Good day. And welcome to the eGain's Fiscal 2020 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 Investor Relations. Please go ahead, sir..

Thank you, operator, and good afternoon, everyone. Welcome to eGain's First Quarter Fiscal 2020 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 that could cause actual results to differ in material respects. Information on various factors that could affect eGain's results are detailed on the company's reports filed with the Securities and Exchange Commission.

eGain is making these statements as of today, November 6, 2019, 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 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 most recently comparable GAAP financial measures.

And lastly, 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 good afternoon, everyone. We achieved a solid performance across the board in Q1. This included top and bottom line results that exceeded our guidance, and we're ahead of Street consensus. And we also generated good cash flow from operations in the quarter. Let me share some financial highlights.

Our SaaS revenue grew 30% year-over-year. Our subscription revenue grew 13% year-over-year and comprised about 91% of our total Q1 revenue. We were GAAP profitable for the quarter with net income of $1.2 million compared to net income of $600,000 in the same quarter of last year.

And finally, we generated $2.7 million in cash from operations in the quarter. So all in all, very strong numbers and a good start to the year. Looking at the business, the last quarterly earnings call we did was just a few weeks ago.

So what I can tell you, which is all good, that we have nice bookings in the quarter with healthy mix of new customers and expansion opportunities. One of the things I want to talk about in terms of sort of market and customer feedback is the Experience 360 event that we had in Chicago, which is our customer event in North America.

We had this event on October 15 and 16, and it was very successful. Some of you attended that event as well. I would say there are three things I want to bring out from that event, and they can speak to the state of our business and where we're going. First is around customers, second is around partners and the third is around products.

So at this event, three of our clients presented their journey with eGain. It's fantastic to hear their perspectives. They were different, but there were commonalities as well.

So the three of them were Comcast, who needs little introduction; Lands' End, many of you know, an iconic apparel brand; and Northern Trust, a global wealth and asset management leader. Comcast, when they presented, they highlighted the speed and scale at which they have consumed innovation on the eGain platform.

Over the last couple of years, they have aggressively been able to shift their customer care volume from voice to digital, primarily for their Xfinity business, and that includes a lot of products.

In that business, they see a 15 points to 20 points Net Promoter Score advantage from when they compare their digital customer service and their voice-based customer service. So the same customers, when they get digital customer care, their Net Promoter Scores are about 15 points to 20 points better than voice.

And as Eric Burton, who's the VP of Comcast who presented, as he put it, if that 15 point NPS advantage is not worth getting out ahead for, I don't know what it is.

And we completely agreed, and that customer experience advantage is phenomenal, and big companies like Comcast are recognizing that they can get tremendous improvement in customer experience and customer sat just by delivering customer care digitally rather than on voice.

And that is on top of the significant cost advantages of digital over voice, which runs to about 2x improvement in a typical scenario, which is based on messaging and chat over voice. Then Lands' End talked about how they are expanding their digital customer service, and they're adding virtual assistance and messaging all on the eGain platform.

This is on top of the current capabilities that they have around knowledge and guidance and chat and email-based service from eGain. They also shared their strategy of delivering convenience and choice in an omnichannel world.

And finally, Northern Trust shared their story of a global deployment of eGain for digital customer care, and the results they saw quantitatively in better service levels, productivity and customer sat. They also outlined the intent to further expand their omnichannel service options on the eGain platform.

What we saw and what we heard, there were great customer successes and great stories, and we are very grateful to our clients for sharing those. What we saw as a common theme across these clients was, first of all, their strategic commitment to a modern, digital-first customer engagement.

And second, their focus on consuming innovation at speed and scale, and as eGain, we being the partner of choice in these cases. What we see is that our solution stands apart from the market in terms of its connected richness and ease of implementation.

And our clients experience it and our prospects learn about it when we do our risk-free trial of innovation in 30 days. That was a very nice view of what we saw customers reflecting what they felt was the value they got for their money from eGain, and the partnership that we brought to the table. Turning to partners.

At the event, all three of our contact center technology partners, Cisco, Avaya and Amazon participated, which is great. It was very heartening to see positive and enthusiastic attendee interest in their joint proposition, and our solution with them.

With increased sales investment in channel-led growth, as we have indicated to investors in the past, we are starting to see a nice pipeline growth. And we expect this trend to continue through the rest of the year.

Finally, as we announced in our press release as well, we launched some exciting new capabilities on our cloud platform as part of our Fall 2019 release. I'll run through the important ones. The first one was eGain Messaging Hub.

This enables businesses to rapidly engage with their customers across all messaging channels, including Apple Business Chat, SMS, WhatsApp, Facebook and others. Using the Hub, they can effortlessly launch new ways of connecting with their customers, either proactively outbound or interactive messaging, which is chat-based.

And all these interactions leverage our eGain AI technology and virtual assistance and lever smartphone service. There are other companies in the marketplace who offer such messaging hubs, but almost all of them that we know of are point tools, and businesses end up having to glue it altogether with their knowledge and AI assets.

Our solution comes with a capability, all these dots pre-connected, available in one place, simple, powerful. Next capability we announced, which was very exciting, was Virtual Assistant for Agents. We've been selling and marketing virtual assistants for self-service for customers.

And this is more applicable to the agents, such that the virtual assistant monitors the digital conversations on the agent desktop and then serves up best-practice guidance and knowledge when relevant.

Our clients love the idea of prompted relevant guidance so that their agents can focus on working with customers and helping them, more like a GPS, if you will.

Next announcement that we have, and we have a plethora of reasons, we're very proud of them, was a new way of looking at applying and solutioning using our technology for sales, not just for service, this we call the eGain Sales Advisor. You recall, we brought Evan Siegel, a banking industry veteran, on board earlier this year.

This was about seven months ago. His mandate was to pursue new growth initiatives, starting with our #1 vertical, which is financial services.

In six months, he successfully led a small team internally who conceived and built the eGain Sales Advisor, which helps guide and coach sales agents in an easy, best practice driven manner while ensuring compliance in the sales process. In short, makes all your sales agents as good as your best sales agent with process guidance.

The interest in this solution from the attendees of the conference was phenomenal. And now Evan and team have secured a pilot plant, so we're off to the races and the pipeline is building.

So very exciting to see us extending out our core technology and core capability to serve the sales side of the house in our business clients, not just service, which is where we are today. Moving to the sort of optimized layer of our platform, we announced two capabilities.

One was analytics for Amazon Connect, which is a - Amazon Connect is one of our key contact center partners, as we know, and that's a rich solution for omnichannel analytics on the voice side of Amazon. And finally, we announced our IVR Analytics capability.

This is a clever solution in our view because it leverages our core technology in analytics, but it addresses an unmet need in the market around one of the largest pools of customer engagement that most businesses engage into them, that is IVR, where roughly three out of every four calls into a business for customer care end up in IVR, either getting result or getting abandoned.

And most businesses that we have talked to and in the market have no idea about what goes on in those 75% of the voice calls.

Four questions people want to know, who calls them? And why do they call them? What's their experience in IVR? And when they escalate, what happens? And our solution for IVR Analytics enabled these businesses to understand that behavior and then assess the experience.

We don't know of any other product in the market, there may be some point tools, but nothing that is part of a platform like ours that addresses this important piece of the engagement puzzle.

All these innovative capabilities now with leading-edge features, all connected and available on our common platform, with the ease and richness that's unique to eGain. Moving forward, this year, we, as you have known, we are systematically ramping our sales investments.

We are up to close to about 30% of our top line now going into sales and marketing for Q1, we will shade under that, and all of it leveraged by channel. So we continue to systematically hire and on-board people for the three layers of investment that we're making.

Marketing, first, followed by channel and finally, sales heads to respond to the demand that we generate. So we are quite enthusiastic about accelerating our SaaS growth in this year. With that, I'll ask Eric Smit, our Chief Financial Officer, to add more color around financial operations.

Eric?.

Great. Thanks, Ashu. As Ashu noted, we achieved top and bottom line results that exceeded our guidance, and we're ahead of Street consensus. And we generated strong cash flow from operations in the quarter. Looking at the financial highlights for Q1, SaaS revenue was up 30% year-over-year, and 33% in constant currency.

Our non-GAAP gross margins were 70% for the quarter, an improvement both sequentially and year-over-year. Non-GAAP net income was $1.7 million or $0.06 per share on a basic and $0.05 per share on a diluted basis, up from non-GAAP net income of $1.2 million or $0.04 per share a year ago.

And we generated $2.7 million in cash from operations during the quarter, a cash flow margin of 16%. Now looking at our quarterly results in more detail. Total revenue in Q1 was $17.2 million, up 9% year-over-year, or 12% in constant currency.

Subscription revenue was $15.6 million or 13% year-over-year, 16% in constant currency, and accounted for 91% of total revenue, which is up from 87% a year ago. Looking at the revenue components. SaaS revenue was $12.4 million or 30% year-over-year, and accounted for 72% of our total revenue in Q1.

The trailing 12-month SaaS retention rates remained healthy with gross retention in the mid to low 90% range, and the net retention, including upsell and uplift, north of 100%, consistent with last quarter. Legacy revenue was $3.2 million, down 24% from the year ago quarter.

And legacy accounted for 18% of total revenue in Q1, down from 26% in the year ago quarter. As we have noted on past calls, we are driving a more accelerated transition of our on-premise customers to our cloud offering. And as such, we expect to see a faster decline in legacy revenue over the next several quarters.

We're targeting legacy revenue to decrease to less than 10% of total revenue by the end of calendar 2020. With this accelerated transition, we are seeing our legacy retention rates come down slightly to the mid-80 range - mid-80% range.

Professional services revenue was $1.6 million or 10% of total revenue, which is down 18% from $2 million, or 13% of total revenue in the year ago quarter. As we have noted before, our goal was to get our PS revenue into the low double digit or high single digit as a percentage of total revenue range.

Now that we've achieved this goal, we would expect our PS revenue to remain in this range as a percentage of total revenue going forward. Now looking at our non-GAAP gross profits and gross margins. Gross profit for the first quarter was $12 million or a gross margin of 70%, up from a gross profit of $10.6 million or a gross margin of 68% a year ago.

The year-over-year increase in the overall gross margin reflects a combination of the benefits we are seeing in the scale and efficiencies around cloud operations and the growth in our high-margin SaaS revenue, while our lower-margin PS revenue declines. Now turning to operations.

Non-GAAP operating costs for the first quarter came in at $10.4 million compared to $9.3 million in the year ago quarter, with increased investments in sales and marketing and product development as the primary drivers for this increase.

Overall, this resulted in non-GAAP operating income in the first quarter of $1.6 million with an operating margin of 9% compared to $1.4 million or a margin of 9% in the year ago quarter. Looking at net income. Non-GAAP net income for the first quarter was $1.7 million or $0.06 per share on a basic, and $0.05 per share on a diluted basis.

This compares to non-GAAP net income of $1.2 million or $0.04 per share on a basic and diluted basis in the year ago quarter. GAAP net income for the first quarter was $1.2 million or $0.04 per share, compared to GAAP net income of $604,000 or $0.02 per share in the year ago quarter. Now turning to our balance sheet and cash flows.

Total cash and cash equivalents as of September 30, 2019, was $34.4 million compared to $31.9 million at June 30, 2019. During the quarter, we generated cash flow from operations of $2.7 million compared to $3.3 million in Q1 last year. Now turning to our guidance.

For fiscal 2020 full year ending June 30, 2020, we are reiterating our previously provided guidance for SaaS revenue of $53.8 million to $55.4 million on a constant currency basis, which represents growth between 20% and 24% year-over-year.

And total revenue of $72 million to $73.6 million on a constant basis, representing growth between 7% and 10% year-over-year. We expect to generate non-GAAP net income of between breakeven to $2 million or $0.00 to $0.06 per diluted share. And we assume a diluted share count of 32.6 million for the fiscal year.

Looking at the foreign exchange impact of the pound to the dollar on our first quarter results. You can see the impact accounted for approximately $300,000 difference in our SaaS revenue and about a $400,000 difference in total revenue for Q1.

Looking ahead, given the strength in the pound to the US dollar so far this quarter, if it should remain at this level, we don't anticipate a significant FX impact on our results for the remainder of the year.

Now looking to the fiscal 2020 second quarter, we expect SaaS revenue of between $13.3 million to $13.7 million and total revenue of $17.2 million to $17.7 million. We expect to generate non-GAAP net income of $200,000 to $700,000 or $0.01 to $0.02 per diluted share.

And we have assumed a diluted share count of 32 million for the second fiscal quarter. Adding further color to our Q2 guidance, we expect to see less of a seasonal impact benefiting our SaaS revenue this Q2 than we saw last year.

This is a function of an increase in our base-level business and the way certain of our agreements have evolved, which is expected to reduce overages that boosted our Q2 results last year.

And rather than a significant spike in Q2, followed by a decline in our third and fourth quarters, we expect to see a more linear improvement in our SaaS revenue through the remainder of the year, which we view as a positive change. Lastly, on the Investor Relations front, eGain will be participating in two upcoming investor conferences next week.

We will be participating in the Craig-Hallum Annual Alpha Select Conference taking place November 12 in New York. And the following day, we will be participating in the ROTH Technology and Cleantech Conference on November 13, which is also in New York. We hope to see some of you there. This concludes our prepared remarks.

Operator, we will now open the call for questions..

[Operator Instructions] We'll go first to Ryan MacDonald with Needham..

Good evening Ashu and Eric. Thanks for taking my questions. Congrats on the strong first quarter numbers. I guess, first off, in terms of the guidance you provided, Eric, I know you made some comments about maybe some impacts sort of throughout the year, some changes here.

But I guess the guidance right now, at the high end, assume sort of a flat year-over-year, I guess, growth to maybe slightly down. Can you talk about maybe what some of the moving parts of that guidance are? And I think it also assumes in the SaaS growth guidance, a bit of a deceleration into maybe the mid-teens there.

So we'd love to hear some more color on that, if possible. Thanks..

Just to confirm, Ryan, are you referring to the Q2 numbers? Is that...?.

Yes, the Q2 numbers..

Yes.

So I think if you recall, last year, we mentioned on the call approximately a $900,000 benefit from seasonal onetime revenue that, as I had mentioned in my prepared remarks, that as certain of these contracts have evolved, we are instead looking to see more sequential improvements in the growth of the SaaS revenue as opposed to, as I've mentioned, if you look at last year, we saw a huge spike and actually then decreases in the revenue that followed.

So as I've mentioned, we've sort of maintained the guidance for the year. But instead of it being sort of more front-end loaded into Q2, we would expect to see that growth rate continue throughout the year, if that makes sense..

And then in terms of the, I guess, the planned investments, can you talk about how you're tracking to internal plan on sort of that increased level of investment on sales and marketing and R&D, and then sort of how we should expect the cadence of the additional investment to play out through the remainder of the year?.

This is Ashu here, Ryan. So yes, so we talked about increasing our sales and marketing investments to a certain level, and I think we are right around that level for Q1. I think we'll continue to see the increases that we have indicated.

Leading up, I think that we probably will exit Q4 around the 35% level, that's my sense, of sales and marketing investments as a percentage of revenue. Now that's not going to go jump up to 35% instantly, but that's the trajectory that we are on..

And I think one more point to add, Ryan, that just that there is an element of seasonality in the sales and marketing spend. So for Q2, where we've had the customer event that Ashu talked about, we certainly see to more increase sequentially from the Q1 numbers as a result of that..

Good point. And that applies to the Q4 as well because we do a significant event in London. So Q2 and Q4, you see those spikes on the marketing plan..

Thank you. And then I guess just one more for me. In terms of the migration or accelerated migration of customers to get them over to the cloud, I know you mentioned you want to have that sort of done by the end of calendar year '20.

How should we think about sort of the pace of those migrations I guess through the remainder of the fiscal year here?.

So I think, as we've said in the past, there's going to be somewhat of a step function in it, where we've looked at some of the larger remaining legacy customers, as we move them, we would see that step down. So I think, again, timing of these activities is not always that easy for us to predict.

But as opposed to it being gradual, we would probably see some fairly steep declines in one or two quarters..

Got it, thank you very much..

We might see anywhere sort of some several hundred thousand dollars decline as a meaningful customer moves..

We go next to Richard Baldry with ROTH Capital..

Sort of curious that recurring cost line fell sequentially pretty meaningfully sort of more in line with what you had mid last year.

So is there anything unusual in that? Or do you see any step function growth in that ahead? Should we look at this as a new sort of baseline?.

So I think, Rich, the - a couple of factors. One, just to reiterate the point about the sales and marketing spend was generally lighter in Q1. So we would expect to see that pick up again in Q2. And we know that there were some year-end costs around our Q4 numbers that drove those costs up higher.

So there were certain elements of it that we recorded in Q4. So I think just to clarify your final point about - is there a specific line item or just expenses in general? Can you repeat on the revenues on the - what --.

Yes, more focused on the recurring line..

So that - I think we'll obviously continue to see that sort of increase as the revenue grows up, but we don't anticipate a dramatic change in the margin profile..

Yes. I'll add a little bit, maybe just a color to that. So the recurring line is somewhat sensitive at this scale because, as you know, we use partners for infrastructure as a service to public cloud with Amazon and Azure. And we keep working with them to drive better value for us.

And so sometimes there is a little bit of a catch-up on those that happens, and I think Q4 may have some of that catch-up element as well..

And if I look back in the past two years, the pattern on deferred revenues sort of seasonally, it's been hard to discern, but it's been growing pretty significantly over the past several quarters on a sequential basis.

So how do I think about evaluating the deferred revenue growth from a seasonal perspective? Or is the fact that you're kind of exiting the legacy line going to leave that number more of a sequential grower that gives us an indication of bookings and your future growth rates?.

Yes. I think as we've said in the past, we're always a little cautious about sort of reading too much into the deferred revenue line, just given the timing of the renewals as they come in and for customers, as a multiyear renewal, that's replaced by a single-year renewal.

So at this point, I'm not sure if we can provide any further insight into it at this stage..

And then your balance sheet has been improved for a couple of quarters now. So I'm sort of curious if you can talk about whether that's had any impact on your pipeline, your ability to engage with larger customers to attract higher-end employees, change your win rates in competitive deals, sort of what your takeaway is from that after a few quarters.

Thanks..

It's a good question. It's hard to correlate that with - improved win rates right now is my assessment. Looks positive, customers like it. We hear good things from them. A couple of customers at the conference in Chicago commented about the fact that we have strong balance sheet now.

So I mean that's sort of the level at which I see it as a positive, but I couldn't put my finger on it and say that we have had this much percentage increase. That's one element. And second part around company confidence and our ability to execute through growth initiatives, that is definitely there. That has changed materially.

And some of the investments we're making on the sales and marketing side, we know that we can sustain it and we will work through the sort of the growing phase to get to a very sort of effective, scalable result at the end of it.

So I feel like the internal impact is very positive and clear to me, the external one is there, but I feel like it's not something I can quantitate..

Right. And I think the only point I would add is that certainly, prior to the improved balance sheet, I had frequent requests from salespeople to participate in due diligence called around the financial viability. And certainly, since the financing, I have not had one single call of that nature..

And last one with the - if we look at the growth in the SaaS revenue sequentially from the June quarter to September, it's almost 2x to 3x the dollar sequential growth you saw in the year prior period.

So I'm sort of curious if you can talk about, is that a material step-up to sort of your sales productivity? Is it maybe a go-live timing issue that we shouldn't think about as sort of like sort of an outlier execution given its dramatic improvement year-over-year? Thanks..

So I think largely, we should attribute it to this timing of deals earlier in the quarter. And sometimes it happens, as you know, deals slipped from prior quarters and some large ones happened earlier in the quarter. I think that's probably the most significant factor.

And bookings have been good, but not - I wouldn't say that that's the single-biggest driver..

[Operator Instructions] We'll go next to Jeff Van Rhee with Craig-Hallum Capital Group..

This is Rudy on for Jeff. A couple from me. One, I think you said last quarter, in terms of the new bookings in Q4, it was about a little over 60% from existing, a little under 40% from new. I'm curious how that was in this quarter.

And then in terms of the pipeline, just as you look over the last three months to six months, what sort of products have been driving the pipe? I know you touched a little around the Sales Advisor driving some good pipeline so far.

But if you could just touch on the products driving the pipeline?.

So sorry, Jeff. I got the first question.

Can you just repeat the second question, please?.

Secondly, on the pipeline, what products, if you had to rank order, the top couple, are driving growth in the pipeline?.

Okay. So the first one, yes, the percentage of existing versus new or new versus existing is materially similar, I would say, for the Q1 as well, probably in that low 60s for the existing expansions and the rest for new.

For the products that are driving the growth, we are seeing more and more now that the expansion sales are happening with all ours, like the suite of capabilities or bundle of solutions on the expansion side. On the new side, knowledge and AI are clearly the one - the top one, and the second one is messaging and digital.

So those are the top two entry points we are seeing in new logos..

And then on the investments in S&M, I know one is marketing, two is channel, how much direct capacity do you think you guys are going to add, say, in the next 12 months or throughout the remainder of this year?.

On the sales side, you mean?.

Yes, direct, in terms of direct sales capacity or direct sales --.

Yes. We're probably going to be adding, let's say, 30% or so of sales capacity. But the investment incrementally on the channel and marketing will be higher in percentage terms because we think that that's a bigger leverage for us..

[Operator Instructions] And at this time, I show no further questions..

Okay, thanks everybody. I appreciate you listening, and hopefully we'll get to see some of you in New York next week. Thank you..

Ladies and gentlemen, this does conclude today’s conference. We thank you for your participation. We may now disconnect..