America accounted for 78% total revenue this quarter, up from 73% in the year ago quarter. Total revenue from North America was $17.9 million, up 2% year-over-year or in contrast total revenue from Europe was $5.2 million, a decrease of 20% year-over-year. Looking at non-GAAP gross profits and gross margins, gross profit for the quarter was $15.8 million, down 13% year-over-year or a gross margin of 69% compared to 76% for the prior year and 75% last quarter. The decline in gross margins is primarily a function of lower revenue for the quarter. In addition, as we are in the middle of a major upgrade to our latest product release, margins reflect the impact of a temporary increase in AWS costs associated with the migration of these customers. Turning to operations, non-GAAP operating costs for the third quarter came in at $14.9 million, down from $15.7 million in the year ago quarter. The expense controls we have implemented enable us to deliver bottom line results that were ahead of our guidance and street consensus. Non-GAAP operating income for the third quarter was $935,000 or an operating margin of 4% compared to an operating margin of 11% in the year ago quarter. Non-GAAP net income for Q3 was $1.1 million or $0.03 per share. This compares to non-GAAP net income of $2.4 million or $0.07 per diluted share in the year ago quarter. Adjusted EBITDA margins for the quarter was 5% compared to 11% in the year ago quarter. Turning to our balance sheets and cash flows, cash flow from operations for the quarter was $905,000 or a 4% operating cash flow margin. For the first nine months, cash flow from operations was $9.1 million or a 12% operating cash flow margin. During the quarter, under our share repurchase program we repurchased approximately 145,000 shares for $1.1 million, at an average price of $7.57 per share. Of the $20 million authorized, $18.9 million remained available under the program at the end of the quarter. Our balance sheet remains strong. Total cash and cash equivalents at the end of the quarter were $81.3 million, up 15% from the year ago. Now turning to our customer metrics, given our increased focus on the North America market, I will share some additional regional metrics. The LTM dollar-based SaaS retention for North America customers was 108%, while EMEA customer retention was below 100% due to the previously discussed churn on the last call, resulting in our total NRR dropping to 100% compared to 109% a year ago. Within the U.S. customer base, the large enterprises which we define as having revenue of $2 billion or more have performed particularly well, with the net retention rates maintaining north of 110%. We also continue to see healthy expansion rates within the U.S. customer base, which is north of 20%. SaaS ARR for North America customers increased 12% year-over-year, while total SaaS ARR increased 4%. And looking at ARR by product hub, knowledge hub is still approximately 50% of our total SaaS ARR, as knowledge deals have accounted for two-thirds of new bookings in the last four months. The number of 1 million ARR customers remain relatively constant year-over-year and looking at RPO, total RPO increased 4% year-over-year to $87.3 million. Now onto our financial outlook and guidance, we remain very excited about the market opportunity. We know that knowledge management and AI-powered automation will continue to grow, as they must have in the enterprise marketplace for customer engagements. But given the business environment, we are implementing additional expense controls to align with the current marketing conditions, and our updated guidance reflects this change. As a reminder, with the currency fluctuations over the last year, for comparable purposes we are also providing revenue estimates on a constant currency basis where applicable, to provide better visibility into the underlying business trends. But for the fourth quarter, we expect total revenue of between $23.4 million to $24 million, and with no material currency impact expected based on currency exchange rates. For the fourth quarter, GAAP net income of $400,000 to $900,000 or $0.01 to $0.03 per share, which includes stock based compensation of expenses of approximately $1.5 million and depreciation and amortization of approximately $125,000, and then resulting in non-GAAP net income of $1.9 million to $2.4 million or $0.06 to $0.07 per share. For the full fiscal 2023, we expect total revenue of between $96.8 million to $97.4 million, and non-GAAP total revenue adjusted for constant currency of between $99.2 million to $99.8 million and GAAP net loss of $300,000 to GAAP net income of $200,000 or a loss of $0.01 to $0.01 per share positive, including stock-based compensation expense of approximately $6.8 million and includes depreciation and amortization of approximately $600,000, then non-GAAP income of $6.5 million to $7 million or $0.20 to $0.21 per share. Included with these assumptions, weighted average shares outstanding are expected to be approximately $32.5 million for the fourth quarter of fiscal 2023, and $32.8 million for the full fiscal year 2023. Looking beyond fiscal year ‘23 to fiscal year ‘24, assuming business continues to improve as we are starting to see, our plan is to remain focused on building a balanced growth and profitability business with preliminary targets of top-line growth returning to low double digits and double digits adjusted EBITDA margins. So in summary, our existing customer base remains healthy, with robust expansion rates and no additional significant churn in the quarter. While new logo business continues to be challenging, we signed several new logos at the end of the quarter and remain focused on continuing that momentum. We have been controlling expenses, resulting in strong bottom-line results, and our cash position continues to be strong, and we're buying back shares up to the maximum that we can based on the volume limitations that we have under our 10b5 program. With our strong balance sheet and positive cash flow, we are well-positioned to capitalize on our expanding market opportunity as business conditions improve. Lastly, on the investor relations calendar, eGain will be meeting with investors at the Annual Craig Hallum Institutional Investor Conference taking place in Minneapolis on May 31, and the Jefferies Software Conference taking place in Newport, California on June 1. We hope to see you at these events. This concludes our prepared remarks. Operator, we will now open the call for questions.

Thank you. [Operator Instructions] Our first question comes from Jeff Van Rhee with Craig Hallum. Please go ahead.

Great! Thanks for taking my questions. I guess just a bunch of them for me. Just talk about SaaS in your expectations, I guess on a sequential basis, how you think that’s going to play here. Maybe just a little more context on the sequential change this quarter, maybe start there.

Sorry Jeff, just to clear, that’s on the SaaS revenue. Is that…?

Yes, just on the SaaS line. I was just looking at it sequentially. I know EMEA, which I want to touch on in a second was very weak. But just, you talked about Cisco. I am trying to discern what happened in the SaaS line sequentially and the sequential drop.

So I think just to recap, as we had discussed on the call last in Q2, the first component was the fewer days in the quarter. I believe we said estimated probably about a 400K impact. And then there was a seasonal business that we had highlighted that we didn’t expect to repeat, which ended up being correct. And then there were the EMEA customer losses that we’ve also discussed. So those all came in pretty much as we had expected. And then on the Cisco OEM side, that decline was close to 600,000 sequentially. So that was the surprise that we hadn’t anticipated in the quarter.

Okay. And then you talked about the gross margin pressure coming from duplicative AWS costs. How do we think about gross margins in the next several quarters? How does that play?

So we’re obviously looking – working closely to optimize that. I would say that we will start to see some improvements, but it will take another quarter or two for us to get through the – you know complete the cycle. So I would say that we will start to see movement back into the low 70% range within the next couple of quarters, moving up into the mid-70’s again.

Yeah, okay. All right, and then you talked about some of the pilots that you are doing around the AI Instant Answers. Just talk a bit more about that. How many are you doing? Just any surprises on the use cases, kind of how they are being deployed, and then obviously just interested in the cost and economics of deploying those.

Right, so a couple of comments. One yeah, so the primary use case that we are deploying right now is in helping the agents or the associates who are in these customer service groups with a generated consumable answer that is tapping into multiple content sources in the background from the knowledge base, and bringing it out with all the verification and stuff that we have built into it and that's the primary Instant Answers use case we are piloting right now. Piloting it in multiple places. Say, the place where we are seeing the most interest is in organizations that have what I call lots of long-form documents, which are all approved and correct, but not easy to process and find the right answer in the moment of the contact or interaction. That's where we are finding the most need, and that's where we are piloting this.

And maybe just last for me, when you are looking at those deploys, in terms of a cost to the end consumer once you incorporate GPT or whatever you are using for the underlying AI, just what's that cost dynamic? Do you have a benchmark, something you can compare it to?

So for now, the pilots that we are doing, we haven't yet started charging them, because these are pilots, and we are monitoring the level of usage and the amount of content that we have to work through to deliver that. Our sense is that we should be able to – with a larger client, be able to bring it out into a bundled solution, but that's something we are going to be refining and defining over the next few months.

Yeah, understood. Thank you.

Sure.

Our next question comes from Richard Baldry with Roth. Please go ahead.

Thanks. Maybe from a broader perspective, talk about the impact you think the genre of AI has or will have. It feels like a lot of people are saying it could have delayed some deals, because it creates more confusion over the short term. Others are saying they think it expands the TAM, because more companies are now aware of some of the functionality that is coming online, but learning about the fact that they need to hook it on to a system of record class platform to make it work. So we sort of understand where you're thinking its impacting now versus where it could be six, 12, 18 months out. Thanks.

Sure. I think both the points you raised I agree with, even though they are sort of working at cross-purposes, but the timeline I think is different. The initial excitement or the need to go try out GPT or any sort of generative capability, that definitely has created another element of – another factor of consideration, and we saw that in a few of our conversations. Like a large bank we were working with went through another cycle of confirming that we could in fact incorporate not just what we are doing with generatives, but also what they are doing internally with it, if they wanted to plug it in at some point in a domain specific way. So yes, there is that extra loop or extra cycle that is getting added to these discussions. But as you said, on the positive side, there is a clear understanding or clearer understanding I would say, that these businesses need to have a modern knowledge platform, because without that, you know the usual risks that everyone is well aware of now, is you are not learning from the right things from a generative standpoint, and the risk of somehow getting it wrong once in a while is something that businesses cannot contend with, right. So, both of those are true, and we are really hammering on both of them. In other words, we are positioning ourselves not just as the platform of choice for a modern knowledge hub, but also pointing out that businesses can try out these generative capabilities in our environment, much easier and better than they would otherwise by doing their own internal connections into different content silos.

And do you think that it does expand the TAM meaningfully over sort of an intermediate-term or a long-term basis or do you think it’s just more additive and applicable sort of to the markets you’ve been addressing already?

I would say that it brings the market in faster. I think that the rate at which people will drive this sort of replatforming if you will, of their content and knowledge assets is going to accelerate. I certainly think that’s going to happen. So, as to whether the market grows beyond what we see the market today, yes, it will. But that will need more enhancements to sort of incorporating those generative capabilities into the solution, which is something that we are doing in this process as well.

And given it looks like there is going to be multiple competing sort of AI engines out there, do you care in any meaningful way, you know which ones are successful or how much market share either ends up with, or do you feel like your platform should be pretty much plug-and-play with whichever flavor becomes important to any given client?

So to begin with, our architecture is composable, so we don’t really have a strong inclination one way or the other, but what we are doing is making sure that we can work with different flavors, and that’s something we just ensure with our connectors and open platform.

Okay. And the last for me, it looks like a lot of the cost-cutting is hid in the sales and marketing area. Can you talk about how you prioritized where to make those cuts? Is it people that are multi-platformed, sort of ready to sell versus point solutions based on tenure, just so we can understand how much that’s impacted your go-to-market engine? Thanks.

Sure. So, we are keeping the front end of the funnel building relatively steady, and so we’ll be marketing and creating that top of the funnel continuously, because we know that that is going to be very valuable as the market turns around. In terms of people, the goal here is to have the best sales people, so we have done performance assessments and looked at people who can sell this proposition in the enterprise, and that's really the group that we are retaining and building on.

Great. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Great. Thanks Operator, and thanks everybody for taking the time today. I look forward to providing an update next quarter.