Good day, and welcome to the eGain Fiscal 2021 Third Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I would 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 third quarter fiscal 2021 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 in the company's reports filed with Securities and Exchange Commission.

eGain is making these statements as of today, May 11, 2021, 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 discuss certain non-GAAP financial measures, such as non-GAAP operating income.

The tables included with the earnings press release include a reconciliation of the historical non-GAAP financial measures to most directly comparable GAAP financial measures. Our earnings press release can be found on the News Release link on the Investor Relations page at eGain's website at egain.com.

And a phone replay of this conference call will be available for one week. 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 pleased with our performance in the third quarter. Both our top and bottom-line results exceeded our guidance, and we're ahead of Street consensus. Our SaaS revenues grew 14% year-over-year and 19% year-to-date. Gross margins improved by 5 percentage points over the prior year quarter.

We were GAAP profitable with net income of $1.3 million, and our cash flow year-to-date is ahead of our expectations. Turning to business progress in the quarter. We continued to build on our sales and marketing investment. Let me share some metrics. Our brand awareness is up significantly.

Website traffic for the period Jan 1 through April 30, this year, was up 144% over the same year-ago period. This awareness increase is driving more interest and opportunities. Our marketing generated leads in fiscal third quarter were up 49% year-over-year.

And as a result, at the end of Q3, our total number of opportunities were also up 70% compared to a year ago. As I noted before, our number-one focus this year from a sales perspective is adding new SaaS logos. And we are doing well on that front. New SaaS wins continue to be up more than 100% year-over-year, both in the third quarter and year-to-date.

Specifically, in the first nine months of fiscal 2021, that is the first three quarters of fiscal 2021, we have added 37 new SaaS customers compared to 11 during the same period last year. Both the total value of our new logo pipeline and the total number of new logo opportunities in the pipeline are up over 90%.

During the quarter, we won some nice new SaaS levers. Let me share some examples. First is a Fortune 500 provider of cybersecurity software. Another one is a big utility out on the West Coast. The third one is a large health care provider on the East Coast. And the last one I'll mention here is a telco based in EMEA.

We also saw healthy expansion bookings with clients during the quarter. Some notable expansions include a large telco where we continue to roll out our solution across multiple business units. Another financial services client, where we're expanding our platform to proactively engage members across all touch points.

The third one is a large business service provider, where our solution is being deployed across their global client base. And finally, a federal government entity in the U.S., where they're expanding the use of eGain for digital service automation.

In terms of renewals, our net retention rate in the third quarter continued to be north of 100% and up sequentially. Our continued investment in customer success has resulted in better value delivery and sustained account expansion.

So now we are at a point where our $1 million ARR plus customers, that count of $1 million ARR customers and more has grown by 63% year-over-year. This is a nice trend. We want to build on it. On the sales front, as you know, we've been ramping our investment in the past three quarters.

Our non-GAAP sales and marketing expense in Q3, as a percentage of total revenue, was at 34%, up from 27% from the same quarter a year ago. The sales rep cohort we hired in the first half of fiscal '21 continues to ramp up in the third quarter. This cohort, as I have mentioned before, is focused on new logo acquisition.

Once fully ramped, this team will increase our sales capacity by 50%. On the partner front, we are building nice momentum as well. Responding to demand from clients, we recently published our platform connector to the Adobe Experience Manager marketplace.

This connector helps businesses leverage our capabilities in concert with Adobe's website publishing tools. Our open architecture allows us to easily plug into other complementary solutions, increasing market rate and awareness. As I had mentioned last quarter, we are seeing good interest from the SI community.

One of them, a global SI, is looking to now include our platform within their reference architecture for enterprise knowledge management. We are keen to provide clients with a unified AI-powered knowledge solution overlaid on multiple CRM systems and continent repositories in any large client environment.

We are jointly pursuing a handful of opportunities with this proposition. Our Cisco partnership continues to deliver good results across the board with a combination of new expansion and renewal bookings in the quarter. And finally, our Avaya partnership is now generating new logos with bookings across enterprise and public cloud offerings.

On the product front, in March, we launched our Virtual Financial Coach, an AI-powered proactive customer engagement solution targeting financial services. We developed the solution in partnership with GreenPath, a leading provider of financial wellness solutions.

This automated coach is powered by AI and machine learning from eGain and comes prepackaged with best practice and compliant know-how from GreenPath. With this solution, our clients get incredible value, time to value as well as value because it combines technology with best practice content. This coach is configurable and turnkey.

So our clients can literally activate it on their website within two hours. In partnership with GreenPath, we have now activated over 25 credit unions in a pilot program, which runs through the end of June this year. Our joint sales pipeline for the coach is building very nicely.

Our coach is a compelling option for banks of all sizes to accelerate their financial wellness programs. We are very excited about this new solution we have come across. In conclusion, our new SaaS logo wins in the first nine months of this fiscal year are trending nicely. Our clients are actively expanding the use of the eGain platform.

Our sales and marketing investments are showing early results with Avaya now beginning to perform alongside Cisco in our contact center channel program. And our new go-to-market investments in partner build out and the virtual financial coach are both progressing well. We do expect to see their top line impact in the coming fiscal year.

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

Eric?.

Great. Thanks, Ashu, and thanks, everybody, for joining us today. As Ashu noted, we are pleased with our strong performance in the third quarter with both our top and bottom-line results exceeding our guidance and coming in ahead of Street consensus.

We continue to see positive results from our increased sales and marketing activities in the third quarter, with solid growth in our SaaS revenue, increased gross margins and significant improvement in our new SaaS logo acquisition. Now looking at our quarterly results in more detail.

For the third quarter, SaaS revenue was $16.9 million, up 14% year-over-year and accounted for 85% of total revenue. For the first nine months, SaaS revenue was $49 million, up 19% year-over-year and accounted for 84% of total revenue.

Our SaaS performance came in ahead of our expectations, driven by a combination of healthy partner contributions, in particular from Cisco and BT, as well as expansion business within our install base.

Our trailing 12-month SaaS net retention rate, which includes upsell, uplift and churn, continued to be over 100% and was up sequentially from Q2 with no unusual churn in the quarter. Our trailing 12-month SaaS expansion rates, which excludes customer churn, was over 110%, where it has been consistently over the last eight quarters.

Professional Services revenue was $1.7 million for the quarter, up 16% from the third quarter last year and accounted for 8% of total revenue. This is consistent with our expectation of PS remaining at under 10% of total revenue as our products have continued to be deployed with a quicker time to value for our customers.

Legacy revenue was $1.2 million, down 43% from a year ago, driven by the continued migration of our remaining legacy customers to SaaS and the sunsetting of our legacy non-cloud offering. At 6% of total revenue for the quarter, we are on-track to reach our target of getting legacy revenue down to a run rate of 5% by the end of this fiscal year.

Now looking at non-GAAP gross profits and gross margins. Gross profit for the third quarter was $15 million or a gross margin of 76%, up 500 basis points from 71% a year ago. Subscription gross margin was 82% for the quarter, up 400 basis points from 78% in the third quarter of last year.

We are pleased with the significant margin expansion, which has been driven by increased automation within our teams. Professional Services gross margin was 15% compared to negative 18% in the third quarter of last year. Now turning to operations.

Non-GAAP operating costs for the quarter came in at $13 million compared to $10.7 million in the year ago quarter. The increase was primarily driven by investments in sales and marketing, which increased to 34% of revenue, up from 27% in the year ago quarter. Looking at our bottom line.

Our non-GAAP operating income in the third quarter was $1.9 million or an operating margin of 10% compared to an operating margin of 4% in the year ago quarter. Despite our increase in sales and marketing spend in Q3, our improved gross margins enabled us to keep operating profits essentially flat year-over-year.

Non-GAAP net income for the third quarter was $1.6 million or $0.05 per share. This compares to non-GAAP net income of $2.4 million or $0.08 per basic share and $0.07 per diluted share in the year ago quarter.

GAAP net income for the third quarter was $1.3 million or $0.04 per share compared to GAAP net income of $1.9 million or $0.06 per share at the year ago quarter. Turning to our balance sheet and cash flows. Our balance sheet remains strong.

While we used a small amount of cash during the quarter, cash flow from operations for the first nine months is $5 million, and we ended the quarter with cash and cash equivalents of $53.4 million, up from $46.6 million in June 30, 2020. Now looking at our short-term remaining performance obligation, or RPO.

As I've mentioned in the past, due to customer concentrations, the timing of renewals can create fluctuations in this balance from quarter-to-quarter. However, with healthy renewals we experienced in the third quarter with over 30 customers renewing and no unusual churn, our short-term RPO increased 20% year-over-year to $50.2 million.

Now on to our financial outlook and guidance. Before getting into the actual guidance, there are a few items I want to highlight. With our focus on migrating our remaining legacy customers to SaaS, we expect a further sequential decline in our legacy revenue to approximately $1 million for Q4.

And with the positive results for our investment in sales and marketing to-date, we continue to invest in sales and marketing. And as a percentage of total revenue, we're expected to increase to approximately 37% of revenue in the fourth quarter.

And finally, we estimate stock-based compensation expense of approximately $500,000, depreciation and amortization of approximately $100,000 and our weighted average shares outstanding of approximately 32.8 million.

So with that said, for the fiscal 2021 full year ending June 30, 2021, we expect SaaS revenue of between $66 million to $66.4 million, which would represent growth between 16% and 17% year-over-year; and total revenue of $77.3 million to $77.9 million, which would represent growth between 6% and 7% year-over-year.

GAAP net income is expected to be in the range of $4.4 million to $5.3 million or $0.13 to $0.16 per share, and non-GAAP net income is expected to be in the range of $6.2 million to $7.1 million or $0.19 to $0.22 per share.

Although we are not initiating guidance for FY '22 or beyond at this time, as we move into the final stage of our SaaS model transition, I would like to provide an update on our target model for SaaS and total revenue growth rates.

Now our legacy business is nearing 5% of total revenue, we expect the gap in growth rates between SaaS and total revenue to narrow.

So within the next one-to-two-year time frame, we expect our year-over-year growth rates for SaaS revenue to move back into the 20% plus range and for our total revenue growth rates to move up into the mid-teen percentage range.

Now looking out a little further into the three- to five-year time range, we expect the SaaS and total revenue growth rates to converge as SaaS becomes likely to be north of 90% of our total revenue. And that would then result in a target year-over-year growth rates for both SaaS and total revenue to move into the mid-20% range.

So in summary, we are pleased with our progress this quarter. We continue to invest to grow faster by ramping our sales and marketing to extend our reach into our 175 SaaS accounts with customer success investments and to acquire new logos, both direct and through an expanding partner ecosystem.

We're also focused on expanding our market opportunity by driving knowledge of standardization across the enterprise and creating virtual solutions to target mid-market customers starting with our virtual financial coach.

We believe we have several growth engines, and we look forward to updating you on our progress with each of them in the coming quarters. Lastly, looking at the Investor Relations calendar, eGain will be participating in three upcoming virtual investor conferences.

Tomorrow, May 12, we will be participating in the Oppenheimer Virtual Emerging Growth Conference. Next week, we'll be participating at the Needham & Company Software Conference on May 18. And we'll be participating in the Craig-Hallum Virtual Institutional Investor Conference taking place June 2.

We hope to see some of you virtually at these conferences. This concludes our prepared remarks. Operator, we will now open the call for questions..

[Operator Instructions] We'll take our first question from Mark Schappel with Benchmark..

Eric, thanks for putting out the longer-term targets. They were helpful.

When do you foresee SaaS revenue growth kind of getting back to the mid-20% range? Is that going to be an exercise that takes place next year or is that probably toward the end of the year - the end of the fiscal year or the beginning of the following year?.

Mark, yes, I think as we've talked about sort of in this range, in the target model we're setting, the three-to-five-year horizon is what we're describing. Obviously, we'd like to get there sooner, but that's the target that we're setting to get back into the mid-20% range.

I think into the low 20s up to the 20%, that will - we expect that to come sooner. But once to that mid-20% range, it will be further out..

Okay. Great.

And then as far as SaaS revenue growth, was - or is next quarter, fiscal Q4, is that expected to be the kind of low watermark as far as growth for SaaS revenue?.

So I think we will have another quarter. If you recall, we've got a large customer churn that impacted us. So we would start to see that impacted the Q1 results. So it will be another quarter before we sort of get through that sort of reduction impact that we're managing through at this stage..

Okay. Great. And then on the margin front, is it fair to - I know you didn't give targets or guidance for fiscal '22 and beyond on margins.

But is it fair to assume, at least, for the next year or so that the plan is to just kind of basically run the business to cash flow breakeven or slightly positive and just plow any kind of upside back into sales and marketing?.

That's correct. I think one item that we've been pleasantly surprised with is the improvements in our gross margins. So that's obviously had a positive contribution at our adjusted EBITDA levels, which was ahead of where we had initially planned to be. So I think we are continuing to look for ways to improve those gross margins.

So obviously, those benefits will help us. But you're correct, I think in the current environment, continuing to plow the money back into sales and marketing to accelerate that top line growth will - certainly continues to be our area of focus..

Our next question comes from Ryan MacDonald with Needham & Company..

Congrats on a nice quarter here.

Ashu, as we look out to fiscal '22 or start to think about that, how should we think about this return to high teens to 20% SaaS revenue growth? Do you feel more confident in the opportunity with continued new logo adoption or is it - you think it would be driven more by expansion opportunity?.

Ryan, it's going to be a mix. But I think that bulk of the increased ARR bookings will tend to come from existing account expansion, but the new logos are vital because we know and see that these new logos once they come in and get into sort of the settle into our environment then the scaling effect is very nice. So to me, we need to do both.

And as the number of new logos continues to move along at a nice space, that bodes well for our ability to expand in those accounts in '22 as well..

Excellent. And then my follow-up question is on the interesting pilot with the 25 credit unions.

Can you talk about what the potential expansion or upside opportunities you're - if you're able to sort of prove out the proof-of-concept that within the pilot?.

Yes. So it's something which we are working through right now. But our expectation is that a percentage of these credit unions will become our customers. And the entry point is going to be the virtual financial coach. And at the same time, there is the opportunity to go into these organizations with our broader digital engagement capability.

And we have seen that this segment of the market, sort of the midsize - small to midsized financial services marketplace, the level of penetration of digital engagement capability is quite low. It's like under 50%. So I think there is an opportunity for us to use this as a beachhead and then expand behind that..

We'll take our next question from Richard Baldry with ROTH Capital Partners..

Could you maybe dig a little deeper into the sales hiring side and whether how well you feel the first cohort is going, how large you think the hiring will be for cohort behind it? And if there's any learning process that's brought that makes it easier to replicate sort of on a go-forward basis as you're scaling up again?.

Yes. So the current ramp-up process is going well. What we recognize is that the sales cycles are still where they are. So since these new sales reps are engaging on new opportunities, new logos, which is where we want them to focus, then their success is going to take a little time, given the sales cycle. But so far, we're seeing them doing a good job.

We have implemented a regionalized pod model. So these new hires are all paired up with experienced managers. And so we feel that the - this cohort is going to become productive in this - in the coming fiscal year - in the first half of the coming fiscal year. And so that's, to me, along the lines of what we expected.

And our current thinking is that sometime this summer, we're going to launch the next cohort and that will be the scale-up from where we are today..

So when you look at sort of the longer-term growth goals that you've illustrated now for us, should we sort of expect the cadence of like one of these cohorts adding early each year? Or is this sort of - because you've added a lot of firepower recently, will it sort of scale down a little bit, but lay on top sort of smaller cohorts year after year after this point?.

I think at this point, we are small enough that we'll probably increase by the similar scale in the next round. But as we grow, we'll see how that number starts to trend. But for the next group that we bring on board will be about the same size as this one..

Okay.

And then on the legacy side, because that is getting to be so small now, is there a thought process about when you'd put sort of a drop-dead horizon to - for customers to either migrate or cancel support for the service to, sort of, cut any associated costs and be a pure play from that point forward?.

Yes, that's the question we continue to wrestle with. We still have some very nice logos in that legacy pool. So what we have done is we have made it clear that the support is starting to become only on maintenance mode, no enhancements. That's been true for some time.

And frankly, I would say, 90% of those remaining logos now are in discussions with us to move. So we are pretty confident that in the coming fiscal year, which is '22, by the end of it, we will be at a point where we can either pull the plug or provide a firm deadline to pull the plug..

Congrats on the new log momentum..

[Operator Instructions] We'll take our next question from Jeff Van Rhee with Craig-Hallum Capital Group..

Ashu, in terms of the flow of these new - of the new logos as both you're signing them and they're flowing through the pipeline, can you talk about what is the sort of the hook, if you will, that is getting them the most - highest priority app or use case that's really drawing their interest? And then secondly, just as it relates to pipeline, maybe a little deeper dive also into the pipeline.

I know you're making that push in the mid-market.

Can you expand just a little bit more in terms of - is most of that momentum in the pipeline, enterprise versus mid-market? And any other delineation you can make there?.

Sure. So in terms of the leading apps, I would say, it's twofold. One is digital messaging-based apps around - combined with virtual assistance and automation. That's one bucket. And the second is knowledge and contact centers. Those are the two leading points that we see, new logos gravitating towards.

And in terms of split between enterprise and mid-market, most of the investment that we have made on the sales side to-date has been on the enterprise side. Mid-market, while it is there, it hasn't - we haven't grown that team significantly yet, because we feel that there's still a lot of opportunity for us to chase in the enterprise.

And so in the mid-market, our thinking is we're going to use the kind of launch that we have done with the virtual financial coach to create a big, sort of, impact on the mid-market to be able to get lots and lots of these logos as opposed to try to go at it one at a time, which is a typical mid-market cadence.

So our pipeline growth is heavily skewed toward the enterprise at this time..

Yes. Fair enough. And last for me then.

Obviously, Cisco has been a key partner for quite a while, have bought some solutions themselves and to the extent that you've seen any changes in behavior? Have they held in there as a percent of revenue? Have you seen any negative impacts of some of the technologies that they acquired where it may be displacing? Or just how is that playing out as you're getting a little more time behind you here to see what it means, if anything, to you?.

So we continue to see good demand from the Cisco partner ecosystem, including from Cisco and Cisco Partners. Having said that, yes, they have acquired technologies, which can do some of what we do, particularly around SMS and messaging. So our approach here is the market is growing very, very fast, and we need to get just our fair share and more here.

And so we continue to see more opportunity in the Cisco ecosystem, not less. But clearly, there is some encroaching propositions, which will come from Cisco as their core product.

We feel very confident that given the quality of solution we have, our integration into the Cisco platform at least on the enterprise side - on the cloud, we haven't yet announced anything - that we continue to have a long runway here in terms of opportunities, and that's what we are prosecuting..

[Operator Instructions] We'll take our next question from Brett Knoblauch with Berenberg Capital Markets..

I think last quarter, you guys said you added 20 new SaaS logos, and year-to-date were up to 37. And I'm guessing there was some in Q1.

So I guess, why the sequential decline when it seems like everything is full ahead of steam on the sales and marketing front and investments there?.

I'm not sure -.

So I think those might have been - yes, I think so were year-to-date numbers. So maybe that was just - that was -.

Okay. No, that definitely helps.

And then just on the virtual coach with GreenPath; how is that potential solution going to be monetized? Is it any different than your traditional solutions or is it more usage based? Any insights there?.

Yes. So we are - that's a good question. We are working through the different pricing models. We have a couple of them out there, and we are working with these pilot clients.

Our sense is that we will gravitate more toward a size of the member base and associating our solution with that, because that also encourages more usage and more marketing of the solution. So that - we see that as a good kind of logo acquisition pricing strategy, but we haven't locked that yet. So that's kind of still in the works..

[Operator Instructions] At this time, I'm showing no further questions in queue. I'll turn it back to eGain management for closing remarks..

Great. Well, thanks again, everybody, for listening to the call. I look forward to providing you updates with our fiscal year-end and, again, in a number of these virtual investor conferences that are upcoming. Thank you..

Thanks..

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