Jim Byers - IR, MKR Group Ashu Roy - CEO Eric Smit - CFO.

Mark Schappel - Benchmark Rich Baldry - ROTH Capital Partners Jeff Van Rhee - Craig-Hallum Ryan McDonald - Dougherty and Company.

Good day everyone, and welcome to today's eGain's Fiscal 2018 Second Quarter Financial Results Conference. Just a reminder, that today's call is being recorded. And 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 second 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 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, February 8, 2018, 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 Web site 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 call will also be available at the Investor Relations section of eGain's Web site. And with that said, I'd now like to turn the call over to eGain's CEO, Ashu Roy..

Thank you, Jim. Hello everyone. This is now our third quarter since the shift to a pure SaaS model. And we are starting to build a nice cadence of execution. With strong interest in our V17 product we're signing up good brands in target verticals, especially financially services.

We also see increased migration of our legacy on-premise customers to the eGain cloud. And our partner-leveraged sales model, put in place by Todd last quarter, is being operationalized well. Finally, our financial performance continues to trend the right way.

In the second quarter of our fiscal year our SaaS revenue was up 24% year-over-year, non-GAAP deferred revenue was up 47% year-over-year, cash flow from operations improved to $2.6 million from a negative $3.8 million in Q2 last year, and we ended the quarter in a net cash position of $3.5 million compared to net debt position of $11.6 million at the end of Q2 last year.

So that performance is looking good. Turning to customers, financial services and government were the top two verticals for the quarter across new logos and expansion opportunities. Some examples of new wins, we won a top-10 European bank as a client. They selected the eGain platform to embark on their digital transformation in customer engagement.

Another one was Waddell & Reed, one of the oldest asset management and financial planning firms in the U.S.. They selected eGain as their omnichannel customer service platform. We also saw an increase, as I mentioned earlier, in the momentum of cloud migration in our on-premise customer base.

One of the nice deals we closed this quarter was a seven-figure ARR deal from a government sector client. And this momentum continues to grow especially in the EMEA client base with the GDPR requirements that are coming on and will be active late May of this year.

There is a lot of interest in moving to our eGain cloud, which we have certified to be GDPR compliant. So that's another driver in the European business, at least, for our clients to move to the eGain cloud. On the sales front, we are investing more in our channel and partner program under Todd's global sales leadership.

As you all know, Cisco is a strategic partner for us. Last month we partnered with Cisco on a four-city road show, in the U.S., to educate our partners and Cisco field on our new AI-guided eGain Solve proposition that seamlessly integrates with the Cisco Compact Central Services using web services in our cloud.

This is the first of our integrations into big contact center and CRM platforms. Later this month, we will exhibit at Call Center World 2018, in Berlin, joining forcers with Cisco to showcase our solution embedded in the Cisco Desktop. We are continuing to invest more in our Cisco partnership.

Last month, Todd added a dedicated director of Cisco Partnership Program globally to his team. And we look forward to growing our strategic partnership with Cisco to greater success. A new partner for us in the contact center space is Avaya. Based on customer demand, we have now integrated eGain Solve with the Avaya Desktop and IVR platform.

Last week, we exhibited at the Avaya ENGAGE conference, in New Orleans co hosted by Avaya and the International Avaya Users Group. We are encouraged by the early interest in our solution in the Avaya customer base. So we will see how that partnership develops over time.

Continuing the theme of integrating our solution into larger ecosystems, we recently announced our integration with Salesforce CRM. This integration gives contact center agents using the Salesforce Desktop access to guided problem resolution powered by our AI solution.

Our goal is to make our solution easily available from all open CRM and contact center platforms. Turning to customer success, we had a very successful Digital+AI Day in Chicago, this December. Some of you attended that, and thanks for coming by. The highlight for the day for us was the Comcast customer presentation.

They shared their digital experience strategy and how and why they chose eGain as their platform partner for digital transformation. On the product front they offered three reasons, simple and powerful, for going with eGain.

First, they said to close an omnichannel platform; second, they said was the comprehensive set of features they were looking for; and the third, from their perspective, was an open architecture for integration. We couldn't have said it better.

Comcast now is servicing 12 million customer chats per year on the eGain platform on a 24/7 basis, handled by over 5,000 agents across multiple locations. Our solution at Comcast has replaced a point chat solution they had deployed several years ago, but was struggling to keep up with demand, and it was not an omnichannel solution.

Comcast now uses eGain AI for dynamic routing to improve agent utilization and simplify the customer experience. And they have also extensively deployed our analytics to measure and manage their digital workforce, track service levels, and compensate their providers.

It's a journey that we are very proud of getting into with Comcast and look forward to helping them in their transformation. At the Digital+AI Day, we also announced two new capabilities in our platform. First, we announced eGain ML or Machine Learning, a core capability added to our platform.

Using it we showcased our enhanced eGain Virtual Assistant which sits in front of our digital engagement platform to predict customer intent and seamlessly guide the customer through an automated service experience. All the while, the customer is never left out to dry in case they need human intervention.

We seamlessly connect the conversation to an agent when needed with full context. And we learn from the interaction for the future using Machine Learning. Second, we announced our Developer Central Portal for partners and customers to use our cloud APIs to develop new solutions, extend existing capabilities, and integrate with third-party systems.

To showcase this portal we demonstrated our integration using APIs with Facebook Messenger for digital messaging. This messaging everywhere theme was very well received. We now offer messaging connectivity through SMS and Facebook Messenger. And in future, we'll connect with other emerging business messaging platforms.

In summary, we are executing well across our business with focus and speed, and we look forward to further improving our business performance. With that, I'll ask Eric Smit, our Chief Financial Officer, to add more color.

Eric?.

Thank you, Ashu, and thanks for joining us today. As Ashu noted, we continue to execute well under our new SaaS revenue model, and are very pleased with our continued positive momentum. Looking at the financial highlights for the quarter, we delivered solid results across our three key metrics.

SaaS revenue was up 24% year-over-year, non-GAAP operating income up $843,000, was up 97% year-over-year, and cash flow from operations was $2.6 million, which brings our operating cash flow for the trailing 12 months to $15.2 million, or cash flow margin of 26%.

This improved financial performance strengthened our balance sheet, resulting in a net cash position of $3.5 million at the end of the quarter, a significant improvement from the net debt position of $11.6 million a year-ago. And our increase SaaS bookings resulted in a 47% year-over-year increase in our non-GAAP deferred revenue.

Financially, this puts us in a solid position to continue to execute to our strategic business plan. Now turning to our financial results in more detail, total revenue excluding legacy license was $15.3 million for Q2, up 13% year-over-year.

For the six months period, total revenue excluding legacy license was $29.7 million, up 11% from the same period a year-ago. Our recurring revenue was $12.6 million in Q2, up 14% from the year-ago quarter. For the first six months, recurring revenue was $24.2 million, up 11% from the same period a year-ago.

Recurring revenue accounted for 82% of total revenue in Q2, up from 73% in the year-ago quarter. Breaking out the revenue components in Q2, SaaS revenue was $7.7 million, up 24% from the year-ago quarter, and up 14% sequentially.

Legacy license revenue was 64,000, down from $1.4 million a year-ago, and professional services revenue was $2.8 million, up 7% from the year-ago quarter. For the six months, SaaS revenue was $14.4 million, up 20% year-over-year.

Legacy license revenue was 252,000, down from $3.1 million in the same period a year-ago, and professional services revenue was $5.5 million, up 14% from a year-ago. Now looking at our non-GAAP gross profits and gross margins; gross profit for the second quarter was $10 million, or a gross margin of 65%.

This compares to a gross profit of $10 million or a gross margin of 67% a year-ago. If you look at the breakout of gross margin by revenue type in Q2, our recurring revenue gross margin was 75% unchanged from the year-ago quarter. Professional services gross margin was 19%, up from 14% a year-ago.

For the six months, gross profit was $19.3 million, or a gross margin of 64%, compared to a gross profit of $19.8 million, or a gross margin of 67% a year-ago. Recurring revenue gross margin for the six months was 75% compared to 74% in the same period a year-ago.

Professional services gross margin was 17% for the six months, up from the 11% a year-ago. Now turning to operations; non-GAAP operating costs for the second quarter came in at $9.2 million, a 4% decrease from the year-ago quarter. For the six months, non-GAAP operating costs were $17.9 million, a 10% decrease from year-ago.

Non-GAAP operating income in the second quarter improved to 843,000 and 97% increase from the year-ago quarter. For the six months, non-GAAP operating income improved to $1.4 million from a non-GAAP operating loss of 21,000 in the same period a year-ago.

Looking at our interests and taxes for the second quarter; interest expense was 239,000, down from 459,000 in the year-ago quarter. And on taxes, we reported a tax expense of 123,000 for Q2, compared to 219,000 a year-ago. For the six months, interest expense was 583,000, down from 881,000 in the same period a year-ago.

And we reported a tax benefit of 38,000, compared to a tax expense at $1.1 million in the same period a year-ago. Looking at net income, non-GAAP net income for the second quarter was 451,000, or $0.02 per share, compared to a non-GAAP net loss of 322,000, or $0.01 in the year-ago quarter.

GAAP net loss for the second quarter was 788,000 or $0.03 per share, compared to GAAP net loss of $1 million or $0.04 in the year-ago quarter. The GAAP net loss for Q2 reflects the impact of a one-time pick-up of about 350,000 of stock-based compensation as a result of the re-pricing we had completed at the end of last quarter.

For the six months, non-GAAP net income improved to $706,000 or $0.03 per share compared to a non-GAAP net loss of $1.9 million or $0.07 in the year-ago period. For the six months, GAAP net loss improved to $1.4 million or $0.05 per share compared to a GAAP net loss of $3.5 million or $0.13 in the year-ago period.

Now, turning to our balance sheet and cash flows, total cash and cash equivalents as of December 31, 2017 was $10.8 million compared to $10.6 million as of June 30, 2017. We generated cash flow form operations of $2.6 million in the second quarter compared to cash flow used in operations of $3.8 million in the same quarter a year ago.

For the six months period, cash flow from operations was $8.5 million, compared to cash flow used in operations of $1.3 million in the same period a year ago. Total net accounts receivable was $6.5 million at December 31, 2017, compared to $7.2 million at June 30, 2017.

And our DSOs improved to 46 days for Q2 compared to 51 days in the second quarter of last year. Total deferred revenue was $68.4 million as of December 31, 2017, up 47% from $46.4 million as of December 31, 2016.

Deferred revenue include both deferred revenue on the balance sheet of $29.1 million and unbilled deferred revenue that remains off balance sheet of $39.3 million, collectively representing contractual commitments that have not yet been recognized as revenue.

Look at our outstanding debt, we paid down approximately $2.6 million in debt during the quarter, and total debt as of December 31, 2017 was $7.3 million, down 66% from $21.3 million as of December 31, 2016.

Now, turning to our guidance for fiscal 2018, we are reiterating our previously provided expectations for fiscal 2018 with SaaS revenue annual growth of between 15% and 25%, and total revenue annual growth excluding legacy perpetual license revenue of between 5% and 10%.

We've excluded the legacy license from this calculation as we expect it to be less than 1% of total revenue at fiscal 2018, reflecting our business model transition. Lastly, on the investor relations front, eGain will be participating at the 30th Annual ROTH Conference taking place next month in Orange County, California.

We hope to see some of you there. And we look forward to updating you on our continued progress when we report our fiscal 2018 third quarter results. This concludes our prepared remarks, and we will now open the call for questions.

Operator?.

Thank you. [Operator Instructions] And we'll go first to Mark Schappel at Benchmark..

Hi. Nice job on the quarter..

Thanks, Mark..

Thank you..

So, Ashu, let's start with you. Last quarter, I believe you mentioned that you were seeing a steady improvement in your renewal rates and your retention rates. I was wondering if it's fair to assume that those trends continue this quarter..

Yes. I mean, they are at a good level. I would say that we improved reasonably. We made good progress in six months, and now we are at a steady level, which is a good level. So that's where we are, yes..

Okay, good.

And then respect to your relatively new Avaya partnership, and granted it's early days here, but has that partnership progressed to the point where it's generating any revenue yet?.

Not yet, no. We have some opportunities, we are working with them. We have some joint customers but those did not come through the partnership, they just happen to intersect. So right now it's really about pipeline..

Okay, great. And then next question here, a quarter or two ago you brought on a new Head of Sales.

And I was just wondering if maybe you could go through in a little bit more detail some of the initiatives that he's put in place here?.

So, I would say broadly two things. One is we discussed and agreed that we were going to focus on the enterprise completely. In other words, not go too much after the smaller end of the mid market.

And that meant that we reorganize the sales team such that before Todd came onboard we had organized a model where we had a direct sales team and we had a channel sales team. And the two teams worked in parallel. But the channel folks sold through the channel and the direct guys sold without partner involvement.

What he's done is made it more of a classic enterprise model, which is the direct sales team, has been reclassified as enterprise sales. And the channel sales guys have become partner managers who are feeding opportunities into enterprise sales, and enterprise sales carries the entire numbers.

It's an overlay model now, which we felt was more appropriate for the enterprise opportunities that we were going after and what we saw was working and not working..

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

And we'll go next to Rich Baldry at ROTH Capital. Please go ahead, sir..

Thanks. If we look at your implied bookings season the revenue and delta deferred model was awfully strong in the quarter. Could you talk about how much of that was really partner-driven versus direct sale driven, and then sort of the balance across geographies, whether you felt that was concentrated in some geographies or spread around fairly evenly.

Thanks..

Okay. I'll break it up into a couple of buckets here, Rich. First of all, let me start with the renewals, because as you know, we do have some large accounts that we service. And so when those renewals come up that tends to shoot up the deferred significantly at that time. So that's one thing to keep in mind.

The second is on the expansion and new logo opportunities. I'd say it is relatively well balanced across enterprise and -- meaning new and expansion, about 50-50 for quarter roughly, although we don't disclose the numbers specifically, but that's where it roughly sits. And in terms of geography I think, again, it's fairly well balanced between U.S.

and Europe..

And in terms of the changes or any changes you might want to see under the new sales leadership, how do you feel about how that's gelling now? Do you think the pace of hiring is going to change materially? How do you feel about the tenure of the team? Any color on that would be helpful. Thanks a lot..

Sure. I think this fiscal year I expect, so the remainder, meaning in Q3 and Q4, I expect Todd to really get the operational cadence working well. Because he's made some changes there, significant changes as I mentioned.

So working that through the team, with the team, making sure everyone understands and is executing according to the new model in a collaborative sort of overlay way. That's really what he's doing a lot of. And he's starting to do some targeted hiring. And I expect that that is the model he will have for the remainder of the fiscal year.

I do think that, assuming that things do work as we believe they should, we can start to scale up in the new fiscal year, which is July onwards..

Last thing would be, as we've seen the legacy license really fall to essentially zero, you talk about sales cycles now because there's no distraction in the customers essentially thinking they can choose one versus -- you know, A versus B or one or the other.

Do you feel like sales cycles have a potential to accelerate without that distraction now? Thanks..

I am not sure. I think the sales cycles are not materially different best as I can tell. What I can say is that we are -- perhaps our win rate once we qualify things should go up. That I think was one of the bigger challenges that early on we'd get all confused, and the customer would be confused. And that part is, I think, not an issue anymore.

We are qualifying things out if there are -- in the U.S. I would say it's a very small minority of customers who are still insisting on on-prem, very small. Internationally I think it's still there, but at least we qualify them out quickly and move forward..

All right, thanks, and congrats on a good quarter..

Thank you..

And we'll move next to Jeff Van Rhee at Craig-Hallum..

Great, thanks. Nice job guys. So a couple for me, Ashu, on the pipeline, just with respect to the net new, not the migrations, but just the new customers, just give us kind of a little walkthrough of how you've seen the market progress over the last five, six quarters. I'm just curious on the flat out new deals.

I mean I know you had some distractions with prem cloud. But just walk just specifically with the focus on that net new in a little more detail, if you would..

Okay. So, I think that the way I would characterize it is that the net new adds are still about at the same rate as they were three, four quarters ago. That has not changed significantly yet. What we do see is that we are able to sell more sweet spot deals. So we're not going after the very sort of off-the-main-track opportunities.

So, the kind of quality of the new logos we are winning are much better even though the numbers may be in the same range that they were before. And that I think is very important for us because when you get a sweet spot opportunity then we do a good job of it initially, and that then builds up more business for us.

So that's the positive I see in the last four quarters..

Okay. All right, great. And then shifting gears just over to Cisco, can you also just give us a little update on how that's progressed the last three, six months. And if you're able to quantify the revenue impact or percent of bookings coming from that channel, just a little update there would be great..

So I would say that on the Cisco front, overall things are in a much better place because we are much more focused on what is the real value add that eGain is brining to the Cisco ecosystem from our resale perspective, the Solution+, which is the Cisco resale model. I think we have a much better feel for that.

And the Cisco ecosystem is much more aligned with that. That's one change for the positive. If you were to call a negative, which in don't think is negative in the long-run, but certainly could seem like a negative in the short-term is that we are guiding more and more of Cisco customers toward their Cisco-branded platform of voice, chat, and email.

Now, remember that we are also the OEM suppliers of that email and chat, but that's not eGain branded. But because that product is solid, we have rebuilt that with Cisco working over a number of quarters. So that in the short-term probably has had a negative impact on digital applications that we're selling through Cisco.

And we are keen to continue to drive that way because we think that the big prize for us together is all the knowledge, and AI, and analytics on top of Cisco rather than the digital add-ons in the Cisco ecosystem..

And from a percentage revenue standpoint it's been pretty consistent, so close to 15% or thereabouts..

Okay, consistent, got it. And then just one last for me, with respect to OpEx and headcount, just your thoughts as we're getting a little bit into '18 here. You've come a long, long way to improve the balance sheet cash flow has been strong.

As you look at the business here, how do feel about headcount? Any particular areas you see, maybe even accelerated hiring or increased staffing either based on pipeline or just delayed needs, if you will?.

I think that the investments will start to look up now, whether it happens this quarter or next, but it certainly will start to look up. So yes, I thin we are going to start to ramp investments starting with the field-facing folks, but also then looking at areas like service and support, but more on the field-facing side, yes..

Yes.

And what is -- just to follow-up, what is headcount as of this quarter and any thoughts -- or I guess as of December, and then kind of even a crude swing at what you think you'll be at end of the year?.

Do you have that data, Eric?.

Yes, I think the headcount number is close to 470..

Yes. That number is a little hard to parse because of the whole global model, but let us think about that will and maybe we can share some thoughts. Yes..

Yes, sounds good. Thanks again. Congrats..

Thank you..

And we'll go next to Ryan McDonald at Dougherty and Company..

Yes, hello. Good afternoon, Ashu and Eric. Congrats on a great quarter.

Can you to go dive a little bit deeper into some of the customer wins in the quarter, you talked about the top 10 European bank, I mean to the extent that you can, you know, what was the sort of competitive dynamics of that deal and was this something that was led or driven by the Cisco channel or was more of a direct sales opportunity?.

So, this one was a direct sales opportunity, but through a partner, but not through Cisco. However, as it turns out that bank is also a big Cisco customer, and so it's quite possible and likely that we will partner with Cisco as we expand in our footprint.

This was a case of digital group that was looking to drive new ways of customer engagement in a business unit that is expressly set-up for a new sort of direct digital banking operation. So, we were competing with all the usual cast of characters, but the big thing for us was we have the try and buy, which worked very well for us.

We can embark in early, and we shape the agenda, and so that's a nice entry. And now it's about figuring out and working through getting more of an enterprise-wide mandate..

Got it.

And in terms of this new partnership with Avaya, I guess, as we look at that partnership starting to ramp, we expect a similar type of -- or amount of investment that you've done with Cisco in sort of developing and building that relationship as well as perhaps bringing on new heads in the sales department also directly focus on Avaya?.

I would say Avaya is extremely early days right now. The only reason I mentioned it is that we have been talking about developing other partnerships that are going to increase our sort of market access, and so, we wanted to make sure that we're keeping everyone up-to-date on it, but at this point, I would say, it's very early days.

And we'll watch it closely. We are obviously investing as appropriate. But it's nowhere close to where we are with Cisco, nowhere close, but on the other hand, you can look at the fact that Avaya does have a significant install base. Coming out of the restructuring, they seem to be very agile and very focused now.

And so, we're optimistic, but it's very early days..

Got it.

And then just one final one, I guess, for Eric here; Eric, obviously with the third quarter here, I know you've obviously reiterated guidance for the full-year on the top-line, but should we be expecting any sort of impact from ASC 606 in terms of on the expense side of the business here?.

At this stage, this is something that becomes effective in the September quarter for us. So, business with the junior in, so we won't anticipate anything in Q3, because we will be adopting the modified retrospective approach to it. So, don't anticipate any changes certainly in Q3..

Got it. Thank you very much..

[Operator Instructions] And gentleman, I have no additional questions at this time. I'll turn the program back over to for any additional or concluding remarks..

Okay, well, thanks everybody. Look forward to updating you when we announce our Q3 results. Thank you..

And ladies and gentlemen, that does conclude today's conference, and again, I would like to thank everyone for joining us today..