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

Mark Schappel - Benchmark Rich Baldry - ROTH Capital Partners Jeff Van Rhee - Craig-Hallum.

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

Thank you, operator and good afternoon everyone. Welcome to eGain's Fiscal 2018 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 convey 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 and 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, May 7th, 2018, and assumes no obligation to publicly update or revise any forward-looking information in this conference call. In addition to GAAP results, we will 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 on the Investor Relations page at 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 directly comparable GAAP financial measures.

In addition, a replay of this conference call will also be available in 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. Hello, everyone. We have now been operating for four quarters as a SaaS business. Our team has done a good job, and as a result, we are seeing the right kind of momentum based on customer satisfaction, partner leverage, and platform innovation. In the fiscal third quarter, our SaaS revenue was up 16% sequentially and 74% year-over-year.

Our recording revenue grew by 30% year-over-year. And with growing revenue, our focus on operating efficiencies improved bottom-line performance, which was at about 8% on a non-GAAP basis, our operating margin for the third quarter.

Finally, our cash flow for the first nine months was roughly at about 18% cash flow from operations as a margin of revenue and that's well ahead of our previously stated expectations of being cash flow positive for the fiscal year. So, that's good. Turning to business in the quarter. We acquired some nice new logos.

The first one I want to mention is a large telco in the U.S. They will be using our connected analytics capability to manage and optimize their nationwide contact center operations. Another good win that I want to mention is a European branded manufacturing business that selected eGain for AI+Knowledge after a successful Try & Buy.

Now, not coincidentally, both these logos came to us through partners. As we mentioned before, we are increasingly investing more in partners. And so I want to mention that in April, which is the current quarter, we now launched a new developer portal which is available at https://developer.egain.com.

This is part of our eGain EcoNet, the partner management program that we have. And this includes specific and detailed and systematic training online and in person, partner sandboxes for partners to build their own capabilities on top of our API, and a 24/7 helpdesk for implementation support, technical certification and best practice enablement.

There's a comprehensive program that we have now launched in April and our partners are responding very positively. About a little over 80 technical professionals from 30 partners globally have now been -- become part of this first cohort that we kicked off with a webinar in April. Looking at customer satisfaction, we continue to focus on two things.

One, to ensure that our customers getting full value from the investment; and two, that we help our on-premise customers, of which we still have quite a few, based on historic customers, that we help them move quickly and safely across to the eGain cloud.

So, for example, last quarter, one of our top ARR customers successfully moved from an on-premise deployment to the eGain cloud in the U.K. This is a government client and they required rigorous security certification and stringent SLAs. So, working with our partner, in this case, KCOM, we delivered this critical project on time and with quality.

Similarly -- or stepping back, the upcoming GDPR compliance deadline that most of you probably know is going to be later this month. That has spurred many on-premise clients to accelerate their move to be in cloud so they can benefit from our GDPR assurance program available only in the eGain cloud.

So, as we connect more proactively with our customers as part of the customer success program, we see a large opportunity to deliver value at scale to most of our clients. This does require some incremental initial investment on our part, mostly with digital transformation consultants and program managers to get ball rolling.

What they would do and they are doing in some cases now, is systematically guide the clients and help them govern the program for running and changing their customer engagement capability. This is a big win for our clients and for us and it's very exciting and very rewarding.

And we believe that this is an opportunity for us to not just retain these clients, but to make them much more successful and expand our business with them. So, we are stepping up our investment in this area in a calibrated way, of course. So, that's on the customer satisfaction front.

And as a result, our customer retention rates are at a level that we feel comfortable with and good about. And so that's an important thing for us that we continue to track. On the sales front, as we look to build on the momentum, I want to mention a few things around the go-to-market progress and plan.

First, just to repeat, our installed base is a big opportunity for us and we continue to focus on that. The second, which is around expanding our channel distribution to increase market reach. As you all know, our partnership with Cisco, which is strategic for us, we continue to invest in that for growing success.

At the same time, we are adding additional routes to market, mostly though integration with open APIs in the eGain platform, and that we are doing with other complementary technology platforms. So, we noted Avaya on our last call, there's a new partner for us.

Now we have moved to the next stage with them, where we are executing co-marketing and field enablement activities with them jointly.

So, for example, as the AI knowledge partner for Avaya, we just finished a multicity roadshow with them in the U.S., where Avaya was introducing themselves along with their partners in the ecosystem to their distribution and delivery partners.

And now in EMEA, we will be participating, again, alongside of Avaya at their Avaya Experience event in Manchester, U.K., later this week. So, that's moving along and we look forward to reporting more progress as we build more momentum on the go-to-market side there.

The third leg for us on the go-to-market side is optimizing our enterprise sales model to take advantage of the partner leverage and focus on larger opportunities where we can help partners sell our proposition.

Now this, as I mentioned earlier, our EcoNet program, which we launched -- or relaunched in April, will systematically help us upskill and assist our partners so that they will then deepen their investment in the eGain platform.

And related very closely and tied extremely closely to do that is this new model that Todd has put in place, Todd Woodstra, our Head of Global Sales, which is a model that brings together our enterprise sales team with a partner overlay.

And this is something that Todd has been successfully, as we have mentioned before, in his previous life at Nuance. And now he's working with the whole of eGain and all his peers, he's situationally developing and refining that model now.

So, this is very exciting for us because we believe that moving forward, this is the right path for us to scale our new logo acquisition. So, as we make progress on this track, we will continue to share the progress and we look forward to growing our new enterprise logo engine through this model. Looking at other business highlights for the quarter.

In February, we announced the availability of our eGain U.K. cloud. This now increases our presence geographically in the eGain cloud across four countries; U.S., Ireland, Germany, and The U.K.

Thanks to our new cloud architecture that we implemented over the last couple of years, or essentially re-architected our cloud completely with that new version, we can now launch new in-country presence of our eGain Cloud in less than three months in new geographies, based on customer and partner demand.

And as you all know, there is a lot of interest and requirement nowadays around sovereign data residency in different markets. So, this has now become a sought-after capability that we bring as eGain Cloud for partners and prospects. We've also positioned our marketing efforts ever so slightly to align more closely with our partners.

For instance, we cosponsored last quarter at Digital and AI Summit with Elisa, which is a partner of ours of the Nordics. We were also invited to present our innovation and success at the University of Wisconsin E-Business Consortium, where we were focused on and talking about AI for customer service.

And recently, we were recognized for AI+Knowledge innovation by KMWorld as one of the companies that matter most in knowledge management.

In fact, interest in AI+Knowledge is at an all-time high, I believe, among enterprises now, especially those who are -- and that includes most companies, who are looking to change the trajectory of their operational performance in customer service. And in fact, nowadays in sales as well.

Those not as big, but we are seeing that extension beyond customer service. More and more businesses are realizing that their strategic intent, however impressive, gets lost in translation without effective process guidance and best practice propagation, which we enable with our AI+Knowledge technology.

So we are seeing more interest from existing clients to deploy Knowledge+AI across their business, not just for customer service because that works well. What works well in customer service and contact centers works quite well across the entire business.

In fact, we have a financial services client in North America who has deployed eGain Knowledge+AI across their branch network after the initial success in contact centers. And they have reported good improvement in operational metrics as a result.

This expertise and proof-at-scale that we bring in the AI+Knowledge area is our unique value in the larger proposition that we have, comprising Digital, AI+Knowledge, and Analytics. And now moving forward, we plan to train partners on this secret sauce, if you will, to deliver transformational value to clients.

Before I hand over to Eric, I want to talk about our upcoming marketing event in Europe, which is our second-biggest marketing event of the year, and this is our eGain Digital+AI Day in London next Monday, May 14th. This is a big event for us, as most of you know. Innovation leaders from -- this time, from British Telecom and car2go.

car2go is the e-business venture of Daimler for cars for hire, as you probably are aware of. Both these customers will share their transformation journey made easy with eGain. We'll also have eGain experts and industry analysts exchanging insights and best practices.

And finally, we will announce new capabilities in our platform, building on what we announced in Chicago late last year around Machine Learning and messaging. So, lots of excitement that we plan to share at the European event in London on May 14th. If any of you are interested, please let us know, and we would love to extend an invite you.

With that said, I'll ask Eric Smit, our Chief Financial Officer, to add more color around the financial operations.

Eric?.

SaaS revenue was up 74% year-over-year, recurring revenue was up 30% year-over-year, and non-GAAP operating income of $1.3 million, or an operating margin of 8%, was up from a non-GAAP operating loss of $1.2 million a year ago. Looking at the financial results in more detail.

For Q3, total revenue, excluding legacy license was $15.6 million, up 23% year-over-year. For the nine months period, total revenue, excluding legacy license was $45.3 million, up 15% from the same period a year ago. Our recurring revenue for Q3 was $13.2 million, up 30% from the year ago quarter.

And for the nine months, recurring revenue was $37.4 million, up 17% from the same period a year ago. For recurring -- for Q3, recurring revenue accounted for 84% of total revenue, up from 73% in the year ago quarter. Breaking out the revenue components in Q3, SaaS revenue was $8.9 million, up 74% from the year ago quarter and up 16% sequentially.

Part of the strong sequential growth was driven by approximately $400,000 on volume billings in Q3, the bulk from one customer that had exceeded their annual volume commitments in the first year of a three-year agreement. The volumes for the second year were reset in April, so we do not expect overages for Q4.

However, at the current customer usage levels, we would expect to see similar overages in Q3 of FY 2019. Legacy license revenue was $151,000, down from $1.2 million a year ago and professional service revenue was $2.4 million compared to $2.6 million in the year ago quarter.

For the nine months, SaaS revenue was $23.4 million or 36% year-over-year, legacy license revenue was $403,000, down 90% year-over-year, and professional services revenue was $7.9 million, up 7% from a year ago. Now looking at our non-GAAP gross profits and gross margins.

Gross profit for the second -- for the third quarter was $10.4 million or a gross margin of 66%. This compares to the gross profit of $8.3 million or a gross margin of 60% a year ago. If you look at the break out of gross margin by revenue type in Q3, our recurring revenue gross margin improved to 76%, up from 70% in the year ago quarter.

Professional services gross margin improved to 13%, up from 4% a year ago. For the nine months, gross profit was $29.7 million or a gross margin of 65% compared to gross profit of $28.1 million or gross margin of 65% a year ago. Recurring revenue gross margin for the nine months was 75% compared to 73% in the same period a year ago.

And professional services gross margin was 16% for the nine months, up from 8% a year ago. Now turning to operations, non-GAAP operating cost for the quarter came in at $9.2 million, a 3% decrease from the year ago quarter. For the nine months, non-GAAP operating costs were $27.1 million, an 8% decrease from a year ago.

Non-GAAP operating income in the third quarter improved to $1.3 million, up from a non-GAAP operating loss of $1.2 million a year ago. And for nine months, non-GAAP operating income improved to $2.7 million from a non-GAAP operating loss of $1.2 million in the same period a year ago.

Looking at net income, non-GAAP net income for the third quarter was $713,000 or $0.03 per share on a basic -- basis and $0.02 per share on a diluted basis compared to non-GAAP net loss of $1.9 million or $0.07 per share on a basic and diluted basis in the year ago quarter.

GAAP net loss for the third quarter was $99,000 or $0.00 per share compared to GAAP net loss of $2.5 million or $0.09 in the year ago quarter. For the nine months, non-GAAP net income improved to $1.4 million or $0.05 per share from a non-GAAP net loss of $3.8 million or $0.14 in the year ago period.

For the nine months, GAAP net loss improved $1.5 million or $0.05 per share from a GAAP net loss of $6 million or $0.22 in the year ago period. Now, turning to our balance sheet and cash flows, total cash and cash equivalents as of March 31st, 2018 was $10.9 million compared to $10.6 million as of June 30th, 2017.

Cash flow used in operations was $196,000 in the third quarter compared to cash flow from operations of $2.8 million in the same quarter a year ago. The use in cash this quarter was due to working capital timing differences and as Ashu indicated, we are still comfortably on track to be cash flow positive for fiscal 2018.

For the nine-month period, cash flow from operations was $8.3 million, up from $1.5 million in the same period a year ago. Total net accounts receivable was $6.7 million at March 31st, 2018 compared to $7.2 million at June 30th, 2017. And our DSO has improved to 38 days for Q3 compared to 50 days in the third quarter of last year.

Total deferred revenue was $71.1 million as of March 31st, 2018, up 32% from $53.5 million as of March 31st, 2017.

Deferred revenue includes both deferred revenue on the balance sheet of $29.6 million and unbilled deferred revenue that remains off balance sheet of $41.5 million, collectively representing contractual commitments that have not yet been recognized as revenue.

Total debt as of March 31st, 2018, was $7.2 million, down 63% from $19.4 million as of March 31st, 2017. Now, turning to our guidance for fiscal 2018.

Given the strength of our year-to-date performance, we now expect to exceed the high end of the range of our previously provided fiscal 2018 financial guidance for both SaaS revenue annual growth of between 15% and 25% and for total revenue annual growth, excluding the legacy perpetual license revenue of between 5% and 10%.

And again, we've excluded the legacy license from this calculation as we expect it to be less than 1% of total revenue in fiscal 2018, reflecting the business model transition. Before we wrap-up the prepared remarks, I did want to note a few points relating to our costs and expenses for Q4.

We expect sales and marketing expenses to increase in Q4 by approximately $500,000 due to events-related activities, the most significant being the European Digital+AI customer event we are holding in London next week.

And then in addition, overall personnel costs are expected to increase by approximately $800,000 a quarter due to company-wide annual compensation adjustments that became effective in April.

In addition, we expect to see an increase in G&A expenses due to year end work related to socks as well as the new revenue recognition 606 work that is currently underway and this will certainly into Q1 of fiscal 2019.

And finally, to follow on the points raised by Ashu, as we see the traction in the business, we are -- we will be looking to make increased investments around customer sets and partner enablement. But again, these increases will more than likely start to show in fiscal 2019.

So, in closing, certainly, we are very pleased with our performance year-to-date. With one year completed under our new SaaS revenue model, we are executing well and see continued positive momentum.

And before I conclude, I'd like to note on the Investor Relations front, that eGain will be participating at the 15th Annual Craig-Hallum Institutional Investor Conference taking place on May 30th in Minneapolis.

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 fourth quarter and year end results. This includes our prepared remarks and I will now open the call for questions.

Operator?.

Thank you. [Operator Instructions] And we'll take our first question from Mark Schappel with Benchmark. Please go ahead..

Hi, nice job in the quarter and thank you for taking my question. Ashu, in your prepared remarks and also in the past, you've noted that GDPR was a driver for your business. I was wondering if you could just provide additional details on how exactly GDPR is a growth driver for you..

Sure. So, this happens to be, Mark, relevant because, as you know, you still have a significant number of our customers who are on-premise. And those who are on-premise are on a version, typically, which is one or two versions behind our latest version, which is in the cloud.

So, what we had announced over six months, maybe even eight months ago, to our customers was that we will provide guaranteed GDPR compliance around all the interaction. Whatever interaction, data gets generated between customers and the business, that's what is subject to GDPR, as you know.

So, that part, we said that if you come into our cloud, we will ensure that the new version of the software will allow you to do the three things that GDPR requires you to do. And that is the driver for moving some customer over to the eGain cloud, which then gives us some incremental revenue, as you know, when they move to the cloud..

Great. Thank you. And then an additional question.

Could you just provide an example or two of how your customers are actually using your AI capabilities in the call center?.

Sure. So, the primary way that the AI capability is used is in two forms. One is for agents/advisers who are on the phone or on any channel, now it could be chat or it could be messaging or could be e-mail, when they are responding to customers, they are using our AI-based guided help, what we call guided help, to ask questions.

And based on the customers' answers, then they get guided to the next set of things they want to be able to -- next best action or next best step. And through an interactive series of these steps and actions, eventually get to a resolution or recommendation. So, that's the primary use case. This is the eGain AI tool that enables that.

And then the flip side of it is enabling digital self-service for customers to self-serve themselves using the same capability, perhaps with a reduced level of sophistication and context..

Okay, great. And then one question for Eric. Eric, in your prepared remarks, you mentioned $400,000 of volume billings in Q3. I was wondering if you could run through that one more time..

Sure. So, I think in this particular instance, we have customer that committed to a minimum level of messages that, for a particular year. And once they exceeded that minimum usage, then that triggered additional billing for this additional usage.

And so as I've mentioned, this is a multiyear contract and they have now started the second year of that contract.

And therefore, again, there's just standard levels of billing take will place until they -- again, as I indicated, likely towards the end of the period, based upon their current usage, that there would be an element that there would be a sort of a pickup from the sort of the standard level that we're getting from them on a monthly and quarterly basis..

Thank you..

And we'll take our next question from Richard Baldry with ROTH Capital. Please go ahead..

Thanks. So, I'm curious, going back to the overage question.

Do you allow -- or are there times when customers renegotiates sort of mid-contract to a larger and maybe extended the terms out, so it's a win for everybody? Or is it a pretty standard play on the contract terms until it runs out?.

It's a bit of both, as you can imagine. If someone is willing to commit to a much higher level of volume in the middle of the contract, I mean, we think that it's better to bank it than to bet on the up, then we will do it.

But what we see mostly is that customers will live with that overage and then renegotiate on the renewal and sign up for a higher level..

Okay. And then the sequential dollar growth on the SaaS side was one of your best ever, and I know they're still the upside for the $400,000 in the quarter. But when we looked back to last year, was it the Q4 quarter sequential growth is actually your all-time high.

Are there similar sort of upsides were built into that a year ago? How should we think about the sequential comparison this year versus last year? Thanks..

Sure. So, I think that just to recap, if you look at the type of businesses that we sell to, there is -- a lot of it is a function of when the new customers end up going live and what the system really states. And so there's that element of timing.

This quarter, in addition to the volume overages, we also benefited from the pickup in the one large customer migration that we had discussed in the U.K. And so I think at this point, it's more a function of the timing of when we do these deals and when that translates to revenue as opposed to their being sort of a clear cut seasonality.

So, I wouldn't lead into anything to say that we would see similar sequential improvements just because it happened last year..

Great. Thank you..

And we'll take our last question from Jeff Van Rhee with Craig-Hallum. Please go ahead..

Great. Thanks guys. Congrats on the quarter. So, a couple for me.

I guess as you're pushing into this migration, for a first year customer that was an existing maintenance-paying customer that moves to the cloud, what's the impact, the net impact on the revenue line? How should we think about each of these migrations impacting in year one?.

So, Jeff, so I think that, for us, again, obviously, this does not -- this doesn't happen every instance. But for the most part, we see a 2:1 uplift. So, if a customer has been paying us $100 in maintenance and support, as they go forward, the new cloud contract would be paying us about $200. Now obviously, the maintenance goes away.

So, you see a net pickup of $100. .

Okay.

And then if you looked at the base now, where are you in migrating the installed base? What percent of customers, I don't know how you best look at it, percent of seats, have moved to the cloud? And how do you think about a reasonable benchmark to that migration over the next, say, two, three years?.

So, Jeff, this is Ashu here. So, I mean, you -- obviously, you know the numbers in terms of dollars, that's pretty obvious because we break it down. So, that is known. That number is coming down, as you can see, the quarterly support revenue number is coming down.

My sense is that in three years, we will pretty much complete the migration or if the migration hasn't happened, then it's probably termination..

And you had referenced the churn. And obviously, this is a big shift that you're trying to make as fluid as you can for your customers, but it's also an opportunity for them to go out and shop and make other decisions.

When you go through this, how are you benchmarking what percent of the base that you expect will be here in -- when you reach that end of the line? Or asked differently, you said you're comfortable with churn rates now.

Can you just give a little more quantification there?.

Yes. So, that is -- what we see with customers is that we pretty much know once a customer is getting value from our software, then given that we are -- as you know, the offer that we make to the customer includes a zero cost for them, a one-time zero cost for migrating the on-premise to eGain Cloud. We take on that investment.

So, the cost of replacing us is still non-trivial for the customer. Now, if the customer is not happy, then we are subject to the problem anyway. So, I don't -- I mean, what I'm seeing now is that the process of trying to bring people over to the cloud is not necessarily a big instigator of an RFP process.

If the RFP process is happening, it is happening anyway. .

Okay. All right. And then just, I guess, two questions related to pipeline. First, I guess, overall size, scope, breadth, depth to the pipeline. I know you're focused on migrating customers and also equipping and enabling this much broader partner ecosystem.

But just can you talk about the breadth and depth and visibility into the pipeline? And alongside that, how that translates for 2019? And realize you don't have the guide out there. But can you give some semblance of where you see that recurring or SaaS next year or the total revenue numbers? Just a little more color along those lines..

So, I'll give you qualitative comments because I don't think we have thought through and are not necessarily sharing that quantitative elements. But what I will say is that the -- we are seeing more and more partner-sourced opportunities that our enterprise sales guys are working.

And so that is creating more qualified opportunities early in the funnel. That's the change that I'm noticing. Because when we go direct -- we still go direct, obviously. But when we go direct, the time it takes to qualify something, to become a deal, is significant, just like any other direct channel -- sorry, direct engagement.

But now that we -- with Todd's focus, we are getting more qualified opportunities in the pipeline through partners. So, that's the change that I'm noticing, which is quite encouraging from my standpoint.

So, the second thing is that in terms of, I think that in this next 12 months, my feeling is that a larger percentage of our new bookings are going to come from existing customer expansions than they did in the last rounds. Because with all the investment that we have made on the customer side, I think that, that's another qualitative shift I see.

So, those are the two changes that I would comment on..

Okay, great. Thanks. Congrats..

And that concludes our question-and-answer session for today. At this time, I would like to turn the conference call back over to management for any additional or closing comments..

I think that's it. Thanks, again, everybody. I look forward to providing you the updates when we release our end of year results. And again, if anybody is going to be in London next week, I'm happy to have you attend the event, just reach out to me. Thank you..

And that includes today's conference call. We thank you all for your participation. And you may now disconnect..