eGain Corporation

Good day and welcome to the eGain fiscal 2023 third quarter financial results conference call. All participants will be in lesson-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 telephone keypad. To withdraw your question, 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 third quarter financial results conference call. On the call today are EGAIN's chief executive officer, Ashu Roy, and chief financial officer, Eric Schmidt. Before we begin, I would like to remind everyone that during this conference call, management will make 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. And these 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 11th, 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 also 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 the most directly comparable GAAP financial measures. In addition, our earnings press release can be found by clicking on the press release link on the investor relations page of eGain's website at eGain.com. And along with the earnings press release, we will post an updated investor presentation to the investor relations page of the website. And lastly, a phone replay of this conference will be available for one week. And now with that said, I'd like to turn the call over to eGains CEO, Ashu Roy.

Thank you. Thank you, Jim. And hello, everyone. We are pleased with our overall performance this quarter. Revenue came within our guidance range, and bottom line was ahead of guidance and consensus. We also initiated our stock buyback program, and we still reported an increase in our cash balance due to positive cash flow in the quarter. Looking at our financial results, total revenue for the quarter was $23 million within our guidance range. We implemented expense controls to align with current market conditions to deliver non-GAAP EPS of 30 cents that exceeded our guidance and consensus. And we were cash flow positive, ending the quarter with more than $81 million in cash. Turning to business highlights, interest in our knowledge-powered customer engagement platform continues to be strong. Decision-making on new logo deals is still a challenge. However, we did sign several new deals toward the end of the quarter. And in the last month or so, we have seen several enterprises now re-engaging on paused opportunities in our pipeline after what seems like the dust settling after the internal reorganization and business adjustments. This leads us to believe that market conditions may be stabilizing. Our U.S. customer base continues to show resilience in the quarter with healthy renewal and expansion rates. Our European customer base stabilized with no additional significant churn and some nice expansion business. As I noted, we signed several new customers near the end of the quarter. Let me share some notable ones. The first one is a major health insurance provider in the Midwest. The next one I want to bring out is a top 10 credit union in the U.S. And then another one is a U.S.-based commercial insurance business. In terms of mentioned expansion wins, let me highlight a few. A multibillion-dollar BPO in the human capital management space. A Fortune 500 energy company. large multinational provider of general insurance services, a top 10 global airline, and a global 500 telecom holding company. Looking at the market and our overall business, we remain very excited about the opportunity. Recent findings from a KM World survey revealed that content silos and legacy technologies continue to be major obstacles to improve customer and employee experiences using effective knowledge. As a result, Gartner has continued to highlight that knowledge management is the number one technology that can simultaneously improve CX employee experience and operating performance in customer service organizations. With our solution, we believe we have the best offering, and we are confident that the need for knowledge management will become increasingly mission-critical for enterprises as they look to employ more AI-powered automation. Speaking of which, as we shared in the last quarterly call, if you recall, we announced the eGain Instant Answers capability powered by generative AI. This was in February. Since then, we rolled out a successful marketing campaign around generative AI applied to knowledge, highlighting compelling use cases for agent and author performance and automation improvements. Interest has been quite strong, and we are now engaging in instant answers pilots with customers and prospects. Stepping back, we see that the excitement around generative AI in enterprises has highlighted the need for a modern knowledge hub, one that serves as a reliable and compliant source of consistent, correct content for the generative AI tools to learn from. As a result, we are seeing renewed interest among enterprises to refresh their knowledge management tech stacks. to effectively deliver operational value in customer engagement automation, generative AI needs a modern knowledge platform to experiment within and to scale on. As we look ahead, Our strong North American subscription renewal and expansion rates are evidence of the fact that our existing customers continue to find increasing value in our industry-leading customer engagement solutions. We continue to build our new business pipeline in parallel as new bound interest remains steady, and we are pleased to have closed multiple new logos in the quarter. We will continue to assess our sales capacity to optimize our sales performance, even as we diligently nurture our new business pipeline. And lastly, with our strong balance sheet and positive cash flow, we intend to execute a balanced growth and profitability plan in fiscal 24. 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 Q4 and the full year fiscal 2023. Total revenue for Q3 was $23 million, down 4% year-over-year or down 1% in constant currency, coming in within our guidance range despite the shift in our focus to profitability and balanced growth. Contribution from our Cisco OEM business sequentially declined, which we believe was due to a timing issue on revenue recognition, as Cisco has indicated that they continue to see good momentum in the business. Had the contribution from the Cisco OEM business been in line with our internal forecast, our top-line results would have been ahead of our guidance and consensus. For the first nine months, total revenue was 73.4 million, up 7% year-over-year. SAS revenue for Q3 was 20.9 million, up 1% year-over-year, or up 3% in constant currency. For the first nine months, SAS revenue was 66.9 million, up 11% year-over-year. Legacy revenue in Q3 was down to just 126,000 and accounts for less than 1% of total revenue. When looking at revenue by region, North America accounted for 78% total revenue this quarter, up from 73% in the year-ago quarter. Total revenue from North America was $17.9 million, up 2% year-over-year. In contrast, total revenue from Europe was $5.2 million, a decrease of 20% year-over-year. Looking at non-GAAP gross profits and gross margins, gross profit for the quarter was $15.8 million, down 13% year-over-year, for a gross margin of 69%. compared to 76% for the prior year and 75% last quarter. The decline in gross margins is primarily a function of lower revenue for the quarter. In addition, as we are in the middle of a major upgrade to our latest product release, margins reflect the impact of a temporary increase in the AWS costs associated with the migration of these customers. Turning to operations, non-GAAP operating costs for the third quarter came in at 14.9 million, down from 15.7 million in the year-ago quarter. The expense controls we have implemented enable us to deliver bottom line results that were ahead of our guidance and street consensus. Non-GAAP operating income for the third quarter was 935,000, or an operating margin of 4%, compared to an operating margin of 11% in the year-ago quarter. Non-GAAP net income for Q3 was $1.1 million or $0.03 per share. This compares to non-GAAP net income of $2.4 million or $0.07 per diluted share in the year-ago quarter. Adjusted EBITDA margins for the quarter was 5% compared to 11% in the year-ago quarter. Turning to our balance sheet and cash flows, cash flow from operations for the quarter was $905,000 or a 4% operating cash flow margin. For the first nine months, cash flow from operations was $9.1 million for a 12% operating cash flow margin. During the quarter, under our share repurchase program, we repurchased approximately 145,000 shares for $1.1 million at an average price of $7.57 per share. Of the $20 million authorized, $18.9 million remained available under the program at the end of the quarter. Our balance sheet remains strong. Total cash and cash equivalents at the end of the quarter were $81.3 million, up 15% from the year ago. Now, turning to our customer metrics, given our increased focus on the North America market, I will share some additional regional metrics. The LTM dollar-based SaaS retention for North America customers was 108%, while EMEA customer retention was below 100% due to the previously discussed churn on the last call, resulting in our total NRR dropping to 100% compared to 109 a year ago. Within the U.S. customer base, the large enterprises, which we define as having revenue of $2 billion or more, have performed particularly well with the net retention rate maintaining north of 110%. We also continue to see healthy expansion rates within the US customer base, which is north of 20%. SAS AR for North America customers increased 12% year over year, while total SAS ARR increased 4%. And looking at ARR by Product Hub, Knowledge Hub is still approximately 50% of our total SAS ARR, as Knowledge Deals have accounted for 2 thirds of new bookings in the last four months. The number of 1 million ARR customers remained relatively constant year over year. And looking at RPO, total RPO increased 4% year over year to 87.3 million. Now onto our financial outlook and guidance. We remain very excited about the market opportunity. We know that knowledge management and AI powered automation will continue to grow as they must have in the enterprise marketplace for customer engagements. But given the business environment, we are implementing additional expense controls to align with the current market conditions. And our updated guidance reflects this change. As a reminder, with the currency fluctuations over the last year, for comparable purposes, we're also providing revenue estimates on a constant currency basis where applicable to provide better visibility into the underlying business trends. For the fourth quarter, we expect total revenue of between 23.4 million to 24 million, and with no material currency impact expected based on currency exchange rates. For the fourth quarter, gap net income of 400,000 to 900,000, or one cent to three cents per share, which includes stock-based compensation of expense of approximately 1.5 million, and depreciation and amortization of approximately 125,000. And then resulting in non-GAAP net income of 1.9 million to 2.4 million or 6 cents to 7 cents per share. For the full fiscal 2023, we expect total revenue of between 96.8 million to 97.4 million. And non-GAAP total revenue adjusted for constant currency of between $99.2 million to $99.8 million. And GAAP net loss of $300,000 to GAAP net income of $200,000, or a loss of $0.01 to $0.01 per share positive, including stock-based compensation expense of approximately $6.8 million, and includes depreciation and amortization of approximately $600,000. then non-GAAP income of 6.5 million to 7 million or 20 cents to 21 cents per share. Included with these assumptions, weighted average shares outstanding are expected to be approximately 32.5 million for the fourth quarter of fiscal 2023 and 32.8 million for the full fiscal year 2023. Looking beyond fiscal year 23 to fiscal year 24, Assuming business continues to improve as we are starting to see, our plan is to remain focused on building a balanced growth and profitability business with preliminary targets of top line growth returning to low double digits and double digits adjusted EBITDA margins. So in summary, our existing customer base remains healthy with robust expansion rates and no additional significant churn in the quarter. while new logo business continues to be challenging we signed several new logos at the end of the quarter and remain focused on continuing that momentum we have been controlling expenses resulting in strong bottom line results and our cash position continues to be strong and we're buying back shares up to the maximum that we can based on the volume limitations that we have under our nb5 program with our strong balance sheet and positive cash flow we are well positioned to capitalize on our expanding market opportunity as business conditions improve. Lastly, on the investor relations calendar, EGAN will be meeting with investors at the annual Craig Hellam Institutional Investor Conference taking place in Minneapolis on May 31st and the Jefferies Software Conference taking place in Newport, California on June 1st. We hope to see you at these events. 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 touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Jeff Benray with Craig Hallam. Please go ahead.

Great. Thanks for taking my questions. I guess just a bunch of them for me. Just talk about SAS and your expectations, I guess, on a sequential basis, how you think that's going to play here. Maybe just a little more context on the sequential change this quarter. Maybe start there.

Sorry, Jeff, just to clear, that's on the SAS revenue? Is that – sorry.

Yeah, just on the SAS line. I was just looking at it sequentially. I know EMEA, which I want to touch on in a second, was very weak. But you talked about Cisco. I'm trying to discern what happened in the SAS line sequentially and the sequential drop.

Got it. So I think just to recap, as we discussed on the call last in Q2, the first component was the fewer days in the quarter. I believe we said... estimated probably about a 400K impact. And then there was a seasonal business that we had highlighted that we didn't expect to repeat, which ended up being correct. And then there were the EMEA customer losses that we'd also discussed. So those all came in pretty much as we'd expected. And then on the Cisco OEM side, that decline was close to 600,000 sequentially. So that was a surprise that we hadn't anticipated in the quarter.

Okay. And then you talked about the gross margin pressure coming from duplicative AWS costs. How do we think about gross margins in the next several quarters? How does that play?

So we're obviously looking, working closely to I would say that, you know, we will start to see some improvements, but it will take another quarter or two for us to get through the, you know, complete the cycle. So, you know, I'd say that we'll start to see movement back into the low 70% range, you know, within the next couple of quarters moving up into the mid-70s again.

Yeah. Okay. All right. And then you talked about some of the pilots that you're doing around the AI use to answer this. Just talk a bit more about that. How many are you doing? Just any surprises about the use cases, kind of how they're being deployed, and then obviously just interested in the cost and economics of deploying those.

Right. So a couple of comments. One, yeah, so the primary use case that we're deploying right now is in helping the agents or the associates who are in these customer service groups with a generated service a consumable answer that is tapping into multiple content sources in the background from the knowledge base and bringing it out with all the verification and stuff that we have built into it. And that's the primary instant answers use case we are piloting right now. Piloting it in multiple places. Say the place where we are seeing the most interest is in organizations that have what I call lots of long form documents, which are all approved and correct, but not easy to process and find the right answer in the moment of the contact or interaction. That's where we're finding the most need, and that's where we are piloting these.

And maybe just last for me, when you're looking at those deploys, in terms of a cost to the end consumer once you incorporate GPT or whatever you're using for the underlying AI, Just what's that cost dynamic? Do you have a benchmark, something you can compare it to?

So for now, the pilots that we're doing, we haven't yet started charging them because these are pilots. And we are monitoring the level of usage and the amount of content that we have to work through to deliver that. Our sense is that we should be able to, with the larger clients, be able to bring it out into a bundled solution. That's something we are going to be refining and defining over the next few months.

Understood. Thank you.

Our next question comes from Richard Baldry with Roth. Please go ahead.

Thanks. Maybe from a broader perspective, talk about the impact you think the genre of AI has or will have. It feels like a lot of people are saying it could have delayed some deals because it creates more confusion over the short term. Others are saying they think it expands the TAM because more companies are now aware of some of the functionality that is coming online, but learning about the fact that they need to hook it onto a system of record class platform to make it work. So we sort of understand where you're thinking it's impacting now versus where it could be 6, 12, 18 months out. Thanks.

Sure thing. I think both the points you raised I agree with, even though they are sort of working at cross-purposes, but the timeline I think is different. The initial excitement or the need to go try out GPT or any sort of generative capability, that definitely has created another element of, Another factor of consideration, and we saw that in a few of our conversations, like a large bank we were working with went through another cycle of informing that we could in fact incorporate not just what we are doing with generators, but also what they are doing internally with it if they wanted to plug it in at some point in a domain specific way. So yes, there is that. extra loop or extra cycle that is getting added to these discussions. But as you said on the On the positive side, there is a clear understanding or clearer understanding, I would say, that these businesses need to have a modern knowledge platform because without that, you know, the usual risks that everyone's well aware of now, if you're not learning from the right things from a generative standpoint, the risk of somehow getting it wrong once in a while is something that businesses cannot contend with, right? So both of those are true, and we are really hammering on on both of them. In other words, we are positioning ourselves not just as the platform of choice for a modern knowledge hub, but also pointing out that businesses can try out these generative capabilities in our environment much easier and better than they would otherwise by doing their own internal connections into different content silos.

And do you think that it does expand the TAM meaningfully? over sort of an intermediate term or long-term basis? Or do you think it's just more additive and applicable sort of to the market you've been addressing already?

I would say that it brings the market in faster. I think that the rate at which people will drive this sort of replatforming, if you will, of their content and knowledge assets is going to accelerate. I certainly think that's That's going to happen. So as to whether the market grows beyond what we see that market today, yes, it will. But that will need more enhancements to sort of incorporating those generative capabilities into the solution, which is something that we are doing in this process as well.

And given it looks like there's going to be multiple competing sort of AI engines out there, Do you care in any meaningful way, you know, which ones are successful or how much market share either ends up with or do you feel like your platform should be pretty much plug and play with or whichever flavor becomes important to any given client?

To begin with, our architecture is composable, so we don't really have a strong inclination one way or the other, but what we are doing is making sure that we can work with different flavors, and that's something we just ensure with our connectors and open platform.

The last for me, it looks like a lot of the cost-cutting hit in the sales and marketing area. Could you talk about how you prioritized Where to make those cuts? Is it, you know, people that are multi-platform sort of ready to sell versus point solutions, you know, based on tenure? Just so we could understand how much that's impacted your go-to-market engine. Thanks.

Sure. So we're keeping the front end of the funnel building relatively steady. And so we'll be marketing and creating that top of the funnel continuously because we know that that's going to be very valuable as the market turns around. In terms of people, the goal here is to have the best So salespeople, so we have done performance assessments and looked at people who can sell this proposition in the enterprise, and that's really the group that we are retaining and building on.

Great. Thanks.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Thanks, operator, and thanks, everybody, for taking the time today. I look forward to providing an update next quarter.

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