Good day and welcome to the eGain Fiscal 2022 Second Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jim Byers and MKR Investors Relations. Please go ahead, sir..

Thank you, Operator, and good afternoon, everyone. Welcome to eGain's Second Quarter of Fiscal 2022 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 the Securities and Exchange Commission.

eGain is making these statements as of today, February 3rd 2022, 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 to tables included with the earnings press release include reconciliation of the historical non-GAAP financial measures. To the most directly comparable GAAP financial measures.

Our Earnings press release can be found by clicking the press release link on the Investor Relations page of eGain's website at www.egain.com. Along with the earnings release, we have also posted an updated investor presentation to the Investor Relations page of eGain's site.

And lastly, 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 have had a good quarter. We are actually rating our top-line growth and flatness. Our total revenue in the second quarter was $23.1 million up 20% year-over-year and up 8% sequentially. Quarterly SaaS revenue grew 26% year-over-year, and 7% sequentially.

So it's an execution cycle which we are deep into, and we are increasing our flux speed on it. Let me share some notable new logos in the quarter. A top U.S. insurance company, they selected our knowledge hub for customer service and number engagement. They plan to deploy it across tens of thousands of contact center reps and field agents.

Interestingly, this company had chosen to go with another provider, few years ago. At that time, we were the unfortunate recipients of the [Indiscernible] letter as the moving finalist. So this win is w sweet for us. 2. I want to mention is a major U.S. airline. They have selected our platform as part of their contact center modernization program.

And interestingly, we won this client in partnership with Avaya. Also, some interesting expansions in the quarter, a couple of them. A large U.S. financial services client, they're expanding the use of our conversation hub to deliver billions of proactive, personalized member notifications across all touch points.

Our unique composable architecture of the conversation hub is very attractive to clients like this. One, because they are looking to compose new experiences for customers by bringing together best-in-class capabilities within an API ecosystem. And this is something we are seeing more and more of which is quite interesting.

The second expansion one that I want to mention is the -- is a large U.S. based utility company. They are significantly expanding the use of eGain. Again, as part of a large contact center modernization program. And noteworthy here is that we are expanding this customer footprint in partnership with Cisco.

So from the ecosystem front, which is something we've been working on for a while. We're making good progress. And we -- our goal is to integrate with most of the leading contact center and CRM platforms using our open APIs. So I want to mention three new ones that are noteworthy here.

The first one is 59, we have certified our knowledge capability, which is now connected and published on the 59 CX marketplace. The next one I want to talk about is Genesys. With Genesys, our knowledge hub connector is now certified and available on their Genesys AppFoundry. And the third one I want to bring out is the service now.

Just earlier today, we announced our certified connector with ServiceNow, BuiltOn now, which is their new platform. What we see is knowledge management being a horizontal need across customer engagement.

And our goal is to make it super easy for partners and customers to use our knowledge, our platform alongside all their current CRM and contact center investments. In the enterprise market, which is where we are playing at any given time, most companies have more than once CRM and more than one contact center platform operational.

Though, our approach is simple, we are building these 35 connectors with all the leading contact center and CRM platforms.

This way, we make it really attractive for our customers to deploy our solution across all those CRM and contact center platform, even as they execute their migration and transformation plans for the underlying CRM and contact center investments.

On the customer success front, we're very pleased that our clients, BT Consumer, won the 2021 KM Reality Awards in November last year. This is a big deal for them and a huge deal for us. Interestingly, they were the sole winners of this award in 2021. If you have a moment, go checkout the article that announced that award on the CareMore website.

In fact, it's hyperlinked to our -- inside our press release that we put out for the quarterly. I think you will be impressed, all of you with the detail and the business value that they share, that they generate with the eGain knowledge hub at scale and across.

As they say, nearly 10,000 -- a little over 10,000 contact center agents handling 0.5 million inquiries every week was just over 25 million inquiries every year, it's really quite amazing the value they're getting.

In fact, the business value they have achieved that this shared and the operational streamlining that they have now been able to accomplish, it's exactly what our prospects are asking for. What everyone's looking for now is a modern knowledge hub that is conversational, that is automated, that's intelligent, and composable.

So to us that's a great story. And on the product front some exciting news for us, which I know you may have seen through press releases. We've received our FedRAMP authorization. Just the best holiday gift we could have imagined came through in late December. And congratulations to our product team.

It's been a long road, 18 months since the start of this process to achieve this authorization for our private suite. In fact, I want to particularly call out and thank the IRS leadership team, the internal revenue service leadership team, for sponsoring us in this process.

We continue to partner with them as you know, to help modernize the tax very experience with our solution. Currently, we are one of the few knowledge powered platforms in the FedRAMP authorization of approved marketplace. As best as we know, none of our knowledge competitors that we track closely are in that FedRAMP mix.

And we are now seeing in the last month, we're seeing growing inbound interest from partners who are focused on the federal and state markets, particularly federal, inviting us into opportunities where they need FedRAMP authorized capability for knowledge management, as well as digital engagement.

And while the sales cycles are understandably long in the government sector, these opportunities are quite attractive. And our solution is a good fit. So this is exciting.

In conclusion, with our continued product leadership, our expanding ecosystem capability that connectors that we're building, our FedRAMP authorization, and our scaled-up sales and marketing capability, we are looking forward to continuing this momentum in the second half of the year.

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

Thanks, Ashu and thanks everybody for joining us today. As Ashu noted, we delivered record total revenue in the quarter of $23.1 million, up 20% year-over-year, well ahead of our guidance and consensus estimates. SaaS revenue was $20.5 million, up 26% year-over-year, up 7% sequentially and accounted for 89% of total revenue.

Looking at non-GAAP gross profits and gross margins, gross profit for the quarter was $18 million or a gross margin of 78% up 200 basis points from 76% a year ago. Now, turning to operations, non-GAAP operating costs for the quarter came in at $14.8 million compared to $12.3 million in the year-ago quarter.

The increase was primarily driven by investments in sales and marketing, which increased 22% year-over-year. Looking at our bottom line, non-GAAP operating income in the quarter was 3.2 million or an operating margin of 14% up from an operating margin of 12% in the year-ago quarter.

Non-GAAP net income for the quarter was $3 million or $0.10 per share. This compares to non-GAAP net income of $2 million or $0.06 per share on a diluted basis in the year-ago quarter.

Turning to our balance sheet and cash flows, our balance sheet remains strong with cash flow from operations of $4.7 million for the first six months of the fiscal year, or 11% operating cash flow margin. We ended the Second Quarter with total cash and cash equivalents of $68.5 million up 26% from a year ago.

Now turning to our customer metrics, as Ashu mentioned, a strong booking in the quarter reflected new customer wins, as well as expansions and renewals with existing customers. This is highlighted by the improvements in several of our customer metrics for the quarter.

Our LTM dollar-based SaaS net retention rates increased to 112% up from 103% a year ago. Our LTM SaaS expansion rates increased to 119% from 115% a year ago. Our SaaS ARR excluding OEM customers, increased 25% year-over-year. Our short-term RPO increased 10% year-over-year to $58.7 million.

And our long-term RPO increased 32% year-over-year to $89.8 million. Now, onto our financial outlook and guidance. As I noted on our last call, our primary focus is on top-line growth. We have seen positive early results from our increased investments.

Based upon this success, we plan to continue investing in sales and marketing to further increase our brand awareness and penetrate and capture greater share of the massive market opportunity we see in front of us. Before sharing our updated guidance, I would like to highlight a few changes.

Based on our strong results in Q2 and positive outlook for the fiscal year, we are raising our annual revenue guidance. We are also updating our bottom-line guidance to reflect our year-to-date performance while remaining committed to make the necessary investments to drive sustainable top-line growth. Now on to the guidance.

For the third quarter of fiscal 2022, we expect total revenue of between $22.9 million to $23.5 million, which would represent growth of 16% to 19% year-over-year. Note, this guidance takes into account that this current quarter has fewer days than in Q2, which translates into approximately $400,000 less revenue.

Also note that with the start of the new calendar year, bookings tend to be more back-end loaded this quarter, and that's not expected to materially contribute to revenue in the quarter. We expect third quarter non-GAAP, net loss of breakeven to a million or 0 to a loss of $0.03 per share.

And GAAP net loss of $3 million to $4 million, or a loss of $0.10 to $0.13 per share. We estimate share base compensation expense will be approximately $3 million and depreciation and amortization expense will be approximately $120,000 for the quarter.

For the fiscal 2022, full year ending June 30th, 2022, we expect total revenue of between $90.5 million to $92 million, which would represent growth of 16% to 18% year-over-year, an increase from our previous annual revenue guidance, non-GAAP net income of $1.5 million to $3 million or $0.05 to $0.10 per share.

GAAP net loss of $9 million to $10.5 million, or a loss of $0.29 to $0.33 per share, where we estimate share-based compensation expense of approximately $12 million and depreciation and amortization expense of approximately $500,000 for the year.

So in summary, we saw continued positive momentum in Q2 with a second consecutive quarter of record total revenue reflecting double-digit growth. We continue on track with our sales and marketing investments to expand our market coverage and partner ecosystem.

Our product leadership in knowledge management and digital customer engagement continues to build momentum, generating increased interest and activity in our business pipeline. And with our recent FedRAMP authorization we are already seeing increased demand for our solutions from potential federal and large state government agency clients.

So based on this recent performance and the significant market opportunity, we are also updating our target model included in our Q2 investor presentation that can be accessed from the IR section of our website. For our interim targets, which we define as in one to two years, we are raising our annual revenue growth rate to 20% from 15%.

For our long-term targets, which we define as in 3 years to 5 years, we are raising our annual revenue growth rate to 30% from 25%. Lastly, on the Investor Relations calendar, eGain will be presenting and meeting with investors at the Annual Roth Conference taking place March 14th and 15th in Dana Point, California.

We'll provide more details as we get closer to that date and hope to see some of you there in person. This concludes our prepared remarks, Operator, we will now open the call for questions..

[Operator Instructions] We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will now take our first question from Mr. Richard Baldry from Roth Capital. Your line is open. Please go ahead..

Thanks. Can we talk about the sales productivity levels that you're seeing? What's your longer-termed ones as well as the newer cohorts? And then the progress that's being made and start building new sales cohort teams to ramp the second half or for fiscal '23? Thanks..

Sure. This is Ashu here, Rich. Yes. So our sales productivity on the core team, which has been around for a year plus, is holding steady, which is good. The new group that the first cohort that we brought in earlier this fiscal year; that's kind of ready to -- the pipeline going now.

And now the second cohort of this fiscal year, which is the hiring we're doing now, we have started back [Indiscernible] as well. So we have this cadence going now which will essentially do 2 cohorts every fiscal year for now, six months apart and training and the on-boarding part is working quite well..

And the professional services costs line went up fairly meaningfully in the quarter more so than the revenue side.

Do you feel like the revenues there are probably going to see an acceleration? Are you hiring to support that swerve or are there any one-time things we should think about in there that maybe skew that number?.

Eric, do you want to take that?.

Sure. Definitely a good point, Rich. We are increasing our investments and the business scale, that's certainly the expectation that we would see that PS line increase as well. I think for the end of the year, there were some variations driven by the holiday periods and the like that might have contribute to that number being a little higher.

But overall, I think the point that you made around increased investments to drive increasing the revenue growth is the one that we focusing on..

And then under legacy maintenance side, it came down a little bit sequentially, but at a fairly slow pace versus some of what we've seen in some prior quarters. Do you want to talk about how long it takes to phase out that? It's a stub revenue now for you.

It's fairly small, but do you think that's a year we could see a gone or do you feel like because those are customers that are still important to come on this long that that could maybe be a multiyear still to see that get transitioned into the Cloud and disappear?.

Different license -- go ahead Eric..

I think we're certainly pushing to get it done within the year. As we have mentioned in the past, what we expect to see is somewhat of a step function because the remaining balance is fairly concentrated. So when one or two of these larger accounts move as we've seen before, they might be flattening then we will see a fairly meaningful decline.

So I'd say that's sort of the Petnet we would expect to continue, but Ashu if you have any further color to that..

That is exactly right, I would venture to guess that in the next 12 months we will probably whittle it down by 80% gross and at that point, we just stop, we ignore it probably..

Lastly, can you talk a bit about seasonality, because implying the guidance as a flattish third quarter, which is at odds with what the win rates that are accelerating inside the data that we're getting, the number of heads that are ramping.

Do you feel there's -- again, any one-time thing we need to be thinking about as we look at the sequential growth patterns or just appropriate conservatism? Thanks..

I think the one item just to reiterate that I've mentioned in the remarks, Rich is that in Q2 numbers, we really benefited from closing business early in the quarter. So we certainly ended up recognizing revenue from deals closed in the quarter definitely ahead of where we had expected.

I think what we've put into the guidance and expectations for Q3, many of the enterprise customers that we're selling to have annual budget cycles that are just closing now. So the expectation that bookings that happen in Q3 really on, at this stage, we aren't modeling a significant impact from those bookings.

Whereas we saw a lot of the upside already in the Q2 numbers, so we're not seeing a significant planned sequential increase in the revenue from Q2 bookings because we recognized a fair amount of that already in Q2..

Great. Congrats on the accelerating momentum..

Thank you..

We will now take the next question from Tim Horan, from Oppenheimer. Your line is open. Please go ahead..

Thanks, guys.

Can you give a little bit more color on the dollar base net retention, that's a pretty big year-over-year improvement? Is that some less customer churn, I don't think you had much customer churn or is it mostly just from customer spending more money? And I guess, where is the potential for that to go to overtime?.

Thanks, Tim. I think both points so are correct. I think we've talked about our focus on increased investments in our customer success team and ultimately the retention of an expansion within the existing customers. I think the team is doing a good job in that area.

The good news, at least from my perspective, is that we still believe that we are quite underpenetrated, so the ability for us to continue to grow that number over time, I think is a good likelihood and certainly, as you may recall, we had some fairly significant churn reductions just over a year ago.

We obviously had contributed to that reduced number from a comparable standpoint. Since then, we are pleased to report that we haven't seen that level of significant churn through the business since then..

Can it continue to improve like we've seen, I mean, can we get up to a 120% this year or next, or to kind of drive that 30% growth, you're talking about?.

Yes. We certainly see that as the line of sight. I think the -- again the investments that we're making in expansion business, certainly an element that we would look to hopefully see this continued improvement of this metric..

Great, and then just lastly, what do you think is the bottleneck to getting better digital or interactivity for customers and customer care or better overall customer experiences, and when do those bottlenecks start to get reduced so the overall industry can have better quality of services and better revenue growth?.

You're asking a very big question here. Our view is limited, but I think a reasonable one which is not -- which is very much along the lines of what Gartner is saying about customer service. In 2022 predict, they have said explicitly that the only technology, in fact they're recommending other process and people stuff outside of apps.

The only technology they're recommending is knowledge management it sounds not really -- it doesn't sound very bizarre because what you see here is most companies in the enterprise have spent a ton of money on digital connectivity for customer service. Okay? And also the cloud move.

What they realize is that once you do that, all you do is -- instead of analogue or legacy connection, you have a digital connection. The conversation, the content that flows through the pipes are still broken.

So knowledge management is the next big thing for customer service because then you can create that modern knowledge experience, which is automated, which has the intelligence and the conversational capability which you need to drive better customer experience..

What's -- and what do you think is the bottleneck to adopting this or really seeing that better customer experience? What does the industry need to do at this point?.

But then I'm not being slipping, but essentially invest in knowledge management, which again, I'll quote Gartner paraphrase, I'm not sure if I'm quoting them. But this is from their report, says that the leaders in digital transformation are disproportionately investing higher in knowledge management right now.

So to the extent and all cause and effect, I don't know if you can, but that's kind of the indication..

Makes sense. Thank you..

Ladies and gentlemen, once again, [Operator instructions]. We will now take the next question from Jeff Winfrey, from Craig-Hallum Capital Group. Your line is open. Please go ahead..

Hey guys. This is Aaron on for Jeff. I appreciate you taking my questions. First question. I know in the past you've given some bounds around new logo capture.

Just curious if you have those metrics on what that looks like in the quarter and then kind of more broadly, how is that broken down as far as direct versus partners? Maybe some color there?.

Yeah, so Thanks for the question. We're really not sharing that as this systematic number right now because as you have seen, now we -- the enterprise focus is really where we're seeing the biggest returns right now. And so the quality of logos that we're closing is where the big advantage is for us. But not to say that we're not closing new logos.

But it's not like we're targeting at this time, at this time to go close hundreds of logos every quarter at this time. The focus is let's get quality logos which should result in again the ARR average that we are able to drive for customer and the back numbers moving up nicely. I know Eric than talked about it, but it's in our investment presentation.

So that's kind of where we are focusing and it's working well for us, I have to say. Perfect. It makes sense. And then the second part of that, as far as direct versus partner? That's a good point.

I think right now it's probably right around 50/50 on the new logos, partner sustained, and direct, and I think both of them continue to do well, so we are kind of driving both of them..

Got you. That's helpful. And then as far as what you're seeing, obviously knowledge management is the area that everything's moving to. You've alluded to that.

Just curious how you've seen use cases change there amongst your customers and then what do you think your revenue mix might look like as we move out into the future? How much would that skew towards the knowledge management versus the traditional customer care?.

Okay. Good question. I think the trend is definitely up toward for knowledge, but it's also pretty good for digital. So it's not like digital is out of fashion. It's just that, what you are seeing is the bigger opportunities are leaning more towards knowledge first. That's the trend right now..

Got it. Last one for me on the hiring front, you talked about having those kind of two cohorts per year. I think previously you talked about this year adding 50% capacity.

Is that still true and is that kind of the trend that you're thinking about going forward?.

Definitely, yes. We're going for more than that. But I think that 50% is definitely a number, a conservative number. We're going to go after it in a bigger way..

Got you. That's helpful. That's it from me. Thanks, guys..

Thank you..

Ladies and gentlemen, [Operator Instructions]. It appears there are no further questions at this time. I will like to turn the conference back to eGain management for any additional or closing remarks..

Thanks Operator, and thanks everybody for taking your time to listen to the update today, we look forward to updating you for the Q3 results and getting out on the roads -- excited to look to get starting some meetings in person in the coming Quarter. Thank you..

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