Good day. And welcome to the eGain's Fiscal 2020 Second Quarter Financial Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Jim Byers of MKR Investor Relations. Please go ahead..

Thank you, operator, and good afternoon, everyone. Welcome to eGain's second quarter fiscal 2020 financial results conference call. On today's call 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, February 6, 2020, 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.

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 are quite pleased with our financial results for the second quarter, both on the top-line and the bottom-line, we exceeded our guidance and we're head of three consensus and we saw solid growth in SaaS revenue both sequentially and year-over-year.

We also continue to rapidly march toward a SaaS-only business model, in fact that plus professional services revenue, which is essentially our go forward business represents 87% of our total revenue in Q2. This is up from 77% of total revenue in the same quarter last year, it's a good progress.

And our SaaS plus professional services revenue grew 16% this quarter, year-over-year. As we drive our legacy customers actively to adopt our SaaS solution even at the risk of attrition sometimes, we have talked about this for a few quarters now.

Going forward, we believe this is the relevant top-line number, which is SaaS plus professional services regimen, the relevant top-line number for our business. So we focused on that from a growth and value standpoint.

Looking at business in the quarter, our customer health remains strong, we booked good business in the quarter as well across new logos and existing customers. One of our exciting new logos last quarter was a very large retailer where we partnered with Cisco. Turning to the market, we see a couple of trends in terms of vertical and geography.

The positive financial services continue to be our number one vertical as always and they're growing the fastest. Especially in the U.S., financial services clients are investing heavily in customer engagement and intelligence, self service. On the negative, we see Europe slowing down in terms of technology investments.

Given this trend, we anticipate increased attrition risk in our European customer base. Accordingly, we are investing more in the financial services vertical and more so in the U.S. than in Europe.

Our sales and marketing investment, as you may have see stands at 26% of revenue in Q2 with continued hiring and increased marketing, we expect it to move closer to 30% in Q3 and then move up into the low 30% range in Q4. As we have mentioned before, our sales and marketing investment falls in three buckets.

First, customer success, which includes customer success teams partnering closely with our expanding professional services team to deliver continuous value to our SaaS customers.

Second, demand generation, which includes more marketing, most people in programs as well as expanded partners, recruiting, enablement and training and the third, sales capacity expansion, both inside and [indiscernible]. So, we are attracting nicely to the growth plan in terms of increased investment in sales and marketing across the street.

The next topic I wanted to share an update on our progress on go-to-market around our new sales advisor solution. As you all know, we launched the sales advisor solution to very good reception last October in Chicago.

Since then, market feedback has been very encouraging and broad-based across mega banks, regional banks, credit unions, mortgage funds, insurance companies and fintechs, so very broad-based. In fact, our team led by Evan Siegel has conducted over 25 demos to interested prospects in the last three months, including the holidays.

Solution is also attracting good conversations and interest with vertically focused teams in both large and midsize and consulting organizations. These are potential partners for us.

They are interested in our solution because they are looking to provide interesting approaches to [C-suite] [ph] times who they are advisor on how to move the growth needle. It's an interesting approach for us to be relevant in these [C-suite] [ph] conversations working with some of the partners.

What we are hearing consistently is that our sales advisor solution is addressing three outstanding strategic pain points. Number one, sales effectiveness.

how do you drive it up? Second, client adherence, how we ensured it better ? And in an auditable, provable way, and third operationalizing the what is now almost a universal corporate mission in fintech and financial services companies improving customer financial health.

So these three pain points are strategic they seem to be getting broad-based and we seem to be addressing them in a way that is quite compelling and differentiated compared to what is available out there? That's what we hear. So we have now landed 200 customers both in the SMB area because their decision-making is abstract as you know.

Interestingly, both of those we are in direct relationship and conversation with the CEO of the two sides. They are the sponsors off our engagement. Now our team is actively deploying the solution.

Overall, sales focused customer engagement, which is what sales advisor is, proving to be a natural extension of our current business, which is centered around customer service. We are super excited about the potential. Third and finally, I want to share an update around the partnership with Avaya.

The day we announced that we have entered into an OEM agreement with Avaya, which will enable a buyout to offer our cloud-based digital engagement capabilities branded Avaya through Avaya workspace for elite customers. This solution is currently slated to be generally available later this quarter.

Avaya announced this capability at their customer event, Avaya Engage in Phoenix of the other suite. We have thrilled about the second one. We see this as a very nice opportunity to jointly serve Avaya clients with integrated best-in-class solutions across Western Digital.

Early interest at the field level in Avaya and their partner ecosystem is strong. We believe this partnership, just like our successful Cisco partnership over time enable us to serve many more global businesses with rich easy solutions that we are.

As market analysts and our customers tell us, our solutions are best-in-class in terms of feature, usability, scale, what we are focused on now with an example, this Avaya partnership and of course our successful Cisco partnership is increasingly to lever these cloud-based solutions to these partnerships with complimentary technology platforms and the ecosystems as well as direct to client.

So we're driving both. With that, I will ask Eric Smit, our Chief Financial Officer to add more color around financial operations.

Eric?.

Thanks, Ashu. As Ashu noted, we achieved top and bottom-line results in Q2 that exceeded our guidance and we're ahead of street consensus. Looking at the financial highlights for Q2 SaaS revenue was up 19% year-over-year and 13% sequentially.

Our non-GAAP gross margins were 72% for the quarter, a 300 basis points improvement year-over-year, we are well on pace to achieve our long-term target of 75%. Non-GAAP net income was 2.5 million or $0.08 per share and we generated $5.3 million in cash from operations during the quarter, cash flow margin of 29%.

Now looking at our quarterly results in more detail, as we have shifted to 100% SaaS business essentially all of our professional services is now for our SaaS customers, so we lead as Ashu mentioned, the combination of SaaS revenue and professional service revenue, the useful measure to value our business on a forward-looking basis.

For Q2, our SaaS and professional services revenue of $15.9 million comprised 87% of our total revenue. This leaves 13% of our total revenue in the legacy bucket something that we are constantly tracking to get down to 10% of total revenue on a quarterly basis by the end of calendar 2020.

Further, our Q2 SaaS plus professional services revenue grew at 16% year-over-year and on a year-to-date basis grew 18% year-over-year. This highlights our progress towards a long-term target model, total revenue growth of between 20% to 25% per year as we increase investment in sales and marketing in line with our plan.

Looking at the revenue components, SaaS revenue was $14 million up 19% year-over-year and accounted for 77% of our total revenue in Q2. We're up against a tough comp from Q2 last year given one-time 900,000 seasonal benefit we experienced last year. On a sequential basis, as revenue grew 13% over Q1.

And year-to-date SaaS revenue was up 24% year-over-year. As expected, the seasonal impact was down significantly when compared to a year ago. The amount of seasonal benefits we estimate to be approximately 150,000 this quarter. And looking at the sequential growth rates, the primary drivers lumped into three categories.

We saw new bookings, expansion of our installed base and the migration of a large legacy customer to SaaS. Our renewals and retentions continued to be positive in the quarter.

The trailing 12-month SaaS retention rates remain healthy with gross retention in the low 90% range and our net retention, which includes up sell, and up lift continue to be above 100%. Legacy revenue was $2.3 million down 42% from the year ago quarter driven primarily by the large customer migration.

And legacy accounted for 13% of our total revenue in the quarter and as you've noted on past calls we are driving the transition, our remaining on-premise customers to our SaaS offering and as such we expect to see a further decline in legacy revenue over the next several quarters.

Professional services revenue was 1.8 million or 10% of total revenue down 4% from $1.9 million. As we've noted before, our goal was to get a PS revenue in the high single digits as a percentage of total revenue. 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, we saw healthy improvements in our margins in Q2. Gross profit for the second quarter was $13 million or a gross margin of 72% from a gross profit of $12.3 million or a gross margin of 69% a year ago.

Those 300 basis point improvement year-over-year, overall gross margin reflects a combination of the benefits we are starting to see the scale and efficiencies around our SaaS operations and the growth are now higher margin SaaS revenue, while our lower margin PS revenue has declined.

Now turning to operations, non-GAAP operating costs for the second quarter came in at $10.5 million from $39.8 million in the year ago quarter. We continue to prudently increase our investments in sales and marketing.

And while the December quarter was quieter in terms of hiring due to the holidays and it's actually noted hiring activity has increased, now planned investments is very much underway. We expect sales and marketing as a percentage of revenue to get to close to 30% in Q3 up from 26% in Q2.

Our non-GAAP operating income in the second quarter was 2.6 million or an operating margin of 14% compared to $2.5 million or a margin of 14% in the year ago quarter. Looking at net income, non-GAAP net income for the second quarter was 2.5 million or $0.08 per share on a basic and diluted basis.

This compares to non-GAAP net income of 2.4 million or $0.09 per share on a basic and $0.08 per share on a diluted basis in the year ago quarter. GAAP net income for the second quarter was $2 million or $0.06 per share compared to GAAP net income of $2 or $0.07 per share in the ago quarter.

Turning to balance sheet and cash flows, total cash and cash equivalents as of December 31, 2019 was 14.3 million compared to 51.9 million at June 30, 2019. During the quarter we generated cash flow from operations of 5.3 million up significantly from 863,000 in Q2 last year. Our operating cash flow margin improved to 29% for the quarter.

Now turning to our financial outlook and guidance. As Ashu stated, we see a large opportunity for our best in class product offering with a healthy balance sheet.

We are well positioned to increase our investments particularly around sales and marketing to support [indiscernible] opportunities with our installed base new business through partners and ramping our inside sales. Before providing our revenue guidance, a few points to highlight.

First, we are excited about the Avaya announcement, but have not factored into our FY'20 guidance. As expected, our Q2 seasonal increase was not as great as last year, but we still saw about $150,000 of seasonality that we do not expect to reoccur in Q3. SaaS revenue plus professional services is a metric that is becoming increasingly relevant.

We believe the best measure of the overall growth rates of our core business going forward. And our total revenue will continue to be negatively impacted with our migration which is to drop legacy business below 10% before the end of calendar year 20.

And again, as Ashu mentioned in EMEA, we are seeing some softness, we expect to see a reduction in some of the accounts that were up for renewal in Q3 and this would impact SaaS revenue by approximately 300,000 in the quarter.

Year-to-date, the FX impact on our SaaS revenue is a negative 267,000 and for total revenue and negative 362,000 which we have factored into our guidance. With the U.S. dollar to British pounds exchange rate remains at the current levels, we don't anticipate a significant further impact on the revenue for the remainder of the year.

Now onto our guidance, for the fiscal year ending June 30, 2020, we are increasing the bottom end of our previously provided range for full year SaaS revenue from $53.8 million up to $54.8 million.

The new guidance range for SaaS revenue for the full 2020 is between $54.8 million to $55.4 million on a constant currency basis, which would represent growth between 22% and 24% year-over-year.

Further, we expect SaaS and professional services revenue of between 61.2 million and $62.4 million on a constant currency basis, which would represent growth of between 18% and 20% year-over-year.

We expect total revenue for the fiscal 2020 year to be at the lower end of our previously provided guidance, which was $72 million to 73.6 million on a constant currency basis, which would represent growth of 7% year-over-year.

And finally, we are raising previously provided guidance for non-GAAP net income of between breakeven to $2 million or $0.00 to $0.06 per diluted share, the new guidance for the full fiscal year for non-GAAP net income of between 3.1 million to 4.5 million or $0.10 to $0.14 per diluted share.

For the third fiscal '20, we are initiating guidance of SaaS revenue of $13.8 million to $14.1 million. SaaS and professional services revenue of $15.5 million to $15.8 million; total revenue of $17.5 million to $17.8 million and to generate non-GAAP net income of breakeven to 500,000 or $0.00 to $0.01 per diluted share.

We are now assuming a diluted share count of 32.6 million for the third fiscal quarter and for the fiscal year. Lastly, on the Investor Relations front, later this month, eGain will presenting at the JMP Securities Technology Conference taking place February 24th in San Francisco.

And then, next month we will be presenting at the fourth annual ROTH Conference in Orange County, California on March 17. We hope to see some of you there. This concludes our prepared remarks, operator, we will now open the call to questions..

Thank you. [Operator Instructions] And our first question comes from Koji Ikeda with Oppenheimer..

Hi, this is Chad Schoening on for Koji. Thanks for taking the question guys. Congrats on a good quarter. Can you give this a split, an idea of the split between new versus existing ARR signed up during the quarter? I know in the past you've mentioned customers increasingly starting small and growing.

So to that end, I'd be curious to hear kind of what products customers are most excited about in terms of up sell opportunities going forward. And then I have one more question. Thanks..

Okay. This is Ashu Roy here. So yes, I think the trend is still very much the case, which is something we are kind of accustomed to now. So the level we see now is more like in terms of dollars, we see more like two-thirds of expansion, one-third is new, but not in terms of new logos.

I mean we still acquire new logos, but they tend to build over time, which is something that has been a trend for some time now.

Does that answer your question?.

Yes. Thank you. That's great. And then, in terms of kind of what customers are most excited about, kind of that up sell motion.

If anything kind of comes to mind, that'd be great?.

Right now I would say the most -- the highest level of interest we see is an intelligent self-service around virtual systems and messaging. Those are the two areas we see a lot of interest in the market. And other than that of course the whole Omni-channel capability where you don't have these silos of capability that is always a steady increase.

But in terms of real ability to pull the trigger quickly, I would say those two that I mentioned are on top..

Great. Thank you..

Our next question comes from Mark Schappel with Benchmark..

Hi, thank you for taking my question. Ashu, I was wondering if you could just address a little bit more detail the slowing in Europe that you noted in your prepared remarks, particularly where in Europe you're noticing the slowing..

Sure. So I would say differentially, if you looked at it, mainland Europe is definitely slower than U.K., but even in U.K., we are seeing decisions are just taking longer. So, that's kind of one observation. The other is that U.S.

continues to be quite active and therefore in comparison I think it's even more the pattern, right? So those are the two comments..

Okay, great. Thank you. And then Eric, in your prepared remarks, you noted a large legacy customer migrating to SaaS.

I was wondering what the company's outlook was for additional sales migrations for the remainder of the year?.

That's actually very good. I think this for us, obviously the numbers coming down, as we've been communicating as this is a very high focus for us. And I think we're encouraged to see that most of the top accounts that we're engaged with or interested in and in different stages of that migration.

So absolutely, we'll continue -- expect to continue to see that through the remainder of the calendar year..

Okay, great. Thank you. That's good news. And then, Ashu just -- finally one last question.

I realized it's still early, but I was wondering if you could just give us an update on your recently released messaging hub and maybe any progress you're making there?.

Sure. So that's kind of been opted very well by the market. We are selling it not just as messaging but messaging as part of the overall Omni-channel. So, in fact a couple of customers we signed up recently, which I didn't mention in the mid-market, they started out with interested on messaging, but eventually ended up buying the entire suite.

So you see messaging as part of the omni-channel story, but it's a great entry point in terms of interest in demand, just like I mentioned to the prior question. Messaging and virtual assistants and conversational bots, those are the two things we are seeing a lot of interest in..

Great. Thank you. Very helpful. That's all for me..

Thank you. Our next question comes from Richard Baldry with ROTH Capital..

Thanks. I think recurring costs fell on the quarter or even with the revenues rising and that's be the second quarter in a row for that.

Is there anything unusual happening in there? How do you see that trending has the second half and maybe next year unfold?.

Good point, Rich. So consistent with what we've seen in previous years, the impact of many of our employees in California in particular reaching their social security cap provides positive benefits from a reduction in tax expenses, it may [indiscernible] expenses.

And then, that combined with people taking time off towards the end of the calendar year as well resulted in reduction. So certainly I would estimate that there was probably $600,000 to $700,000 worth of -- an effort that we received on those two components that will obviously would not repeat in Q3..

And maybe can you talk a little bit more about the Avaya OEM, sort of maybe compare and contrast that to your Cisco relationship. What type of resources you will need to allocate to that or commitments from Avaya to allocate to that. So we kind of understand what its outlook could be, maybe size what you think the market opportunity would be? Thanks..

Sure. So many questions in that. Let me see if I can pick off limited time. It goes with market opportunity, I would say that the Avaya installed base in the enterprise, as you well know is very large, probably the largest even now despite some historic attrition that they've had. So that's the first point.

Second is that the solution we announced that Avaya has announced and we are the provider in that is a cloud-based eGain capability that integrates into the enterprise solution from Avaya. So that is different from what our current OEM arrangement is with Cisco as you know.

In the Cisco partnership, OEM component of that is not from eGain is not so from the cloud, the resell components of eGain and eGain are so from the cloud. So that is an important distinction.

We think that as the market has now moved into the cloud model and adoption is good that we will comparatively speaking be able to deliver greater customer success in this arrangement just given the nature of cloud implementation and the ability to control the eventual experience for the client. So that's the second point.

The third is, the partnership, the way it stands now is unlike the Cisco partnership, which is a bundled OEM which has its own price points and attach rate unlike that this partnership, the OEM arrangement is an optional one.

In other words, the customer would buy something additional to get the digital capabilities, which will be Avaya branded and we would be the provider for that. So, those are three kind of comparison points I can bring up. In terms of our sense of the opportunity here, it's early days at Avaya, but Cisco is our number one partner, very successful.

We've been working very closely with them for a number of years and clearly we have joint customer and business success. Avaya we're just building that looks very promising but it's still early days.

So, as Eric mentioned, for fiscal '20, we are not factoring anything from that partnership, but we do think that in fiscal '21, we should see the positive impact from them. I think that's it. Thanks..

Maybe lastly the cash on the balance sheet has been growing nicely, any thoughts about the tuck-in acquisition, small buybacks, any other way to deploy that cash that's building up. Thanks..

Again, good point, Rich. It's something that we're obviously pleased with the progress and so definitely those are all options that we're considering, but nothing at this stage that we would want to highlight..

Thanks. Congrats on a good quarter..

Our next question comes from Jeff Van Rhee with Craig-Hallum Capital Group..

Hey guys, this is Rudy on for Jeff. Couple of questions for me. First Eric, I want to go back to that weakness in Europe. If I heard correctly, I think you said that it's going to be a 300,000 headwind in Q3 from customers coming up for renewal.

Is that from attrition or customers taking less product at renewal less seats? Just a bit more color there? That'd be great..

I think there's a bit of both, but I think the most part was up at renewal or reduction was the primary driver, so it was taking less as opposed to a loss..

Got it. Got it. Helpful. and then with the Avaya OEM had great color there.

Just one more thing, so your guys' solutions, their OEMs into their workspace offering and that's to target their on-prem installed base or your guys' solutions also available? I know it's early for them in the cloud, but are your guys' solutions also available for their cloud contact center seats as well or just the on-prem?.

So we have not announced anything or Avaya has not announced anything in that regard. We obviously looking at all those things as part of the partnership..

Okay. Got it. And then, lastly, just want to look at the deferred revenues on the balance sheet, obviously, we will get the RPOs in the 10-Q. As I look over the last four or five quarters, revenues going up and in sort of the divergence between the short-term RPOs and the guided revenue has gotten wider.

How should we think about how deferred revenue in the RPO should trend from here going forward?.

Yes. So, I know we've addressed this in the plots, Rudy. I think just sort of given our current business structure, unfortunately this is a metric that's since it's been adopted we haven't seen some obvious patents as it would sort of provide useful leading indicators.

And I think as I've said in the past, the main factors that impact this is because we have a relatively concentrated group of customers one or two large renewals that could be done on a multi-year or renewed on an annual basis is going to sway things. So I think it's really around the timing of when these big renewals come up.

And so from one quarter to the next, you may have fluctuations that are going on as you point out. It's really on an indication of where the revenue growth is happening. So, I think to your point these numbers really haven't moved around much.

And again, more I would say a function of the timing -- often the length of the renewals more so than anything else..

Got it. Helpful. Got it. That's it for me..

Thank you. Our next question comes from Ryan McDonald with Needham & Company..

Hey, this is Alex Narum on for Ryan.

And I was hoping to get an update on the partnership with Amazon and if you're seeing any traction on that front?.

So yes, we continue to work with Amazon.

We have been doing some joint marketing and working with their partners and that's kind of an ongoing progress, just like an Avaya case, right? When we work with Avaya for some time and then we have something to share and we shared, [indiscernible] with Amazon, we are working with them, when we have something worthwhile to share in terms of real progress and milestone, we will certainly bring it up.

As of now they are one of the top three partners we are working with. Cisco and Avaya being the other two..

Okay, great.

And then, could you give us an updates on the investment in the mid-market and how you're building out the sales organization and when we'll be able to see some of that revenue contribution from that?.

Good question. So the mid-market is already starting to contribute on the booking side.

And what we are really working now with how do we systematically scale that sales and the customer acquisition engine? My expectation as a team, our expectation is that in fiscal '21, we should be able to show real sort of attributable evidence to the kind of impact that we can have on the new logo acquisition.

I think from a total booking standpoint, they'll obviously make a difference. But the real interesting to me is going to be the increase in new local acquisition. So, yes, that's something we look forward to sharing about that..

Okay, great. Thank you..

All right, gentlemen, there are further questions in the queue at this time..

Okay. Thanks everybody..

This concludes today's conference. Thank you for your participation. You may now disconnect..