Jim Byers - MKR Group Ashu Roy - Chairman & CEO Eric Smit - CFO.

Mark Schappel - Benchmark.

Good day and welcome to this eGain Fiscal 2017 First Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Jim Byers of MKR Group. Please go ahead, sir..

Thank you, operator, and good afternoon everyone. Welcome to you eGains fiscal 2017 first 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 contains management 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 the Safe Harbor 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.

Including those relating to our belief that we are seeing and will continue to see the benefits of the company's transition to a cloud-based business, and we'll continue to see success in implementing the land-and-expand sales model. Actual results could differ materially from those described in this conference call and presentation.

Information on various factors that could affect eGains result are detailed in the reports filed with the Securities and Exchange Commission. eGain is making statements, as of today, November 9, 2016 and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call.

In addition to GAAP result, we will discuss certain non-GAAP financial measures in this conference call such as adjusted EBITDA and non-GAAP net income. Our earnings press release can be found on the news release link on the Investor Relations page of eGains website at www.egain.com.

The tables included with the earnings press release include a reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. A replay of this conference call will also be available at the Investor Relations section of the eGain website.

With that said, I'd now like to turn the call over to our CEO, Ashu Roy..

Thank you, Jim and hello, everyone. We are pleased with our continuing transition to a fast business model. 65% of our new bookings in the first quarter of fiscal 2017 were subscription-based compared to 44% in the year ago quarter.

The first quarter historically, the slow quarter for us; even so our new subscription ACB was up 63% year-over-year, that's 82% in constant currency.

Equally importantly, we generated positive cash flow from operations off roughly $2.4 million, this is a significant change from where we were the same quarter a year ago, when we had negative $5.6 million of operating cash flow. Now turning to our business; we hosted a very successful digital AI event in Chicago in mid-October.

This was our Annual Customer Event in North America, attendance this year was up over 50% compared to last year.

We effectively reintroduced our proven and rich AI capabilities, something we have been enhancing and selling successfully under the covers for over a decade, both has guided help for customer care agents and virtual assistants or self-service.

We saw some really good interest among attendees in getting a rich walk through across our expanded digitally AI capabilities, complemented by knowledge and analytics, all in one platform, that's robust improvement.

We also had two very nice customer success presentations from Alliance Data, a large financial services BPO, and LL Bean, top shelf retailers as all of you know. The first one talked about their knowledge power service transformation journey and LL Bean shared the digital customer experience they have been delivering powered by the eGain platform.

All in all, a great event for us. On direct sales front, our try-and-buys are working well. In the last twelve months, we have now executed 48 such try-and-buy, and we have converted a little over 75% of those into plans or expansion among existing plans.

One of the better testimonials under try-and-buy program for me personally was from the Head of Service Transformation at a large UK retailer I went and met with last week; and they successfully went through try-and-buy program in June. Now they're looking to expand the use of eGain.

And among the things he said; one thing that struck me was when he said; if it weren't for your try-and-buy we would still be talking about this project. And that's sort of the essence of the try-and-buy program.

Another customer who successfully ran through our try-and-buy program and recently launched was Lego; and now they are looking to expand as well with more eGain application.

One more reason, we feel our try-and-buy is working well is that we seem to get a lot of feedback from our prospect, particularly some of the new ones, about our competitors who are actively bad mouthing our try-and-buy as a desperate attempt to win business. And whenever we hear that, we ask our prospects what they think about try-and-buy.

And they like the transparent and risk-free options, in fact one of the other presentation that our digitally ID [ph] in Chicago looks from a new eGain client had fellows, who shared their experience of working with through try-and-buy program; and their summary was that they never felt like they were being sold to, that's exactly what we intend with our try-and-buy.

On the channel front, we have talked about our expanded partnership with Cisco. In late September, Cisco announced the availability of the next version of their contact center enterprise product and our email and chat capabilities are now part of that next version, as a bundled OEM.

This means every customer who buys their new enterprise product, will also get our email and chat capabilities bundled. Plus all their installed base customers, who upgrade to the new version in the enterprise will get the same bundled email and chat capability.

So that's a big step for us in terms of expanding our access to a much larger target market. We're also working with Cisco to enable new easier ways to access our cloud capabilities from the contact center desktop empowering agents with knowledge, regardless of whether the fiscal platform is deployed on premise or in the cloud.

As a result, we expect that more and more off our new business generated through the Cisco partnership on the resale side, will also shift to a apps based model in the second half of fiscal '17 and the reason I say second half is, the program is just getting rolled out now and we expect that the effect of that will show in the back half of this fiscal year for us.

And with that I'll ask Eric Smit, our Chief Financial Officer to add more color around the quarterly results.

Eric?.

Thank you, Ashu, and thanks for joining us today. Before I begin my prepared remarks, I'd like to note that the P&L numbers I'll be sharing are non-GAAP unless otherwise noted. Included with the press release is a supplemental table that provides the reconciliation of the non-GAAP to GAAP numbers.

I'll start by reviewing our ACV and booking metrics for the quarter, then go into details of our first quarter financial results. As Ashu mentioned, we are pleased with the continued acceleration in our shift-to-assess based business model.

Our new subscription ACV for the first quarter was $1.9 million, up 63% year-over-year and 82% in constant currency. Our new subscription ACV bookings accounted for 65% of new bookings, up from 44% in the year ago quarter. Our total subscription ACV at the end of the quarter was $26.3 million, up 14% year-over-year, and up 21% in constant currency.

Our total subscription that support ACV at the end of the quarter was $44.2 million, up 3% year-over-year and up 11% in constant currency. Backlog as of September 30, 2016 or total deferred revenue plus unbilled and uncollected was $44.8 million, up 30% year-over-year and up 20% in constant currency.

When looking at this increase in backlog, I want to highlight one point we are seeing as we gain traction in moving existing customers to the latest version of our product in the cloud.

Once in a while when the customer has deep integrations and significant customization in their existing deployment, it takes longer than usual to migrate them to our new platform. One such significant deal in this quarter is the 750,000 ACV contract with an existing clients where the migration effort is likely to take upto nine months.

As a result, the revenue recognition for this deal is expected to start in Q1 of next fiscal year. Typically, we do not see such complex migration projects but when we do, we do our best to accelerate the migration efforts.

Moving forward, we will continue to standardize the terms of our five migration projects for existing clients, so that we can transparently model out ACV bookings into revenue.

Now turning to our revenue; total revenue for the first quarter was $14.8 million, which is $16 million in constant currency compared to $16.5 million in the comparable year ago quarter.

Our subscription and support revenue for the first quarter was $10.9 million, $11.7 million in constant currency, compared to $10.8 million in the comparable year ago quarter. Subscription and support revenue for the quarter accounted for 74% of total revenues, up from 66% in the comparable year ago quarter.

License revenue for the first quarter was $1.7 million, compared to $2.4 million in the comparable year ago quarter. This decrease is due to the accelerated business mix shift we saw in the first quarter and is consistent with our transition-to-assess model.

Professional services revenue for the first quarter was $2.2 million, down $3.2 million in the comparable year ago quarter.

Again, this decrease is consistent with our strategic direction and as I've stated on previous calls, the improvements of our products has simplified our deployment process, resulting in a reduction in time and cost with average implementation project.

We've made adjustments to our peer's organization to align with this change as evidenced by the 800 basis point margin improvement from the same quarter a year ago.

Now looking at our gross profit and gross margins; gross profit for the first quarter was $10.1 million or gross margin of 68% compared to a gross profit of $10.6 million or gross margin of 64% 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 was 76% compared to 75% from the comparable year ago quarter. Professional services gross margin was 8% for the quarter compared to breakeven in the comparable year ago quarter.

Now turning to our operations, operating costs with the first quarter came in at $10.1 million that 13% decrease from $11.6 million the comparable year ago quarter. Adjusted EBITDA margin for the quarter was 1% or zero per share, compared to adjusted EBITDA margin of the 5% negative or $0.03 negative per share in the comparable year ago quarter.

By streamlining our business operations, we've been able to deliver this improvement in adjusted EBITDA while the revenues declined. Net loss for the first quarter was $2.4 million or $0.09 per share compared to a net loss of $3.2 million or $0.12 per share in the comparable year ago quarter. Now turning to our balance sheet and cash flows.

Cash and cash equivalents was $9.5 million as of September 30, 2016, compared to $11.8 million as of June 30, 2016. Cash flow from operations was $2.4 million in the quarter compared to cash flow used in operations of $5.6 million in the comparable year ago quarter.

With this significant improvement, we were able to pay down $5 million of debt during the quarter. The improved cash flow was driven in part by solid collection as evidenced by the DSOs at the end of the quarter which improved of 24 days from 61 days in the comparable year ago quarter.

Total net accounts receivable was $7.3 million at September 30, 2016 compared to $11.2 million at September 30, 2015. Total deferred revenue which includes both differed revenue on the balance sheet of $18 million and then deferred revenue that remains off balance sheet of $26.8 million.

Was $44.8 million as of September 30, 2016 compared to $39.7 million as of September 30, 2015. In summary, we are pleased that we are seeing an acceleration in our shift [ph] to assess model. As a result of this accelerated shift to a recurring revenue model we expect global license revenue moving forward.

We appreciate our shareholders patience as we work through this business transition. Although it creates optical challenges in the short term. We know that this is the right path to take to build shareholder value based on a recurring revenue model.

We continue to focus on the alignment of cost, and cash flow during this is business formation, as evidenced by the significant improvement to cash flow from operations in the quarter an $8 million improvement when compared to the year ago quarter. And a 600 basis point improvement to adjusted EBITDA margins for the comparable year ago quarter.

With that said we look forward to updating you on our continued progress, when we report our Q2 results. This ends our prepared remarks I will now open the call for question, operator. .

Yes sir, thank you. [Operator Instructions] Our first question comes from Mark Schappel with Benchmark..

Hi, good evening, thank you for taking my question. Eric, starting with you with respect to the extent in platform deployment that you mentioned in your prepared remarks. What was so different about that about that project or that deployment as compared to your more normal ones. .

It is Ashu, here Mark. I will add a little more color on that. So, I think the big thing that is this was a customer who's got very extensive integration into the back-end data systems from our environment. And the second is, the customizations they have done in the past. They -- this was a customer who has been with us for over four years now.

And so, they have to be migrated a couple of versions to bring into the -- into the eGain cloud for the latest version.

And that -- Those two put together combined with the fact that they already on a fairly large customer, so that they serve all 5000 agents in the contact center of the dissolution, so that that testing and working with them back and forth, those are the three factors that's leading to this that time line. .

Great, thank you. And then Ashu, in the past you ignored -- that the federal government was one of the top sectors I think it was a top three sector the company was targeting. And if you just give a little color how you're doing with of September quarter, more color on how you are doing, a better government sector.

And with that you could also give us some indication if that businesses say 10% of total sales you have. .

Okay, I will take the first part and maybe Eric can have the second. So the business on the government side is going well and we -- We've closed a couple of new logos with the government broadly federal and say in the last quarter.

The part that we are working on as we had mentioned in the -- in the last conference call is folks like IRS who are one of global Live with our solution with the eGain cloud in late November, early December.

So to us, that's going to be a fairly important milestone because the account as big as that and as important as that going on to the eGain cloud and that's a big thing for us. What we're seeing that as we've also brought in a new customer success person to focus on the federal government.

Mary Ann Munro, she used to run the customer experience team at GSA. So we are investing in that and we are seeing good interest and opportunity in that, in the broadly speaking federal government and the state government..

Okay, thank you. That's all for me..

And I don't think we're quite close to 10%, I think we're getting close to that but it's outside under 10% on ACV basis at this point..

Thank you..

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

Good evening, this is Brian [ph] sitting in for Jeff.

Just first question, can you just go over the sales force, just any changes in productivity there? I know you guys really stressed the landing -- expand just how is that progressing? Also in last quarter you mentioned you'd be pulling out of some geographies -- we'll like to hear an update on those step and sales reps take down as well, right?.

Sure.

So the first thing is on the land expand model, so we've been rotating some of our investments into more expand, and not to say that land is not important but we see the existing customers as a very valuable and important for us to make sure that we are keeping them happy but also seeing a lot of interest in expanding and the use of eGain, so we are rotating some of our investments into more expand; that's one.

And the place where we have been reducing on the land side is some of those deals the you talked about where we have been pulling out off. So that's one rotation that continues. And then the second piece around hiring new people, that's more of an ongoing performance management sort of things, so nothing unusual to report on that..

But how is it going in those geographies with the partners? Are the partners being able to ramp up well or is there any delay there? Just some kind of update on that would be helpful..

So the two big geographies were -- well, two significant geographies where we are making sure that the partner model continues to operate is, one is broadly speaking that the German market which is the Dutch [ph] market; and the second is the France market.

And in Germany I think we have made very good progress in working with the small set of partners. And in France, I would say we are a step behind right now but we are still working on it..

Great, thanks.

And then Avaya [ph], that's the partner that's been mentioned on and off now, just -- any update?.

We continued to work on it but go don't have a lot of new update at this time but we continue to work on it. It's an area where we are seeing more and more large accounts that we are selling direct into.

They are --They are pleased to see that we have a partnership with Avaya where there is not fiscal presence, let's say and that's something that we continue to work on..

Great, thanks guys. .

[Operator Instructions] And no one has signaled at this time. I'd like to turn the conference back over to management for any closing remarks..

Thanks everybody, again for listening in and look for to providing you the update on Q2 results. Thank you..

That does conclude today's conference. We do thank you for your participation and you may disconnect at this time..