Jim Byers - Investor Relations, MKR Group Ashutosh Roy - Chairman and Chief Executive Officer Eric Smit - Chief Financial Officer.

Nick Altmann - Northland Securities.

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

Thank you, operator, and good afternoon, everyone. Welcome to eGain's fiscal 2017 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 contain management's expectations, beliefs, plans and objectives, regarding future financial and operational performance.

Forward-looking statements are generally preceded by words such as believe, plan, intend, expect anticipate or similar expressions. Forward-looking statements are protected by the 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 that could cause actual results to differ in material respects, including those related to our beliefs 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 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 10, 2017 and assumes no obligation to publicly update or revise any forward-looking information in this conference call. In addition to GAAP results, we will also 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 eGain's website at www.egain.com. The tables included with the earnings press release include reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures.

A replay of this conference call will also be available at the Investor Relations section of the eGain's website. And with that said, I'd now like to turn the call over to eGain's CEO, Ashu Roy..

first, our product depth, solution breadth, platform scale; second, our try-and-buy experience, which was quite good for them; and third, our strong customer references. Now, we are excited that we are now implementing the solution for rollout this summer with this client. Of course, this is all in the eGain cloud.

The other win which is interesting to mention is a significant cloud-based deal through the Cisco partnership. This client is a large U.S. based healthcare provider. They will use the eGain desktop bundle, including all our capabilities and digital knowledge in AI, to deliver better customer experience in concert with the Cisco contact center platform.

Both these wins have been a result of not just our product, but also improved execution, both on the direct side, as well as the partner side. On the product and marketing front, we had a very successful Digital+AI Day in March in London, with nearly 800 attendees, non-eGain that is. This was a 50% increase in attendance compared to last year.

At this event, we showcased our new eGain advisor desktop. It's a re-imagined product that extends our core strengths in digital knowledge, AI and analytics, with powerful case management and agent collaboration capabilities.

With this introduction and our expanded desktop footprint, we have now successfully debut in the Gartner MQ for CRM customer engagement center, something that was released earlier this week. Our customers are very excited about our new capability and so are we.

We've already won that couple of mid-size deals with our new advisor desktop, going up against some classic CRM vendors. We believe that our innovative product in this area and attractive price point with the bundling that we offer is going to be compelling for the enterprise B2C market.

On the sales side, we are finding more sweet spot opportunities for Knowledge+AI, especially in the U.S. market. And some of these seem to be coming from a lot of share-point implementations that are struggling for effective knowledge management and process guidance in large customer service environments.

Also our sales teams across the direct sales channel and installed base are collaborating even more actively than before, especially with partners, so that we can leverage them more to reach more opportunities. This is helped by the fact that our new go-to-market for our Cisco partnership is now fully rolled out.

As you know, that the new go-to-market from eGain and Cisco is based on pure subscription pricing, and therefore, a fully SaaS based model. With this SaaS transition now complete, we expect all new business going forward to be SaaS based. And this positions us really well for steady SaaS type revenue growth in fiscal 2018 and beyond.

With that, I'll ask Erick Smit, our Chief Financial Officer to add more color around finance and operations.

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 will be sharing today are non-GAAP unless otherwise noted. Included with the press release is a supplemental table that provides a reconciliation of the non-GAAP to GAAP numbers.

I'll start by reviewing our SaaS bookings metrics for the quarter and then go into detail of our third quarter financial results. During the quarter, we saw a solid growth in our new SaaS bookings and our backlog. New bookings for the quarter was $4.6 million, up 47% sequentially and up 88% year over year.

Gross bookings for the quarter was $21 million, up 27% sequentially and 64% year over year. Our total ACV at the end of the quarter was $44.8 million.

This is up 7% on a constant currency basis with the prior year, despite the impact of a previously announced one-time $5 million reduction in ACV for the quarter due to the transition of one customer away from the cloud.

Total backlog as of March 31, 2017 or totaled deferred revenue plus unbilled and uncollected orders was $53.5 million, up 43% year-over-year and up 50% in constant currency. Included in the backlog there are a few deals, we had booked earlier in the year that we have not - but we've not yet started revenue recognition due to acceptance requirements.

Our expectation is to fulfill these requirements and start recognizing the revenue on these contracts in Q1 of fiscal year 2018. Turning to our revenue, total revenue for the third quarter was $13.9 million, $15 million in constant currency compared to $16.3 million in the comparable year-ago quarter.

For the nine months, total revenue was $43.6 million, $47.6 million in constant currency compared to $51.8 million in the year-ago period. Our subscription and support revenue for the third quarter was $10.1 million or $11 million in constant currency.

This is compared to $10.3 million in the comparable year-ago quarter, or up 6% in constant currency year over year. Excluding the impact of the one-time $5 million reduction in ACV, as I just talked about, subscription and support revenue for the quarter was up 18% in constant currency year over year.

Subscription and support revenue for the quarter accounted for 73% of total revenue, up from 63% in the comparable year-ago quarter. For the nine months, subscription and support revenue was $32 million or $34.8 million in constant currency compared to $32 million in the same period last year, or up 9% in constant currency year over year.

License revenue for the third quarter was $1.2 million compared $3.2 million in the comparable year-ago quarter. This decrease reflects our business mix shift to a SaaS model.

As Ashu mentioned, now that we have made this transition, we have no significant license deals in our pipeline, so we expect license revenue to be less than 5% of revenue going forward. Professional services revenue for the second quarter was $2.6 million compared to $2.8 million in the comparable year-ago quarter.

For the nine months license revenue was $4.2 million compared to the $10.7 million in the same period last year, while professional services revenue for the nine months were $7.4 million compared to $9.1 million in the same period last year.

Now, looking at our gross profit and gross margins, gross profit for the third quarter was $8.5 million or a gross margin of 61% compared to gross profit of $11.1 million or a gross margin of 68% 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 71% compared to 74% with the comparable year-ago quarter. Professional services gross margin was 5% for the quarter compared to 12% in the comparable year-ago quarter.

For the nine months, gross profit was $28.9 million or a gross margin of 66% compared to a gross profit of $35.3 million or gross margin of 68% for the same period last year. Subscription and support revenue gross margin was 75% for the first nine months, as same as last year.

Professional services gross margin for the nine months was 10% compared to 8% in the comparable year-ago period. Now, turning to operations, operating costs for the third quarter came in at $9.3 million, a 21% decrease from the $11.7 million in the comparable year-ago quarter.

For the nine months, total operating costs were $29 million, a 19% decrease from $35.8 million in the prior year. Adjusted EBITDA for the quarter was a loss of $814,000 compared to an adjusted EBITDA loss of $280,000 in the comparable year-ago quarter.

For the nine months, adjusted EBITDA loss was $55,000 compared to adjusted EBITDA of $6,000 in the same period last year. GAAP net loss for the third quarter improved $2.5 million, or a loss of $0.09 per share compared to a net loss of $3 million or a loss of $0.11 per share in the comparable year-ago quarter.

For the nine months, GAAP net loss improved to $6 million or a loss of $0.22 per share, compared to a net loss of $7.6 million or a loss of $0.28 per share in the same period last year. Now, turning to our balance sheet and cash flows, cash and cash equivalents were $10.3 million as of March 31, 2017, compared to $11.8 million as of June 30, 2016.

During the quarter, we generated $2.8 million in cash from operations, the same as in the third quarter a year ago. For the nine months, cash flow from operations was $1.5 million compared to cash flow used in operations of $326,000 in the same period last year.

With our improved cash flow, we paid down approximately $2 million from our loan during the quarter. And we are pleased to have successfully executed the transition of our business model into our cash generation.

Our net debt position at the end of the quarter was $9.1 million, compared to $11.6 million at the end of last year and $11.4 million at March 31, 2016. Total net accounts receivable was $7.7 million at March 31 compared to $6.6 million at March 31, 2016. In summary, we are pleased with our continued progress this quarter.

While the business shift has negatively impacted our license revenue and our total revenue this fiscal year we have focused our efforts on operating efficiencies during this business transformation, and are pleased with the progress we have made.

For the first nine months of FY 2017, we have maintained adjusted EBITDA breakeven, while total revenue declined by more than $8 million. Looking forward, as Ashu mentioned, we are very excited to have completed our transition phase to a SaaS model. We believe this position us for steady continued SaaS type revenue growth in fiscal 2018 and beyond.

With that said, we look forward to updating you on our continued progress when we report our Q4 and full year results. And this concludes our prepared remarks and I will open the call for questions.

Operator?.

Thank you very much. [Operator Instructions] We'll take Mike Latimore with Northland Capital Markets first..

Yes, hey, guys. This is Nick Altmann on for Mike. Thanks for taking my questions. Can you guys - you guys mentioned that one of your bigger deals in the quarter was closed through kind of your try-and-buy sales strategy.

Can you guys just kind of give us an update there on the success rate with that strategy and anything around how the sales force is utilizing that?.

Sure, so - this is Ashu here. So for us the try-and-buy has become embedded as part of our sales model. And we use it where the customer is not late in the evaluation cycle and in an RFP mode.

And we find that our success rate still continues to be in that above 50%, which is what we had said in the past, that we win more than 50% of the opportunities where we will successfully - we will deploy our try-and-buy.

That's become a way that we show the difference between a lot of marketing claims out there from competitors and what we think as the proof point that businesses are looking for in their own environment, in a production pilot..

Got it, got it, okay.

And then, can you guys just give a little bit more update in regards to the relationship with Cisco and maybe talk about the pipeline there?.

So, a couple of points. One, we as you know, we have refreshed and sort of gone to the next version of our partnership with Cisco with the new bundled OEM, which is something that is now being sold and we are collecting royalties for it. That's a good thing.

On top of that, we've also refined our resell partnership, which is the SolutionsPlus partnership. And that one is now on the forward-looking basis 100% subscription based pricing, which was a big thing for us and Cisco to effect. And that is now completely implemented.

Put those two together and we are finding more streamlined pipeline generation than in the past. In the past, we would have a lot of variation as we were transitioning. Sometimes there would be perpetual deals. Sometimes there would be cloud deals.

And now, all the forward-looking stuff is all subscription based, so that makes the execution a lot better. Specifically in the U.S., for instance we're finding good success in the healthcare market. And that's an area where we've been quite successful with the Cisco partnership in the U.S..

Got it. Got it. Okay.

And just going off of that, any other verticals that you guys see any near-term opportunities, maybe more so than others or pretty consistent with how it's been in the past quarters?.

On the direct side, I would say the one that is the most active for us right now is BFSI, which is Banking and Financial Services, Insurance, that sector all put together. That's been the most active vertical for us in the - on the direct side..

Got it. And then, just last one if I could.

Do you guys anticipate any more bigger or larger customers in the future, that could go from cloud to on-prem?.

No, we are not aware of any at this point, no..

Okay. Okay, thank you..

You're welcome..

[Operator Instructions].

Okay. Well, looks like we've come to the end here. Thanks again to everybody for joining us today and we look forward to updating you with our Q4 and fiscal year results. Thank you..

Thank you, everyone. That does conclude our conference call for today. You may now disconnect your line..