Charles Messman - VP, Finance Ashutosh Roy - Chairman, President, CEO Eric Smit - CFO.

Jim Fitzgerald - Northland Capital Markets Jon Hickman - Ladenburg Thalmann.

Good day and welcome to the eGain Fiscal 2016 First Quarter Financial Results Conference Call. Today's call is being recorded. At this time, I'd like to turn things over to Charles Messman, Vice President and Finance of Corporate Development. Please go ahead..

Good afternoon and thank you for joining us today for eGain's conference call to discuss results for fiscal 2016 first quarter ended September 30, 2015. Please note this call is being recorded and will be available for replay from the Investor Relations section of our Web site at www.egain.com for seven days following the call.

Before I begin, I'd like to remind all listeners that this conference call contains forward-looking statements within the meanings of the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. This conference call contains forward-looking statements that involve risk and uncertainties.

These forward-looking statements include, among other matters, statements referring to organizational changes in the business mix to achieve in our success of matters covered by such forward-looking statement involve risk uncertainties and assumptions.

If any such risk or uncertainties materialize, or if any the assumptions prove incorrect, the company's results could differ materially from the results expressed or implied by the forward-looking statements we make.

The risk and uncertainties referred to include but are not limited to, our ability to capitalize on customer engagement, the success organizational changes, risks that our hybrid revenue model and lengthy sales cycles may negatively affect our operating results; risk related to our reliance on a relatively small number of customers for a substantial portion of our revenue and ability to compete successfully and manage growth.

Our ability to develop and expand strategic and third-party distribution channels; risks associated with new product releases; risk related to our international operations; our ability to invest resources to improve our products and continue to innovate; and other risks detailed from time-to-time in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed on September 11, 2015 and quarterly reports on Form 10-Q, which are available on the Securities and Exchange Commission's Web site at www.sec.gov.

These forward-looking statements are based on current expectations and speak only as of date hereof. The company assumes no obligation to update these forward-looking statements.

On today's call, we will mention adjusted EBITDA, a non-GAAP financial measure, that is defined as net income, adjusted for the impact of purchase accounting adjustments to deferred revenue related to acquisition, depreciation and amortization, stock-based compensation expense, interest expense, net income tax provision, amortization of acquired intangibles and acquisition-related expenses.

I should note that non-GAAP results are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies.

We use these non-GAAP measures to compare the company's performance to that of prior periods for trend analysis, and for other budgeting and planning purposes.

We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and comparing the company's financial measures with other software companies that present similar non-GAAP financial measures to investors, allowing for greater transparency with respect to key metrics used by management in its financial and operational decision-making.

With me today are, Ashu Roy, Chairman and Chief Executive Officer; and Eric Smit, Chief Financial Officer of eGain. To begin the management discussion, I'll now turn the call over to Ashu.

Ashu?.

Thank you, Charlie, and good afternoon, every one. On our last conference call, we shared our plan and early progress toward becoming a cloud business. We talked about how we enhanced our product and simplified our implementation model in the fiscal 2015 timeframe.

So now moving ahead as promised we are building on that foundation in the first quarter of fiscal 2016 with our new land and expand sales strategy fronted by our Try+Buy proposition and supported by a best practice led agile implementation model. As we mentioned before Q1 is historically the slowest quarter for us.

Last year, our first quarter results were unusually strong because of a very large on-premise expansion deal with an existing client. We did not catch any such wealth this quarter.

This year 44% of our new bookings in the quarter are in the cloud, compared to 6% in the same quarter last year and this is inline with our expectation as we execute our cloud strategy. Now a few significant deals from Q1 that I would like to share with you. One was a seven figure cloud contract with a large BPO in the U.S.

a new logo where our Try+Buy approach significantly accelerated the client's time to value and now we are actively engaged in discussing expansion opportunities beyond this deal across that operation. The next was a Phase 1 win with a large U.S.

federal agency another new logo where we partnered with Cisco and AT&T to become the preferred platform provider for the agency's digital customer communications. This deal happens to be on premise. As we have discussed before when we are partnering with Cisco, the move to the cloud is going to be a little slower.

Third, a leading private bank lined up to move their on-premise eGain implementation to the eGain Cloud. Their security team subjected the eGain Cloud to unprecedented scrutiny. In the end, our cloud passed all tasks successfully.

This client is widely regarded as a gold standard in security and privacy matters, so this win will become another lighthouse reference for our cloud. Stepping back, last quarter we had mentioned the Try+Buy initiative something that we had rolled out a few months before and we were actively pursuing multiple Try+Buy initiatives.

So just to give you a quick update, some of you may have seen our press release today announcing our GameStop customer win. They are one of our new clients who chose us as a result of a successful Try+Buy.

As we gain more experience, we realized that this Try+Buy program is not just good for quickly acquiring new logos but also for systematically expanding in existing clients. So we are now increasingly offering this Try+Buy capability to existing clients and starting to make this available through some of our key partners but all in the eGain Cloud.

Overall, our cloud momentum continues to strengthen. In the month of October, which is in the second quarter what we are in now, we closed two new seven figure multi-year cloud contracts. Based on this momentum, we feel increasingly comfortable that we will achieve our target of securing at least 50% of our new bookings in the cloud in fiscal 2016.

Turning to our leadership team, we announced today that Joe Brown has been promoted to be our new Head of Worldwide Sales. I want to thank AJ Berkeley for his leadership through a period of significant change and we wish him well in retirement. Since Joe's recent appointment as the Head of North America sales, he has been hard at work.

He has hired some strong talent in key positions including a recent hire for a new Head of Worldwide Customer Success reporting to him. He has also rolled out his land and expanse strategy in North America. This change incidentally has energized our North America sales team. They have rallied behind Joe's cloud focus go-to-market plan.

Moving forward Joe will continue his roll out in EMEA in the months ahead. At the same time in the short-term, Joe has focused on ensuring that we keep hitting our quarterly booking goals even as we operationalize the new land and expanse strategy. In this process, he is actively rationalizing our sales investments based on performance and pipeline.

As a matter of fact, our continued focus in this area over the last couple of quarters has resulted in a significant rationalization of our sales and marketing costs without compromising our ability to deliver to plan in fiscal 2016. On the partner front, on the partner front our Cisco relationship continues to do well.

As I mentioned earlier, we partnered with Cisco and AT&T to win a phase 1 deal as part of a multi-year digital transformation program for a large U.S. federal agency. Also in October, we signed an agreement with Cisco whereby eGain Solutions will be part of a multi-channel contact center cloud service for Cisco's top tier clients.

The initial deal is for supplying our capability for three Cisco clients with usage ramping over the next couple of quarters. This is a big milestone for us something that as a team we have been working with Cisco on for over a year.

As you all know, cloud is one of the top three market transition priorities for Cisco as the new leadership focuses the business on this cloud opportunity. We are very excited about adding this new dimension to our already successful partnership with Cisco. Together, we continue to define what's possible in digital customer experience.

On the product front, we continue to increase our lead in the digital customer engagement market. In October, we hosted our Annual eGain Digital Summit in Chicago attended by a record number of attendees up 35% over last year.

At the summit, we showcased our platform with significant new capabilities including the expanded omnichannel analytics that we have continued to develop and expand on the foundation of the Exony Technology that we had acquired last year as well as knowledge personalization capabilities back in the past were mostly custom built and now will be part of the core product.

These new exciting capabilities will be generally available later this quarter. All in all, the level of interest in our solution, the demos, the presentations and our Try+Buy led approach was very positive. In closing, we remain focused and excited about the opportunities ahead.

Digital customer engagement is on the shortlist of strategic priorities for most large businesses and we offer the easiest platform solution for them. With that, I will now turn the call over to our CFO Eric Smit.

Eric?.

Thank you, Ashu and thanks for joining us today. Before I begin my prepared remarks I'd like to note that the numbers I'll be sharing are non-GAAP unless otherwise noted. I'll start by reviewing our ACV and booking metrics for the quarter, then go into details of our financial results and close with an update on our guidance for fiscal 2016.

Our cloud ACV at the end of the quarter was $23.2 million compared to $22.1 million at the end of the first quarter last year and $23.2 million at the end of the fourth quarter of fiscal 2015. Excluding an unfavorable foreign exchange impact the cloud ACV was $23.5 million.

In the quarter, we had one significant reduction in contract renewal with the health insurance clients; two years ago they successfully deployed our platform to assist with new customer acquisition during the launch of ObamaCare. Moving forward the client anticipates decreased use during their annual enrollment cycles.

As Q1 is historically our slowest quarter and based upon the cloud momentum in our pipeline, we are still targeting a 25% increase in our cloud ACV in fiscal 2016.

Our total subscription and support revenue ACV at the end of the first quarter was $43 million compared to $42.4 million at the end of the first quarter last year and $43.2 million at the end of the fourth quarter of fiscal 2015.

Excluding an unfavorable foreign exchange impact of approximately $810,000 the total subscription in support revenue ACV was $43.8 million.

Gross bookings or revenue plus change in deferred for the first quarter was $13.9 million compared to $26.6 million in the first quarter last year, excluding an unfavorable foreign exchange impact of approximately $700,000 total gross bookings were $14.6 million.

Last year's bookings included a $10 million plus multi-year cloud renewal and also included the one significant license deal that's Ashu referred to have more than $5 million. Backlog as of September 30, 2015, or total deferred revenue plus unbilled and uncollected was $39.7 million compared to $45.6 million at the end of the first quarter last year.

Excluding an unfavorable foreign exchange impact of approximately $700,000 the total backlog was $40.3 million. Now turning to our revenue, total revenue for the first quarter was $16.5 million compared to $20.8 million in the comparable year ago quarter.

Our subscription and support revenue for the first quarter was $10.9 million compared to $10.5 million in the comparable year ago quarter.

License revenue from perpetual sales for the quarter was $2.4 million, a decrease of 64% from the comparable year ago quarter, while profession services revenue for the first quarter was $3.2 million a decrease of 9% compared to the prior year quarter.

I do note, we delivered approximately $200,000 of PS work in the quarter that was not recognized due to milestone based contracts. Looking at the geographic mix, total revenue in the first quarter comprised of 58% domestic and 42% international.

Now looking at our gross profit and gross margins, gross profit for the first quarter were $10.5 million or a gross margin of 64% compared to a gross profit of $14.4 million or a gross margin of 69% 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 first quarter was 75% compared to 77% in the comparable year ago quarter. Professional services gross margin was a negative 2% for the quarter compared to a negative 11% in the comparable year ago quarter.

The negative PS margin was primarily due to timing of revenue recognition of the PS work delivered, but not recognized in the quarter due to milestone based contracts. We expect to recognize this revenue in Q2 and see it move back to positive PS margins.

Now turning to our operations, operating cost for the first quarter came in at $11.5 million a 15% decrease when compared to $13.5 million in the comparable year ago quarter. Sales and marketing expense for the quarter was $6.3 million down 23% from the first quarter last year.

This is a result of continued focus on performance management as Joe rolls out the new land and expanse strategy on a worldwide basis. Adjusted EBITDA net loss for the quarter was $769,000 or a loss of $0.03 per share compared to adjusted EBITDA net income of $871,000 or $0.03 per share for the first quarter of fiscal 2015.

GAAP net loss for the quarter was $3.2 million or a loss of $0.12 per share on a basic and diluted basis, compared to a net loss of $1.6 million or a loss of $0.06 per share in the comparable year ago quarter.

Now turning to our balance sheet and cash flows, cash and cash equivalents was $7.3 million as of September 30, 2015 compared to $8.6 million as of June 30, 2015. Cash used in operations for the quarter was $5.6 million compared to cash used of $6 million in the comparable year ago quarter.

We typically see a use of cash in Q1 although this quarter was higher than planned due to a couple of large payments totaling approximately $4 million we expected to collect at September that slipped into October. We have since collected these funds and are confident of achieving our targeted positive cash flow from operations for fiscal 2016.

Total net accounts receivable was $11.2 million at September 30, 2015 compared to $13.1 million at September 30, 2014. DSOs for the first quarter was 61 days compared to 67 days for the comparable year ago quarter.

Total deferred revenue which includes both deferred revenue on the balance sheet of $39.7 million and unbilled deferred revenue that remains off balance sheet of $13.1 million -- was $26.6 million as of September 30, 2015 compared to $45.6 million at September 30, 2014.

Now turning to our fiscal 2016 guidance, as we noted on our last call, as we make the transition to a cloud business our focus will be on two things. One to grow our cloud ACV and two, to manage our cash flow from operations.

As I stated earlier, we are reiterating our previously provided guidance for our cloud ACV to grow by 25% over fiscal 2015 and to target positive cash flow from operations for fiscal 2016. In closing, I'd like to say we are pleased with our start to fiscal 2016.

Total revenue of $16.6 million on a constant currency basis net consensus estimates and our adjusted EPS loss of $0.03 came in well ahead. And finally with our year-over-year cloud bookings growth in the way our pipeline is building we feel good with our decision to transition to a cloud business.

With that said, I will now open the call for questions.

Operator?.

Thank you. [Operator Instructions] We'll take our fist question from Mike Latimore with Northland Capital Markets..

Hey, guys, this is Jim Fitzgerald pitching in for Mike Latimore.

So first question, here you guys mentioned cloud agreement with Cisco, I think you said you agreed on that in October, so when would we start to see revenue from that, is that something we see still this year or is that going to be a 2016 revenue event?.

So this will be -- there will be some lag time with this, so the expectations will start to see some revenue in the back half of 2016 but ramping up in 2017..

You mean fiscal 2016?.

Fiscal 2016 right..

Okay, got it great.

And then moving to Exony quick, is the United States still the geographic focus there and how have maintenance renewal rate has been trending?.

So yes, this -- the question -- the first part of the question, yes, it is still -- bulk of the business is still in the U.S., but we are seeing some good growth in EMEA now a days particularly with some of the HCCs providers in the Cisco ecosystem, the hosted contact center provides, so that's kind of an interesting area of growth in the EMEA business around the core Exony products on the voice side.

And then the question about -- the second question was around renewals?.

Renewals, yes. And haven't seen any significant drop on the Exony customers..

Okay, got you.

And then I think historically you guys have had price reductions for recent renewals related to the push to the cloud, is that something that's still occurring?.

I mean, there is the usual renewal pressures on like-for-like renewals and that's not anything unusual in the context of the cloud renewals. We mentioned the one unusual one that we saw which was a significant reduction that had to do with the fact that their business needs had changed materially over the last couple of years..

Okay, great. Thank you. I appreciate it..

[Operator Instructions] We'll hear next from Jon Hickman with Ladenburg Thalmann..

Hi.

First question, can you tell me like you closed these two new deals in October the seven figure deals, what's the normal timeframe for implementation to when you can start recognizing revenues from them?.

Well, certainly -- well, the one where we talked about with Cisco, the lag is going to be longer than typical. So that's when we wouldn't expect to see any significant revenue for certainly a couple of quarters.

I think for standard new cloud deals, we typically look to 30 to 45 days would be the expectation that we start to see revenue from those start to kick in..

Okay.

And Eric, can you tell me the total deferred revenue number again?.

Sure. About $39.7 million was the total number..

With 13.1 being….

13.1 on the balance sheet..

Okay, okay.

And then so can you -- can we talk a little bit about professional services, so the fact that the gross margins were negative was due to timing of when you did the work versus when you can actually bill for the work?.

When you could recognize, that's great. So the work was performed that we weren't able to recognize the revenue associated with the work that has been completed..

But going forward do you think that, it will move back into a positive gross margin situation?.

That's correct..

Okay..

That's one element and the other element, which we didn't mention, but always in Q1 is the holiday schedule in parts of our business also kick-in particularly around EMEA, so some of the available utilization drops in Q1 a little bit..

Okay.

Because what -- because of summer in internationally, is that what you're talking about?.

Yes. Just people making more time off in the non-U.S. markets. And our team included..

Yes, okay. And then, I just want to make sure I understand Try+Buy, so Try+Buy means that you let them use it for a certain period of time for free.

And then after a month or so whatever the timeframe then they have to decide either pay for it, or you install it, is that what happened?.

That's correct, that's correct. With the added bet in front and that is, it's not just a sandbox kind of environment where they are actually using it in production and we put in their data and their configuration a subset of their used cases into the solution in the cloud..

So there, it's live. It's for real that it's just free for a specific timeframe..

Yes. It's about four to six weeks, yes, exactly..

Okay. Thanks. That's it for me..

Sure..

[Operator Instructions] And at this time, I'm showing no further questions. I'd like to turn the call back over to management for closing comments..

Well, I thank everyone for joining us today. Should you have any further questions please feel free to give us a call here in the office and we look forward to talking to you on our next quarter conference call. Thanks. Have a great day..

That does conclude our conference for today. We thank you for your participation..