eGain Corporation

Good day and welcome to the eGain fiscal 2023 second quarter financial results call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchstone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now 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 fiscal 2023 second quarter financial results conference call. On the call today are EGAIN's Chief Executive Officer, Ashley Roy, and Chief Financial Officer, Eric Smith. 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 and 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. He again is making these statements as of today, February 14th, 2023, 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 recently comparable GAAP financial measures. Our earnings press release can be found by clicking the press releases link on the investor relations page of eGain's website at 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 hello, everyone. We delivered another quarter of record revenue. Our total revenue was $25.6 million, up 15% year over year in constant currency, and exceeded our guidance and consensus estimates. Our SAS revenue grew 18% year over year in constant currency. and we generated strong cash flow from operations in the quarter of over $7 million. Turning to business highlights, let me share some notable customer expansions in the quarter. The first was a significant expansion with a leading healthcare services provider as they continue to digitally transform their business. The second was with a global provider of specialty insurance products as they're driving more cloud adoption. The third one was with a multinational retail bank in Europe. The last one I want to mention is with a fast-growing insurance company that's technology first and has adopted eGain solutions as their customer engagement hub. Our focus on stabilizing client retention, especially in Europe, and our continued expansion with clients is showing results. Moving to an exciting product update, this past week we announced the general availability of eGain Instant Answers. First of its kind capability, Instant Answers enables knowledge users to find relevant answers and attributable responses by tapping into enterprise content repositories using generative AI technology like ChatGPT. We've been trialing instant answers since late last year, and it's been a hit with our limited release plans because the solution addresses an outstanding pain point in knowledge management. how to deliver relevant answers with minimal knowledge curation effort in the business. We are the first in the knowledge management market with such a solution. We're especially excited because we believe this approach presents breakthrough automation opportunities when combined with critical attributes our platform offers, and this is key. attributes like compliance, analytics, design experiences, and more. So bringing this new technology around generative AI and combining it smartly with all the required critical attributes for enterprise knowledge management is what we think delivers a solution that is going to be consumable, safe, and responsible. Thanks to our composable architecture, we can quickly incorporate new technologies as they become available. Given the trajectory of this disruptive technology, we are bullish about marshaling it and using it to drive user-friendly automation. Looking at the market and our overall business, market demand remains high for our knowledge-powered customer engagement offering. New inbound interest continues to be steady with more opportunities in our sweet spot of the large B2C businesses. The focus of customer experience improvement and service cost reduction. As we know, Gartner's top technology recommendation for customer service and support leaders continues to be investment in knowledge management tools. And we also know the market penetration for knowledge management tools is still low, according to Gartner's assessment, between 5% and 20% of the market. So now with our comprehensive solution, we believe we have the best solution for this market need, and we are confident that this need around knowledge management will become increasingly mission critical in the enterprises. At the same time, in the current environment, we continue to see sales cycles lengthening. Buying decisions are slowing down due to cautious spending and careful reconsideration of priorities. Given these longer sales cycles and the fact that we are focusing on enterprises, we are refining in an ongoing way our direct sales model. So we are hiring more seasoned sales professionals versus having a larger number of junior team members in sales. In parallel, we are maintaining marketing around brand leadership, highlighting customer success, and ecosystem expansion. In fact, our next scheduled customer success webinar is with one of our marquee clients, Veterans Affairs, on February the 28th. With the strength of a balance sheet, we intend to maintain a healthy level of sales and marketing investment so that we are well positioned to capture market share as business conditions improve. In summary, we delivered another quarter of record revenue with strong cash flow. We continue to see a large market opportunity for our knowledge-led offering. We continue to innovate, improve our offering with innovation-like instant answers as we lead the market in delivering solutions powered by knowledge and AI for customer engagement. New inbound interest remains steady even in this environment. And so we are continuing to build our new business pipeline. We are refining our sales model and hiring more seasoned salespeople, focusing on enablement of the team and sales productivity. And finally, with our strong balance sheet, we intend to maintain a level of sales and marketing investment that allows us to be well positioned as business conditions improve. With that, I'll ask Eric Smith, our Chief Financial Officer, to add more color around our financial operations. Eric?

Thanks, Ashu, and thanks, everyone, for joining us today. Let me share some financial highlights for the quarter before getting into our outlook and guidance for Q3 and fiscal 2023. Total revenue for Q2 was a record 25.6 million, up 11% year over year, or 15% in constant currency, and up 3% sequentially from Q1. SAS revenue was 23.4 million, up 15% year over year, or 18% in constant currency, and up 4% sequentially from Q1. Legacy revenue in Q2 was down to just 185,000, and accounted for less than 1% of total revenue in the quarter. In looking at revenue by region, North America accounted for 77% of total revenue this quarter, up from 73% in the year-ago quarter. Total revenue from North America was 19.8 million, up 18% year-over-year, where in contrast, total revenue from Europe was 5.8 million, a decrease of 8% year-over-year. Looking at non-GAAP gross profits and gross margins, gross profit for the second quarter was $19.3 million of 7% year-over-year for a gross margin of 75% compared to 78% for the prior year quarter and 76% in the preceding first quarter. Now turning to operations, non-GAAP operating costs for the second quarter came in at $17.3 million compared to $14.8 million in the year-ago quarter, and $17.5 million in Q1. Given the current macro conditions and lengthening sales cycles, we continue to refine our direct sales model, as Ashu mentioned, hiring more seasoned sales professionals versus having a larger number of junior team members, but we continue to maintain a level of sales and marketing investment given the large market opportunity that we see. Looking at our bottom line, non-GAAP operating income for the second quarter was $2 million or an operating margin of 8% compared to an operating margin of 14% in the year-ago quarter and up from 6% in the preceding first quarter. Non-GAAP net income for Q2 was $1.7 million or $0.05 per share. This compares to non-GAAP net income of $3 million or $0.10 per share on a basic $0.09 per share on a diluted basis in the year-ago quarter. and adjusted EBITDA margin for the quarter was 9%, up from 6% in the preceding first quarter. Turning to our balance sheet and cash flows, cash flow from operations for the quarter was $7.4 million, a 29% operating cash flow margin. Our balance sheet remains very strong. Total cash and cash equivalents at the end of the quarter was $80.9 million, up 18% from a year ago. Now turning to our customer metrics, Consistent with our focus on selling to large B2C businesses interested in knowledge management to improve customer experience and reduce service costs, the number of 1 million ARR customers increased 21% year-over-year. Our average revenue customer of 480,000 was up 20% year-over-year, and our knowledge hub now makes up approximately 50% of our total SaaS ARR. Turning to our LTM dollar-based test retention metrics, for the quarter, the total number came in at 105%. This compared to 112% a year ago, but on a sequential basis, we saw an improvement from 103% in the first quarter. Looking at the retention rates by region, retention and expansion within our U.S.-based continues to be healthy with a slight improvement in NRR in the quarter to just over 110%. In Europe, the number was still below 100%, but we also saw a slight improvement quarter over quarter as the customer base in Europe has stabilized with no additional significant reductions in the quarter. However, the losses we discussed last quarter will begin to impact our revenue in Q3. Our SAS ARR, excluding OEM, increased 12% year-over-year, and looking at our RPO, total RPO increased 3% year-over-year to 92.1 million. Before moving on to our financial outlook and guidance, I'd like to highlight a few items that we've taken into account when determining our guidance for the third quarter. First, with the current strength of the U.S. dollar to the pound and euro, for comparison purposes, we are also providing revenue estimates on a constant currency basis to provide better visibility to the underlying business trends. In addition, as we experience every year, there are two fewer days in our fiscal third quarter than in the second quarter, resulting in approximately $400,000 in less revenue. Our second quarter revenue benefited from a significant uptick in seasonal volume that accounted for approximately $1 million in revenue that we do not anticipate recurring in our fiscal third quarter. And finally, the loss of the EMEA customers we discussed last quarter will reduce Q3 revenue by approximately $800,000. With that said, for the third quarter of fiscal 2023, we expect total revenue of between $23 million to $23.5 million. Adjusted for constant currency, we expect Q3 total revenue of between $23.5 million to $24 million. Turning to the bottom line for Q3, we expect a gap net loss of $1.2 million to $1.6 million, or $0.04 to $0.05 per share, which includes stock-based compensation expense of approximately $1.6 million in depreciation and amortization expense of approximately $125,000. We expect non-GAAP net income of breakeven to $400,000 or zero to one cent per share. And the weighted average shares outstanding are expected to be approximately $32.1 million for the third quarter of fiscal 2023. For the full year fiscal 2023, Given the macro, given the current economic environment, with timelines extending for deals to close, we are revising our previously provided guidance. So for the full fiscal 2023, full year ending June 30, 2023, we now expect total revenue of between $97 million to $99 million. Adjusted for constant currency, that would equal $100 million to $102 million. Non-GAAP net income of $4.3 million to $6.3 million, or $0.13 to $0.20 per share. The GAAP net loss of $700,000 to $2.7 million, or $0.02 to $0.08 per share, where we estimated share-based compensation expense of approximately $7 million for the year and depreciation and amortization expense of approximately $600,000. Our currency conversion rate assumptions are as follows. For Q3 23 and the remainder of fiscal 23, we are assuming USD to British pound of $1.20 to one pound. This compares to Q3 22 when the USD to GBP rate was 134 to one, and for fiscal year 22 when the USD to GBP rate was 133 to one. So in summary, we delivered record revenue and strong cash flow in the quarter. While sales cycles continue to lengthen in the current environment, market interest in knowledge-powered customer engagement remains high. We have made adjustments to our sales team by focusing on enterprises and refining our direct sales model, hiring more seasoned sales professionals versus having a large number of junior team members. But with our strong balance sheet, we plan to maintain a level of sales and marketing investment that allows us to be well positioned as business conditions improve. Lastly, on the investor relations calendar, EGAIN will be presenting and meeting with investors at the annual Roth Conference taking place March 13th and 14th in Dana Point, California. We'll be providing more details as we get closer to that date and hope to see some of you there in person. Also, we are going to be doing a virtual product demo at the end of March where we will be highlighting the attributes of our new Instant Answers features that Ashi spoke of, as well as our broader knowledge management offering. We'll provide more details on that event in the coming weeks. This concludes our prepared remarks. Operator, we will now open the call for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to sample our roster. Our first question comes from Richard Baldry from Roth Capital. Please go ahead.

Thanks. Could you talk a little bit more about the changes in the sales team? Was this a proactive effort to sort of weed out underperformers and replace them with more seasoned reps. How is that effort going to find those people? Is that easier given the sort of layoffs we're hearing about in the tech space, or is it still challenging to find the right people?

Yeah. So two things. One, the refinement part of it is what you said, which is just looking at we had hired as we intended to scale up the sales team quite significantly. And then as we started to look at enablement and seeing the productivity, we felt like we had to performance manage some of the people. So that was one element that we continue to do. The other one is that as we are seeing the opportunities coming more in the larger enterprises, We feel that it's better for us to go upgrade some of the teams into more seasoned sales reps. And that's the other part that we're doing. And then again, sort of driving performance management on the bottom.

Right, and can you talk a little bit more about the generative AI technology piece for the instant answers? So will that add on to what you have? Will it be standalone? I didn't catch quite quickly enough, you know, is that an embedded version of what a chat GTP is or is it just similar to that type of technology but something you've built on your own? And how do you see the economics on an offering like that being similar to what you've done in the past or different depending on sort of, you know, technologies embedded in it that might have higher costs? Thanks.

First of all, the instant answers capability is very much going to be layered on top of our knowledge hub. It's just a better way to get to the answer using the generative AI capabilities and the underlying large language model technologies. you and others who are following the space know that chat GPT is one manifestation of an underlying large language model capability that is pre-trained on a humongous amount of content and billions of parameters right so what we are doing is taking the underlying large language models and training them so using some of the core training that is pre-training of chat gpt but then fine-tuning that with enterprise content which is specific to the business and making sure that for those businesses especially in enterprises they care about privacy of their content but that is done in a secure way so that their contents are not bleeding into back into sort of the common pre-trained elements of chat gpt so that's so it's a search tool where Your search still works pretty much the way you used to except that the ability to find the right answer and to get summary results. Summary results, let's say you have long documents in enterprises that have very detailed content and you're asking a question and the intent of that question can be responded to with a 50 or 75 word answer as opposed to having to read the whole document. That's where the generative part becomes really exciting. So that's the second part. The third part around cost, that's something we're still figuring out in the sense that there is a base level of capability that we are going to embed as part of the product, but to get into more advanced and large-scale pre-training on cost the amount of content that an enterprise might expose to our service. That's something that is quite likely that we will have as an add-on solution, and that's something we are still working with some of our early customers, and we'll be cognizant of the fact that there is a larger COGS element to doing that for very large content repositories.

Great. And the last quick one for me would be, you know, while the market and headwinds are pretty tough, so I'm curious, your cash generation's been good. Has there any plan to begin or aggressively deploy the buyback that you'd announced previously? Thanks.

Sure. So we have the buyback in place. So that's, you know, we put a structured plan through last quarter. There was no purchases through the quarter, but obviously we'll be evaluating that now we've just made this announcement to see if any adjustments will be made. Thanks.

Again, if you have a question, please press star, then one. Our next question comes from Jeff Van Ree from Craig Hallam. Please go ahead.

Great. Thanks for taking my questions. A couple for you. On the sales motion front, I know Rich was asking about the direct side. I want to touch on the channel maybe. What have you seen in terms of the sales motion now, particularly the momentum there in the channel versus maybe the rest of the business?

Yeah, that's a good question. The channel is still generating opportunities, we see that. I think that the larger opportunities that we're chasing are coming in through the direct channel, through direct sales, sorry. And the channel is there and the logos are still the right kind of logos, but the opportunity sizes are add-on opportunity sizes and particularly in the sort of the CCAT channel, that is what we see. There is a difference with the SI channel, and that is an area where we are steadily building up more SI partnerships. Those are the right kinds of large opportunities. Of course, they have a cycle through them because they are early stage conversations in large organizations through an SI looking at a strategic knowledge project, but we are seeing more and more of those coming into our conversation. To me, that is very encouraging.

Fair enough. And then on GPT, as you look at your prospects and customers, understand it's happened recently, so you haven't had a lot of time to get feedback, but what are the customers and prospects saying, and how is that potentially surprising you?

So... Everyone is talking about it, not just customers, partners, analysts. We talk to Gartner, we talk to other analysts, and there is a lot of conversation around it at every level. Now, when we get to the details at the senior level, I think people are saying, how are we taking advantage of it? The fact that we have a solution at this time that we have been demonstrating for the last few months, but now we are making generally available. That puts us in a good position to say, we are here, we are now, and we can make sure that you can take advantage of this in a, like you said, safe, responsible way. Because everyone is well aware of the snafu, and I'm sure you guys know it well enough with what happened with Google. It has nothing to do with Google. It has to do with the fact that in that 0.1% of the case or in their case, whatever that was, you have to know how to attribute, that's our judgment anyway, in customer engagement, which is where we are, and in business environment where answers matter in terms of correctness, you have to have a system that manages the generative bit so that you minimize absolutely the risk of providing an answer that is grossly incorrect, right? And so people are really keen to understand how to make it work in their enterprise constraints, right? Compliance, security, attribution, correctness. So those are the things that we feel we are being brought in to talk about to say, can you do it? And we are happy because that's what we've been doing in the last several months, working those things out.

Okay, also helpful. So maybe last for me then on the sales side, the bookings environment, you know, you've commented on the macro. Obviously, last quarter you had said as well was difficult. Cycles were lengthening. They've lengthened a bit more here. And you referenced a number of reasons, reprioritization of spend and a number of other things that might be taking place. Just expand on that a little bit with respect to what you saw in the bookings and sort of the ability to close business this quarter. And specifically on things that didn't get done. What are people reprioritizing? What's getting done? What's not getting done? Just maybe expand a little bit more on what's going on there.

Yeah. So what we are seeing is not in every case, but in... In several cases, we're seeing people saying, we are going to evaluate, right? So this is the quarter in which people are evaluating their priorities. So that's the thing we are hearing. Also, we are seeing people, and I'm talking about the ones that are not moving fast enough, people saying, let's watch for the market, and then we will open up the budgets toward the middle of the calendar year, right? So those are the two things we are hearing right now. on the deals which are slowing down.

Okay, and maybe if I could just sneak one last one in on the sales side as well. You commented on the healthy S&M spend that you expect to continue. Can you put a little finer point on that? What are you thinking in terms of, I don't know if it's dollars or percentage, and or if you want to quantify it from a rep standpoint, like where did you end 22? Where do you think you'll end 23? Okay.

I mean, we still, you know, even at the current capacity, we have doubled our capacity from even where we are today. We have doubled the capacity where we were 18 months ago. So that's what I mean by healthy. I feel like we have a good set of sales team members and a structure, and the enablement has been, you know, Of course, we continue to drive that. So to us, it's a matter of making sure that they become productive, and that's really the focus at this point.

Okay. Thanks for taking my questions.

You're welcome.

Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Thanks, Operator. Thanks, everybody, for listening and look forward to providing you an update when we put out our Q3 results.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.