Good day and welcome to the eGain Fiscal 2022 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, MKR Group. Please go ahead..

Thank you, operator, and good afternoon, everyone. Welcome to eGain's third 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, May 5, 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.

The 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. And now with that said I'd like to turn the call over to eGain's CEO, Ashu Roy..

Thank you, Jim, and hello everyone. We executed well to deliver another quarter of record revenue in the third quarter. Our total revenue was $23.9 million, up 21% year-over-year and up 4% sequentially from our record revenue in Q2. Our revenue was ahead of our guidance and consensus, and our quarterly SaaS revenue grew 23% year-over-year.

Finally, we were cash flow positive ending the quarter with more than $70 million in cash. So that was nice. Let me share some notable new SaaS wins for the quarter. We have some good ones; a leading crypto exchange selected our Knowledge Hub to deliver customer service across the globe in compliance with country-specific regulations.

Another one, a Fortune 500 investment management firm, selected us to replace the legacy knowledge solution. Another one, a global vehicle leading business, it's a multibillion-dollar business selected eGain and Knowledge again to improve agent experience. Another one, this one a state agency in the U.S.

responsible for workforce development selected us to deliver better citizen service. And then one more I want to bring out, which is marked a new logo for us but moved from our on-premise solution to the latest and greatest in the eGain cloud, but this is a Top 5 U.S. insurance company, where we have been serving them in the on-premise world.

As you know, we have a few customers left in that mode, and this one now has decided to move to the eGain cloud. So that was good for us. Overall, our demand is still good in the enterprise, particularly in sectors like financial services, insurance, health care and government. On the demand side, our sales team has plans, continues to grow.

We have now hired two cohorts this fiscal year, one in the first quarter and one in Q3. The first cohort is now shaping up. We believe we will start winning new logos early in the coming fiscal year.

With – the second thing, which is interesting on the demand side, is with our FedRAMP certification; we are now seeing an increasing interest in the government sector, both federal and state, both direct as well as through partners. So I know that, that was a big investment for us.

And we are one of the very few providers with a combination of knowledge and digital capabilities that is FedRAMP certified. So this is an area that we believe will work out well for us. Another area which is going as planned is the well expanded contact center ecosystem partnerships with all the connectors that we have.

As you all may recall we talked about the connector we added last quarter for Five9. So we are now connected for our Knowledge solution. We're connected pretty much to all the significant enterprise contact center providers. And with that expansion, we are now seeing more activity in that CCaaS market.

The way it is, is that the more and more of these contact center RFPs seem to require not just digital channels alongside voice, but also agents-facing knowledge. And so that's an interesting one for us in terms of demand growth.

And then the final one I want to bring out, which is relatively new, but it's kind of interesting and exciting we're building couple of new partnerships with global system integrators. These are focused around common enterprise clients and some new opportunity. And it is early days, but the potential is high and the fit is good.

So we are excited, we are investing. This is something that – is another iron in the fire for us as we drive our growth. On the product front, in April, we released the first version of our eGain marketplace for partners to certify and publish apps on the eGain platform.

At the same time, we refreshed the eGain Developer Portal with enhanced APIs, SDKs and event models. This is a significant milestone for us because it provides us the foundation to launch new product-led growth initiatives in the medium term and in the short-term, benefit from the ecosystem awareness effects.

And I'm pleased to say that the partner interest is strong. In fact, we have several new apps that are already in the development pipeline. Also in April, we launched the eGain Knowledge Academy, a part of the eGain University, our online learning center for customers.

What's new and different about the Knowledge Academy is that using the usual sort of self-paced learning content and technique focuses on teaching knowledge management practitioners, how to solution, how to implement and how to operate on the eGain Knowledge platform. This is not about features and functionality.

It's about how to make it easy for practitioners and also partners to solution, implement and operate. As far as we know, this academy is the first of its kind in the Knowledge space. Now just to step back, we made these investments in response to what we see as a gap in the market of knowledge. Now we have shared this before with all of you.

Knowledge management as a technology is recommended by Gartner Research as the Number 1 investment area for technology in customer service in 2022.

At the same time, we feel that the corresponding rate of knowledge technology adoption is still limited by the lack of what we believe is, lack of whole product capability around knowledge management beyond the functionality.

So now with our triad of this Knowledge Academy, the new partner marketplace and the enhanced developer portal, we believe that we are now going to go beyond just functionality, which we do feel we have a strong advantage in.

But to go to the next level of offering the old product capability to help clients easily select, implement and adopt Knowledge platforms, of course, focusing on the eGain platform. So this is a big shift for us as for ecosystem enablement, big step-up. In conclusion, we are pleased with our overall execution over the last couple of quarters.

And despite the macro headwinds, which we are all very familiar with, as far as we can see demand for technology, for effective desktop tools, for customer service and contact center agents still seems to be strong. And so our knowledge power portfolio benefit from that.

Moving forward, we are going to continue to invest in brand awareness and sales expansion, as we have said before, underpinned by the platform build-out, which we just talked about around the marketplace and the academy and the developer portal, which will lead to ecosystem expansion, we believe that this is going to help us accelerate our top line growth.

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 everyone for joining us today. As Ashu mentioned, we delivered record total revenue in the quarter of $23.9 million, up 21% year-over-year and up 4% sequentially and ahead of our guidance and consensus estimates. This is our third consecutive quarter of record quarterly revenue.

For the first nine months, total revenue was $68.4 million, up 18% year-over-year. SaaS revenue for Q3 was $20.7 million, up 23% year-over-year and up 1% sequentially. Legacy revenue in Q3 was $1 million, down 13% year-over-year, but up sequentially.

The sequential increase was due to a catch-up renewal of approximately $200,000 from the legacy customer. We are in the process of moving this customer to SaaS, which requires them to be current on support before proceeding. We see this as an outlier.

And given our recent progress on moving other customers to SaaS, our expectation is for the legacy revenue to decline below 3% of total revenue in Q4. Looking at non-GAAP gross profits and gross margins. Gross profit for the quarter was $18.2 million, up 21% year-over-year for a gross margin of 76%.

The slight sequential decline reflects revenue mix in Q3, including a healthy sequential increase in professional services. As we move to more knowledge and AI business, we are seeing more consultative PS work, and our increased investments in ramping up our PS organization contributed to the sequential margin decline.

PS was still only 9% of total Q3 revenue, and we remain comfortable with the medium and long- term target ranges that we set. Now turning to operations. Non-GAAP operating costs for the quarter came in at $15.7 million compared to $13 million in the year ago quarter.

The increase was primarily driven by investments in sales and marketing, which increased 20% year-over-year. Looking at our bottom line, non-GAAP operating income in the quarter was $2.5 million or an operating margin of 11%, unchanged from the year ago quarter.

Non-GAAP net income for the quarter was $2.4 million or $0.08 per share on a basic basis and $0.07 per share on a diluted basis. This compares to non-GAAP net income of $1.6 million or $0.05 per share in the year-ago quarter. Turning to our balance sheet and cash flows. During the quarter, we generated cash flow from operations of $1.2 million.

And for the nine months for the fiscal year, cash flow from operations is $5.8 million or 9% operating cash flow margin. Our balance sheet remains strong, and we ended the third quarter with total cash and cash equivalents of $70.5 million, up 32% from a year ago. turning to our customer metrics.

Our strong bookings in the quarter reflected the healthy mix of new and customer wins and expansion within existing customers. This is highlighted by the improvement in several of our customer metrics for the quarter. Our LTM dollar-based SaaS net retention rates increased to 109% from 105% a year ago.

Our SaaS ARR, excluding OEM business, increased 24% year-over-year. The number of 1 million ARR customers increased 31% year-over-year, and our total RPO increased 35% year-over-year to $84.2 million. Now on to our quarterly guidance. Before sharing our updated guidance, I'd like to highlight a few items. First, if the current strength of the U.S.

dollar to the pound and euro continues, this will impact our expectations for Q4. Therefore, for comparable purposes, we are also providing revenue estimates on a constant currency basis to provide better visibility into the underlying business trends.

As I mentioned earlier, there was a $200,000 increase in our legacy revenue in Q3 that we do not expect to repeat in Q4. And as I stated, we expect legacy revenue in Q4 to drop below 3% of total revenue. We are also updating our bottom-line guidance to reflect our continued investments in sales and marketing to drive growth. Now on to the guidance.

For Q4, we expect total revenue of between $23.1 million to $23.5 million, representing growth of 14% to 16% year-over-year. Adjusted for constant currency, we expect Q4 total revenue of between $23.6 million to $24 million, representing growth of 17% to 19%.

Looking at total revenue for FY 2022 if you add the midpoint of our currency adjusted Q4 revenue through the total revenue through Q3, we get to $92.2 million which is ahead of the high end of our previous guidance for the year.

Turning to the bottom line for Q4, we expect GAAP net loss of $3.1 million to $3.7 million or a loss of $0.10 to $0.12 per share, which includes stock-based compensation expense of approximately $3 million and depreciation and amortization of approximately $120,000.

Non-GAAP net loss we expect to be breakeven to a loss of $700,000 or zero cents to a negative $0.02 per share. Weighted average shares outstanding are expected to be approximately 31.7 million for the fourth quarter of fiscal 2022.

In summary, we are executing well and saw continued positive momentum in Q3 with the third consecutive quarter of record total revenue and double-digit growth. In closing, just one update. On the Investor Relations calendar, we will be participating in three investor conferences in June.

We'll be meeting with investors virtually at the Annual Craig-Hallum Institutional Investor Conference on June 1. And the following day, we will be presenting and meeting with investor's in-person at the Jefferies Software Conference taking place in San Francisco on June 2.

We will also be participating in the Loop Capital Markets Investor Conference in June. We'll provide more details as we get closer to these dates and hope to see some of you at these conferences. This concludes our prepared remarks. Operator, we will now open the call for questions..

Thank you. [Operator Instructions] We will go to our first question from Richard Baldry from ROTH Capital. Please go ahead..

Thanks. Could you maybe drill into the sales cohort experience you've had so far sort of where you think your first hiring cohort is in terms of building pipelines, maybe any early conversions? And then can you talk about how you feel that hiring cohort pattern might repeat itself or not repeat itself looking out to fiscal 2023? Thanks..

Sure. So as I mentioned, Rich, the two cohorts, right? One in Q1, one in Q3. The Q1 one – a couple of them have already got some wins going, small wins, but they've got some wins going. So we know that the primary sort of the ramping process and the on-boarding and pipeline building process has worked reasonably.

With – and as I mentioned in the prepared remarks, I feel like the Q1 cohort, which will be 12 months in roughly at the end of Q1 of next fiscal that we should be seeing production from them early fiscal 2023, right? So that's good. And then with the Q3 cohort, that's still early. They've been in for an average of two to three months.

So I think we now have the process down. Now it's a question of getting the right kind of people, which we have also defined in the second cohort we went for different profile than the first one, which I think will bear well for us. So yes, I feel good about what we are doing in terms of operational refinement and measurement and optimizing that..

And then if I look at the professional services side, the costs have been sort of leading up ahead of the revenues, which have now started to grow pretty quick.

So how do we – should we view that as a leading indicator for demand that you're seeing out there? And then maybe can you talk about how you're tying that increased professional services sort of resource base to winning new customers and the types of abilities you bring to those new prospects with that greater resource in-house? Thanks..

Right. So I'll make three points to that. First is the significant step-up cost that we have in the services team. There's sort of a minimum efficient scale thing that we have to get to, which was important for us, so we could then build it scalably from their answers of building some infrastructure around teams and organizations overhead, et cetera.

So that is one element. The other two elements. The second one is, we are seeing more and more, especially as Eric mentioned, the knowledge in AI project, that investment, both in the implementation service as well as in the managed service, really goes a long way in driving adoption and stickiness.

So in some cases, we are investing ahead of the curve of the increased adoption. So that part is definitely showing a little bit in our cost structure.

And the third piece, which I think is equally good for us in a way, that the services partners, who we are starting to enable, there is a little bit of overhead for our current services team to help them get on-boarded and inject them going in terms of certain projects that we are working with them on.

So that early enablement is also an investment that we are happy to make.

Thanks. And maybe the last one, just from a very general perspective.

How many people are looking at these solutions, particularly as you sort Knowledge tied to bots as adding sort of features that you couldn't have done before versus enabling them to lower costs by deflecting higher costs for live person – live human being sort of operator interactions? But the reason I'm asking is, if we were to head into a tighter economic macro backdrop, how much do you think you'd be able to push through that selling sort of a lower cost replacement solution to higher cost sort of human-intensive solutions? Thanks..

Yes. That makes a very good observation, and one that we think about.

But I don't have a very good answer for it except to say that what we are seeing right now is the pressure on agent, investing in agents experience is fairly high, not just because there is a cost argument in terms of lower cost of service, but also there is availability of appropriate workforce in the agent population.

So that attrition is creating a lot of havoc. And so people are investing in tools, which are reducing the need to go train people up again and again and take a lot of time doing that. So I think that's one element that is relevant in this conversation as well alongside the self-service versus assisted service one, which is a reasonable argument.

And as you know, our solution has both self-service and assisted service components. But the dollar – generally speaking, the dollar realization on the self-service side typically is not at the same level as number of users in a contact center dollar realization. That's my general assessment for most businesses..

Alright. Congrats on a great quarter..

Thank you..

Thank you. We'll go to our next question now from Jeff Van Rhee from Craig-Hallum. Please go ahead..

Greetings. A number of from me. I think maybe, guys, maybe touch on the pipeline and the breadth and depth of the pipeline. I mean, you've added a lot of resources and particularly got to be driving a lot of legion at the front end of that. So I don't know, give a little color on what's changing in the pipeline.

And then specifically, if you could quantify the magnitude of the growth in the pipeline maybe year-over-year?.

Yes. So I'll tell you one metric that we track pretty closely, which is kind of in the middle of the pipeline, not just at the front end. Over the last three months, we have been doing this a couple of days ago. So I remember it. The number of RFPs that we have responded to is about double of what we responded to for the same three months last year.

That's not front of the pipeline. That's not the end of the pipeline, but that gives you a feel for the level of increase that we are seeing in our pipeline..

Yes.

And what do you make of that in terms of doubling? Is that – how much of that is just your better coverage, getting yourself involved in things more often versus an inflection in the market to knowledge management, understanding you got to support agents and all the other digital channels?.

There is a – was – so for an example, we have seen the state of government – are effective, right? So that one I will give it to the fact that we have gotten the effect on our FedRAMP number certification.

But other than that, I think the fact that we are in more places now through our partners and our direct marketing, I would say, it's probably the bulk of that increase is my sense..

That's helpful. It is – obviously, with your fiscal year, we're looking at the end of the year here. So you'd be looking forward to formal guidance for FY 2023 ended June. But in advance of that, I mean, it looks like you're lining up for around 17% year-over-year growth.

I mean, can you give us some guardrails for 2023? Do you think we'd see similar growth, accelerated growth and even maybe some directional commentary on margins, just even some preliminary thoughts to help us frame our forward models?.

Sure. So I think that as we've updated deck, we'll be looking at our sort of medium-term models, right, moving that growth rate up into the 20% – low 20% range with that ultimate goal of getting closer to 30% in the out years. We've seen no things that would sort of pull us back from continuing to execute to that plan.

So that's sort of where we're all directionally, where we'll be. So continuing to work on, but obviously, we'll have more details when we finish up the year..

Okay. And then one last, if I could. There are a number of things. Obviously, you didn't mention Avaya, Cisco, Amazon Connect. You've got a number of partners. You also launched a boat load of connectors, Genesis, Five9s, et cetera.

And you also referenced a little bit of a teaser on some global SIs that you're trying to ramp up, sort through that 80/20, what in their matters? Like what's really materially different than what you had maybe been seeing previously that could move the needle?.

So I think the cloud contact center connectors that we have built right, historic Cisco, Avaya was more of the models, whereas in the last nine months, all the connectors we've built have all been in the cloud model and focused more on the Knowledge side, right? Whereas the earlier ones, as you know, we were doing all of the solution suite.

So it's the Knowledge-specific one where we are seeing more replicability and more activity. That's one comment. The GSI one is not really leading to a big pipeline change right away, but there are some early conversations.

But I brought it up only because I'm hopeful that as we start making progress and that we'll be able to report some of that in the coming quarters..

Yes. Okay. Yes, real nice progress here guys. Thanks for the updates and for taking the questions..

Thank you. I show we have no further questions at this time. I would now like to turn back to the management for closing remarks..

Okay. Well, thanks everybody for listening today. We look forward to giving you the updates as we finish up our fiscal year-end. Thank you..

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