Jim Byers - IR, MKR Group Ashutosh Roy - Chairman and CEO Eric Smit - CFO.

Austin Williams - Craig-Hallum Capital Group.

Good day and welcome to the eGain Fiscal 2018 First Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jim Byers of MKR Group. Please go ahead, sir..

Thank you, operator and good afternoon, everyone. Welcome to eGain's fiscal 2018 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'd 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 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 respect. 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, November 08, 2017 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 in this conference call such as non-GAAP operating income.

Our earnings press release can be found on the News Release link in 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.

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

Thank you, Jim, and hello, everyone. We're executing well with our new SaaS model and we're off to a good start for the year. We're pleased with the customer activity we are seeing.

They uniformly seem to be excited about our new solutions and finally our new Head of Sales, Todd, has ramped up nicely and is starting to make some adjustments that we are working together and look forward to executing. Turning to the quarterly highlights, our SaaS revenue was up 16% year-over-year.

We also saw a 7% improvement in our non-GAAP operating income and the cash we generated from operations was a strong $5.9 million up 142% from the first quarter a year ago. As a result, we are very pleased to end the quarter in a net cash position. It's a great way to mark the conclusion of our business model transition.

Looking at our business, most of our new logos this quarter were in targeted verticals; finance, telco, healthcare and retail. All of our new wins as you know are now SaaS based. In terms of customer renewals and expansion, thanks to our customer success investment, we are now seeing a steady improvement in our renewal terms as well as retention rate.

Looking at the broader market and upfront, the market is coming to us. The 2017 Gartner Magic Quadrant report on CRM customer service called out knowledge management, artificial intelligence, digital and analytics as new requirements. Digital continue to disrupt the phone-centric world of customer engagement.

Gartner predicts that this year 0.5 million agent positions will transition from phone to digital channels. This is from an estimated worldwide agent population of about $14 million. So, you can see the market opportunity ahead.

And now the new wave of AI is building on this digital foundation to drive extreme automation across self-service and agent desktops. For enterprises, these are exciting and challenging times. There are almost no templates for success.

What they want, what they need is a partner who can guide them to their aspirational business outcomes by leveraging these disruptive technologies as part of a proven solution on a future proof platform. As you know we at eGain started digital 20 years ago. Then we met on AI knowledge and virtual assistance in 2000, years before it was fashionable.

Since then we have continued to deliver transformational solutions to enterprises, leveraging these technologies and enhancing them steadily with customer feedback and used cases. As the broader market moves toward us, based on these powerful trends, we have an amazing opportunity in front of us and this is exactly our focus now.

To gain and sustain customers with the best solution in a market that is moving from nice to have, to must have, which brings me to our sales and go the market.

Todd, our new Head of Sales has hit the ground running after observing and participating activity for a few weeks, he has now put together a refined go to market to drive more collaboration across our enterprise sales channel partners and customer success teams. At the same time, we are expanding our partner enablement program.

Based on experience over the last two years, this collaborative sales approach will be a better fit for our enterprise target market and should improve our win rate. On the product front, our eGain Solution, eGain Solve 17 continues to excite the enterprise market.

They see it as the easiest omnichannel solution with integrated, innovative and rich functionality and a unique digital-first desktop.

In addition, compliance requirements like GDPR in Europe, I'm sure most of you have heard of it, even though GDPR applies to all business who serve European consumers, but these compliance requirements that are expected to kick in May of 2018 are creating a sense of urgency among our on-premise clients, who now would like to move to the eGain cloud to benefit from our GDPR assurance program.

Finally, I want to tell you about our upcoming Digital AI Day, which is going to be in Chicago on December 5. Among other highlights, digital leaders from Comcast will present their digital transmission journey powered by eGain. As always, we will also be showcasing our new platform, our latest products and best practices for clients and partners.

Please do visit our website to register or contact us if you want to attend. And with that, I'll ask Eric Smit, our Chief Financial Officer to add more color around finance and operations, Eric..

Thank you, Ashu and thanks for joining us today. We're pleased to start -- we're pleased with our start to fiscal 2018. For the first quarter, we reported health year-over-year growth in our SaaS revenue and total revenue excluding legacy license. Our non-GAAP operating margin improved by almost 700 basis points year-over-year.

We generated $5.9 million in operating cash flow and we ended the quarter in a net cash position, the first time in over three years. Financially this puts us on solid footing and well-positioned to capitalize on this large market opportunity we see in front of us.

Turning to our results for the first quarter, total revenue excluding legacy license was $14.4 million up 10% year-over-year. Our recurring revenue was $11.6 million up 7% year-over-year. As we noted on our last call, our Q4 recurring revenue included approximately $600,000 of catch-up items.

Though excluding these items Q1 recurring revenue was up 6% sequentially. Recurring revenue accounted for 80% of total revenue in Q1 up from 74% in the comparable year ago quarter. Breaking out the recurring revenue components, SaaS revenue was $6.8 million up 16% year-over-year and the legacy support revenue was $4.9 million down 3% year-over-year.

Our legacy license revenue was $188,000 down 89% year-over-year and our legacy license revenue accounted for only 1% of total revenue, which is down from 11% in the comparable year-ago quarter. Professional services revenue for the quarter was $2.7 million up 23% year-over-year.

Now looking at our non-GAAP gross profit and gross margins, gross profit for the quarter was $9.3 million for a gross margin of 64%. This compares to a gross profit of $9.8 million or a gross margin of 66% in the comparable year ago quarter.

If you look at the breakout of gross margin by revenue type, our recurring revenue gross margin for the quarter was 75%, unchanged from the comparable year ago quarter. Professional services gross margin for the quarter was 15% up from 7% in the comparable year ago quarter.

Now turning to operations, non-GAAP operating costs for the quarter came in at $8.7 million, a 15% decrease year-over-year. On a non-GAAP operating basis, operating income improved to $569,000 from a non-GAAP operating loss of $450,000 in the comparable year ago quarter.

Looking at our interest and taxes, interest expense was $344,000 down 18% year-over-year and on taxes, we reported a tax benefit of $161,000 compared to a tax expense of $832,000 in the comparable year ago quarter.

GAAP net loss for the quarter was $568,000 or $0.02 per share on a basic and diluted basis, compared to a GAAP net loss of $2.4 million or $0.09 in the comparable year ago quarter. Now turning to our balance sheet and cash flows, total cash and cash equivalents as of September 30, 2017, was $10.7 million compared to $10.6 million as of June 30, 2017.

The company paid down approximately $5.9 million in debt during the quarter. As Ashu noted, we generated improved cash flow from operations of $5.9 million in the quarter a 142% increase year-over-year.

We benefited from the timing of certain non-renewal payments this quarter and not expecting to repeat our cash flow from operations at this level every quarter, but this sets us up well to achieving our guidance of being operating cash flow positive for the year.

Total net accounts receivable was $5.5 million as of September 30, 2017, compared to $7.2 million at June 30, 2017. Our DSOs improved to 33 days for the quarter from 44 days in both Q4 and the first quarter of last year.

We're very pleased with our collection efforts this quarter, but don't expect our DSOs to stay at this level, but rather return to where we've see it historically in the mid-40s to 50s range. Total deferred revenue was $62.2 million as of September 30, 2017, up 39% from $44.8 million as of September 30, 2016.

Deferred revenue includes both deferred revenue on the balance sheet of $27 million and unbilled deferred revenue that remains off balance sheet of $35.2 million. Now turning to our guidance, we are reiterating our previously provided expectations for fiscal 2018.

We continue to expect to report SaaS revenue annual growth of between 15% and 25% and total revenue growth excluding our legacy perpetual license revenue of between 5% to 10%. We've excluded the legacy license from this calculation as we expected to be less than 1% of total revenue in fiscal 2018, reflecting our business model transition.

Finally, on the Investor Relations front, eGain will be participating at several upcoming investor conferences. Next week we will be in New York meeting with investors at the Roth Technology Corporate Access Day on November 15 and then at the Craig Hallum Alpha Select Conference taking place the next day November 16 also in New York.

We hope to see some of you at these conferences. In addition, we will be hosting an Analyst Day event in conjunction with our Digital Plus AI Day in Chicago on December 15.

This is a great event for current or prospective analysts or investors to attend as we will have presentations from senior managements including our new Head of Sales as well as the Customer Roundtable.

We look forward to seeing some of your at these events and then updating you on our continued progress as we report on fiscal 2018 second quarter results.

This concludes our prepared remarks and will now open the call for questions, operator?.

Thank you. [Operator instructions] And we'll take our first question from Jeff Van Rhee with Craig-Hallum. Please go ahead..

Hey guys, this is Austin on for Jeff.

Just a question around the pipeline, can you talk to me about what's changed over the last 90 to 180 days, maybe through the Cisco channel and maybe through the direct channel and just what's changed there?.

So, for us, the pipeline is we have been looking at all three sources, which is historically, we've been looking at it more as separate sources of business as we had set it up about two years ago. One was the direct channel. The other was direct sales. The other was channel and the third was existing accounts.

And that is something that Todd has now as I mentioned, he is looking to change that where we want to do more collaborative selling.

So, we're going to be driving these opportunities let's say if it's an existing account, which is going through channel, you'll have enterprise sales and channel partners as well as the customer success team, all working these opportunities to maximize them.

So as a result, what we're seeing is in the last month or so, that we've been changing that behavior.

We are seeing more existing accounts that we have, we're developing opportunities in which is very, very good for us and then on the channel side, we are rolling out as we've talked in the past to our updated, the embedded OEM in the fiscal product and that's something that we have been driving through the go-to-market and so we're seeing more interest in the cloud-based version of our solution in complementary integration to the embedded OEM.

So those are two interesting areas where we're seeing more demand..

Okay. Okay.

And can you give any accrued sense of the growth in the pipeline?.

That's not something that we have been talking about. So, no, I wouldn't be able to do that..

Okay. And I guess I have another question around just the typical duration of contracts.

Have you seen any kind of change in the duration of contracts specific to new contracts or renewals over the last six to 12 months or so?.

So, what we've seen is that of a standard three-year contract is really where we've settled in. I think that's both for new as well as renewals. I know this is something that we've made a concerted effort to move towards. So that's definitely the direction that it's going..

Okay. Great. Thank you..

And it appears, we have no further questions at this time. Ladies and gentlemen, this does conclude today's call and we thank you for your participation. You may now disconnect..

Thank you..