eGain Corporation

Good day and welcome to the eGAIN fiscal 2023 fourth quarter and full year financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then 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 touch-tone phone. 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 with MKR Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Welcome to eGain's fiscal 2023 fourth quarter and full year financial results conference call. On the call today are eGain's Chief Executive Officer, Ashu 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. And 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, September 14, 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 reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. In addition, the GAINS earnings press release can be found by clicking the press release link on the investor relations page of eGain's website at eGain.com. And along with the earnings release, we will post an updated investor presentation to the investor relations page of eGain's website. 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've had a solid year despite a difficult economic environment through the fiscal year our total revenue for fiscal 2023 grew seven percent year-over-year to 98 million dollars our non-gap net income was 8.4 million dollars or 25 cents per diluted share and we bought back of our own stock while still generating good cash flow from operations for the year of $4.6 million, growing our cash balance to just above $73 million at the end of the fiscal year. Looking at the fourth quarter, both our top and bottom line results were ahead of our guidance and street consensus. We saw good renewals from our existing customers during the quarter. including several big ones, multi-million dollar ARR clients. At the same time, new logo acquisition continued to be challenging in the quarter as decisions continue to get pushed out. Stepping back, as I look at the year, I want to share what I see as market trends and that impacts how we are planning to operate in fiscal 2024. As you all know, in late 2022 calendar, the chat GPT announcement definitely ended up impacting our new logo acquisition plans in an already challenging macroeconomic environment when businesses were retrenching and they were scrutinizing their technology investments. Many of our active enterprise opportunities paused to assess how CapGPT and more broadly generative AI would impact their customer engagement investments going forward. Now, interestingly, over the last couple of months, we are seeing that businesses seem to have mostly run through their initial assessment exercise, and several of them we see are again prioritizing a knowledge hub, which would serve as a reliable and compliance ready source of content or generative AI tools to learn from and contribute to. Specifically, we are now seeing enterprises looking for these modern knowledge of platforms where they can plug and play their generative AI IT that they seem to be working on internally. At the same time, we are seeing some businesses with legacy knowledge systems which cannot take advantage of these generative AI capabilities as well. those businesses seem to be looking to re-platform. And so these two trends, they're sort of resulting in the volume of increased RFP and pilot activity for us, which has ramped up nicely in the last two, two and a half months, essentially this current quarter. What seems to us is that generative AI is elevating the importance of and rejuvenating the demand for knowledge hubs. Businesses are looking to optimize their business experience and drive productivity with AI-powered automation. Customer engagement seems to be a popular reach head to start that. Looking at our clients, we continue to do very well with them. Our client satisfaction levels are at an all-time high. inching up to about 4.8 on a scale of five on the Gartner Peer Reviews website. Our clients are looking to invest more in implementing their knowledge strategies to drive more automation across all customer touchpoints, both agent-assisted as well as self-service. Turning to business outlook for fiscal 2024, We are optimistic about the demand trend. As I mentioned, it's jumped up in the last two and a half months compared to the first half of calendar 2023. We see re-engagement from several opportunities that have stalled in our pipeline, and we see new ones coming in, and I'm talking about Fortune 500 companies here. So we do believe that we will see new global momentum improving in fiscal 2024. However, we believe it's prudent to remain cautious from a planning and forecasting perspective because the macroeconomic environment continues to be somewhat uncertain. Over the past couple of quarters, we have made the necessary adjustments to reflect our caution and align our business operation to an environment where we can still continue to invest in product innovation and customer success, as well as prosecute these sales opportunities effectively, but do it with a view that we are still navigating through what seems like the back half of the market flow. On the sales and marketing front, we are very excited about our upcoming annual customer conference, eGain Solve 23, which we are holding in London. This is on September 25th. Conference registrations are at an all-time high for us for this event, which includes clients, prospects, partners. We'll have clients, many, actually six of them, sharing customer stories and successes and journeys with eGain, their innovation. And we, eGain, will be announcing and demonstrating some new, exciting capabilities at the conference as well. To conclude, based on our recent... improved pipeline activity, we believe that the market for knowledge hubs is working back up. As I mentioned, we are now engaged in more RFPs and pilots, in fact, more than we have ever been in the last 12 months. However, we continue to be cautious and mindful of the broader economic uncertainty. And so, with the operational adjustments in place that we have made, We feel that we can continue to invest in product innovation and customer success while pursuing these enterprise opportunities that have reengaged with us and the new ones that are coming in. Finally, we are super excited about SALT23, and we invite you to join us at this event in London, if you can, on September 25th. 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 and full year before getting into our outlook and guidance for fiscal 2024. Total revenue for the fourth quarter was $24.6 million, up 5% year-over-year and up 7% sequentially. Contribution from Cisco OEM was positive this quarter and helped drive revenue above our guidance. That's revenue for Q4 was 22.7 million, up 10% year-over-year. And for the full year, total revenue was 98 million, up 7% year-over-year, or up 9% in constant currency. That's revenue for the full year was 89.6 million, or up 11% year-over-year, or up 13% in constant currency. And legacy revenue in Q4 was down to just 99,000. When looking at revenue by region in Q4, North America accounted for 80 percent of total revenue this quarter, up from 74 percent in the year-ago quarter. For the four-year, North America accounted for 78 percent of total revenue, up from 73 percent in the prior year. In Q4, total revenue from North America was 19.6 million, up 13 percent year-over-year, where in contrast, total revenue from Europe was 5 million, a decrease of 19% year-over-year. Looking at non-GAAP gross profits and gross margins, gross profit for the fourth quarter was 18.2 million, up 3% year-over-year for a gross margin of 74%, compared to 75% for the prior year quarter, but up from 69% last quarter. For fiscal 2023, gross profit was 72.2 million, or a gross margin of 74% compared to a gross margin of 77% for the prior year. Now turning to operations, non-GAAP operating costs for the fourth quarter came in at $14.9 million, down 12% from $16.9 million in the year-ago quarter, reflecting the expense controls we have implemented. Looking at our bottom line for Q4, Non-GAAP operating income for the fourth quarter was $3.3 million, or an operating margin of 13%, up significantly from 3% in the year-ago quarter and 4% last quarter. Non-GAAP net income for Q4 was $3.6 million, or $0.11 per share, as compared to non-GAAP net income of $893,000, or $0.03 per diluted share in the year-ago quarter. Adjusted EBITDA margin for the quarter was 16% compared to 4% in the year-ago quarter. For the full fiscal year, non-GAAP operating income for the fiscal year was 7.6 million, or an operating margin of 8%, compared to an operating margin of 10% for the prior year. Non-GAAP net income was 8.4 million, or 26 cents per share on a basic basis, and 25 cents per share on a diluted basis. This compares to non-GAAP net income of $8.9 million, or $0.28 per share on a basic and $0.27 per share on a diluted basis in the prior fiscal year. Adjusted EBITDA margin for the fiscal year was 9% compared to 11% in the prior fiscal year. Turning to our balance sheet and cash flows, we continue to generate good cash flows from operations while buying back shares of our stock. For the full fiscal year, cash flow from operations was $4.6 million, or a 5% operating cash flow margin. During FY23, under our share repurchase program, we purchased approximately 786,000 shares, totaling $5.8 million. Of the $20 million authorized, $14.2 million remained available under the program at the end of the fiscal year. Our balance sheet remains strong. Total cash and cash improvements at the end of the fiscal year was 73.2 million, up from 72.2 million a year ago. Now turning to our customer metrics, we saw strong renewals from our existing customer base with over 20 million in ARR renewing during the quarter. And as I'd mentioned on previous calls, given our increased focus on North American markets, I will share some additional customer metrics on a regional basis. LTM dollar-based SAS net retention for North America customers was 106%, while EMEA customers' retention continued below 100% due to the churn we had discussed on previous calls, resulting in our total NR net retention rate dropping to 100% compared to 105% a year ago. SAS ARR for North America customers increased 8% year-over-year, while total SAS ARR increased 3%. And looking at ARR by product hub, knowledge now makes up 47% of total SAS ARR, as knowledge deals have accounted for two-thirds of new bookings in the last four months. The number of million-dollar ARR customers remained relatively constant year-over-year. Looking at our RPO, total RPO decreased 3% year-over-year to 97.3 million, but increased 11% sequentially with the strong renewals closed in the quarter. And our short-term RPO was 66.7 million, up 6% year-over-year, but up 28% sequentially, again, due to the strong renewals in the quarter. Now, turning to our guidance for the First quarter of fiscal 2024, we expect total revenue of between $23.5 million to $24 million. Turning to the bottom line, for Q1, we expect gap net income of $500,000 to $1 million, or $0.02 to $0.03 per share, which includes stock-based compensation expense of approximately $1.2 million and depreciation and amortization of approximately $120,000. We expect non-gap net income of 1.7 million to 2.2 million or 5 cents to 7 cents per share. Looking at the fiscal 2024 full year ending June 30th, 2024, we expect total revenue of between 96 million to 98 million, non-GAAP net income of 11.8 million to 12.3 million or 37 cents to 38 cents per share, and GAAP net income of 7.6 million to 8.1 million or 24 cents to 25 cents per share, where we estimate share-based compensation expense of approximately 4.2 million and depreciation and amortization of approximately 500,000. Looking at weighted average shares outstanding, we expect approximately 32.2 million for the first quarter and for the full fiscal year of 24. So in summary, We have adjusted our business operations to a level where we can operate profitably in the current environment. Our sales and marketing investments are at the right level, and we are seeing more opportunities developed in the pipeline. Overall, our existing business is doing well, as evidenced by the health renewals we booked in the quarter. Innovation is on track with some exciting announcements to come at our Solve23 customer events in London later this month. We implemented a share repurchase program that we plan to continue in fiscal 24, and the opportunity for e-gain is significant. We remain well positioned to capitalize on our expanding market opportunity and with our strong balance sheets and cash flow generation. Lastly, on the investor relations calendar, e-gain will be meeting with investors at the 12th annual Roth New York Conference on November 15th, and the annual Craig Hallam Office Select Conference also in New York on November 16th. We hope to see some of you there in person. This concludes our prepared remarks. Operator, we will now open the call for questions.

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. If at any time your question has been addressed and you would like 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 Richard Baldry with Arup MKM. Please go ahead.

Thanks. When you talk about the RFP pipeline starting to accelerate, stop pausing, whatever you want to think about it, are the RFPs that are coming back explicitly talking about AI functionality, either included or capable via APIs, sort of some demonstration of the ability to interact with the new regenerative AI engines? Is that sort of one of the signals that's telling you that people are sort of getting through their analysis process? Thanks.

That's exactly right, Richard. So what we are seeing is those RFPs in some cases have been reissued. In other cases, they had not issued any RFPs because people were still kind of deciding whether they were going to invest or not, right? There were lots of conversations, but no structured RFP yet. But I would say pretty much every single RFP now in the last two months that we have been working with have generative AI in one of those three configurations or asking what all can you do, right? Do you have inbuilt generators in your knowledge platform? Do you have it as an option that I can plug in? Or is there something else that you do that is different? So those sort of three questions come up.

And you know, with the pace of the RFPs coming back and, you know, recently streamlined some of your costs in the sales and marketing side, do you feel like you're appropriately staffed to handle it for now? You know, what kind of signals or growth in that RFP volume would you need to see to say, you know, maybe we should go back and start adding, you know, headcounts, you know, given it takes some time to get them up and running?

Yeah, yeah. So this time around, we're sort of staying close to our nettings, which is, you know, the large opportunities. And so that gives us good headroom at this time. I would say for the next couple of quarters, I don't think that we'll need to add more headcount. So maybe in the fiscal fourth quarter, assuming things continue to ramp, that would be the time to look at additional headcount.

Thanks. And, you know, you've been active in the buyback. Can you talk about, you know, do you have a theory since your profitability stepped up of How much of cash flow should be allocated to that return of capital? Is it dependent on M&A opportunities you might see? How do we think about how to expect that buyback to deploy?

Good question. I think that's exactly the way we're evaluating it. I think certainly in this environment, exploring inorganic opportunities is an area that we will likely participate pay closer attention to. I think given our strong balance sheets and the challenges that others are having in the marketplace, we certainly want to have funds available and we'll look to more carefully at this than we've done in the past. But with that said, given our current sort of, I would say, sort of optimized cost structure, given the current run rate, we certainly feel comfortable about continuing to execute to the plan at the rate we've done and, you know, hopefully accelerate it if possible given sort of where the current stock price is.

And last for me would be, you know, when you think about the AI functionality that customers are looking for, how much of that do you think is important to be able to do or provide in-house sort of bespoke versus, you know, being able to use APIs, whatever, to plug into our best of breed, whichever the customer wants to work with externally and, you You know, if you were to look in the M&A side of the table, would it be something around the AI world you'd be looking at, or are there other things that'd be interesting? Thanks.

Right. So I would say, Rich, except for the very, very high end of the market, you know, most companies, I believe, will look for all-in-one solutions around generative capability, but not necessarily... The core technology of generative being different, but the way it is applied and the way you fine-tune it, those things we intend to do ourselves, but not the core technology, which clearly is not our bailiwick, and we don't think that's. That's our place to invest in innovation. But how we connect the dots and compose the solutions, absolutely. How we take advantage of all the loops of improvement and optimization, absolutely. Those are going to be the place we invest in. And then the We have several of these larger prospects who clearly want to have their own generative capability, but they want to plug it into our knowledge platform very tightly so that they can get the best of both worlds. So that's the level we're playing at. So I think we'll have our own with fine-tuning and contextual optimization as the way to differentiate and then have the ability to compose and connect into the someone who may have their own generative capability.

Maybe one last one, if I could. The recurring revenue line sequentially was up quite strongly. Was there any one-time oriented sort of impacts inside of that that we need to be careful about when we're modeling looking forward? Thanks.

I think sort of as I pointed out, and if you recall on the previous call, you know, we do see some variability from quarter to quarter on the Cisco OEM. So last quarter, you know, it came in below the number and resulted in the decline, where on the flip side, and as we sort of had expected to some extent, sort of given the commentary we'd heard that business journey had been positive, that what we saw this quarter was a healthy uptick in that. So there's definitely that fluctuation that comes from that Cisco OEM business that we would be mindful of not necessarily repeating again in the coming quarter. So that's the one call-out I would make. Great. Thanks for your help.

Our next question comes from Jeff Randry with Craig Callum. Please go ahead.

Great. Yeah, thanks for taking my questions. So on the annual guide, talk to me about what else you might be seeing that's giving you the caution. I mean, you commented that the pipeline, you know, in many respects, pilots, et cetera, are, you know, really breaking out to the positive, yet the forward guide essentially guides for flat sequentials for a while. You know, talk beyond what you can see in your pipeline that's causing you not to put any of it really through into the guide because it's obviously well below the stream.

Yeah. So just the thing is timing of closing those deals is where we need more evidence to have closed some big deals in this quarter and next to say, okay, the cadence is starting to be more predictable on the close, right? So we have several opportunities where we deepen the discussion and agreement and everything is fine, but the question is, when are they going to sign? And that process still seems a little bit macroeconomic influenced, right? So that's the challenge we are trying to navigate with this question.

Okay. That's helpful. And then the AI deals you mentioned, kind of GPT came out, froze things, a lot of people took a look at it, went away, some came back. Of the ones that didn't come back, what did you learn? I mean, what did they choose to do, and how do you react to that to potentially make yourself more attractive to those customers as well?

It's a good question. My sense is that, to be honest, I don't know the exact answer, but what we are seeing is that some companies – have decided that they could apply GPT or broadly generative capability on existing content stores that they have. Right? And so that, there is a school of thought there. We don't believe that works with quality and compliance and cost effectiveness, but You know, that's always been one of the things that is a substitute is that, you know, you have SharePoint, and if I just put GPT on it, will it solve the problem? So that's kind of the – I think there's going to be crossovers on that line both ways over time.

Yeah, helpful. And then last, just for me, the partners. I think you touched on Cisco kind of ebbing and flowing there. You've got a lot of key relationships. Maybe spend a second just talking about, you know, both your outlook on Cisco for the year, you know, how you feel about that and why, and then the other key two or three that either are showing traction or are worthy of calling out.

Yes, on Cisco, I think it's kind of flat to modest upside, I would say. I wouldn't say anything more than that, probably flat. But, Eric, what's your opinion?

Yeah, I think that seems consistent.

We've seen that year over year. So that would probably be the outlook there. But with other partners, which is, yeah, you're right, we have invested in some of the larger SIs, you know, they are equally challenged at this time. Many of their large projects are kind of not getting the big engagements and investments that clients have stalled on over the last few quarters. So In fact, I think that we are starting to see more engagement. Maybe we are not deep into that. We don't have visibility into their pipeline as much. So I wouldn't really comment on that. But I do think that the system integration partners seem quite interesting to us, especially in financial services. You know, some of the partnerships we are talking to prospects who are banks and insurance companies who have been working with these partners, and those seem to be perking back up as well.

Okay, got it. Great. Thanks for taking my questions. Appreciate it.

As I show no further questions at this time, I would like to turn the call back over to the management for any closing remarks.

Thanks, operator, and thanks, everyone, for joining the call today. We look forward to hopefully seeing some of you at the customer events in London and then the upcoming investor conferences, and we'll be providing an update once we close out our Q1. Thanks very much. Thank you.

This concludes the conference today. Thank you for attending today's presentation. You may all now disconnect.