eGain Corporation

Good day, and welcome to the E-Gain Fiscal 2024 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. 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 2024 second quarter 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. 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 eGains results, are detailed in the company's reports filed with the Securities and Exchange Commission. EGAIN is making these statements as of today, February 8, 2024, 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, tables included with the earnings press release, include reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. And our 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 also post an updated investor presentation to the investor relations page on 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 good afternoon, everyone. Our top and bottom line results for the quarter have exceeded our guidance, and our assist GPT AI offering is being well received by the market and helping us win new logos. Turning to business, we signed several new logos in the paper. Some notable wins here. A global investment management company chose Regain to modernize their knowledge management capability. Their services staff was struggling to find answers in what are long, complex documents in their business spread across many silos. They selected eGain based on our ability to unify that knowledge and deliver consumable answers using generative AI in a safe, auditable way. Another new logo is a membership-based primary care practice, which is in hyper-growth mode. They selected eGain to enable their associates with a unified knowledge platform. Again, they will integrate all their content and knowledge sources on the EVN platform and use our assist GPT capability to deliver easy answers and ramp up the new hires. Lastly, I mentioned a pioneering U.S.-based mutual auto insurance company. They selected us to streamline their agent experience and therefore improve their customer experience. They've gone live with eGain already for their service group and are now looking to roll out the knowledge capability across the enterprise. We also saw good expansion from existing customers during the quarter. A couple of notable ones, a large PNC insurance company and a global electronic component distributor. Turning to renewals, In the current macro environment, we are working hard to serve and retain customers as they look to reduce their operating costs. We've had good renewals in the quarter, including large healthcare insurance clients, an industry-leading HCM SaaS solution provider, and a large multinational bank. At the same time, We have received notice from two large clients about their intent to not renew with us. The first is a conversation hub client. They're choosing to consolidate vendors for all their digital customer communications. The second is an analytics hub client. They are choosing to build out their homegrown capability to measure and manage their contact centers. The combined ARR of these two accounts is approximately $8 million. These churn events are challenging as they are not factored in our fiscal 2024 plan. At the same time, we are very encouraged by our new logo pipeline is growing nicely with knowledge and AI opportunities. We're also feeling good about our new logo sales performance in the quarter. And as macro conditions improve, we believe we can grow our new logo acquisitions without adding sales capacity. Our new Assist GPT and Instant Answers capabilities are generating lots of good market interest. With Assist GPT, customers can speed up knowledge creation by 4X. For an early client in the energy vertical who we piloted with, what historically would have taken eight weeks of human effort was done in less than two weeks. With instant answers, another AI product, agents get much better and faster answers from our knowledge base. At one of our insurance clients, insurance, this is P&C insurance, Agents have seen more than a double improvement in speed to answer, even as answer quality has improved. Our product investments and leadership continues to be recognized by the market and clients. We were honored to be the sole recipient of the 2023 KM Promise Award from KM World Magazine. This award recognizes the provider who best delivers on the promise to customers with innovative solutions integrated into their business process. Also in November, EGAIN was named a visionary in the Gartner Magic Quadrant for CRM customer engagement. We had mentioned this in our prior call, but that was followed by our receiving the top rating for knowledge management in the 2023 Gartner Critical Capabilities Report, and that was something new that we had not mentioned before. We continue to invest at this intersection of AI knowledge and digital technologies to extend our product leadership. To conclude, we see good momentum in new logo wins and pipeline activity. We continue to invest in innovative AI capabilities like assist GPT and instant answers to enhance our knowledge hub. And as market conditions improve, we are well positioned to capitalize on this big opportunity to help automate knowledge for customer service. With that, I'll ask Eric Schmidt, our Chief Financial Officer, to add more color around our financial operations. Eric?

Thanks, Ashut, and thanks, everyone, for joining us today. We delivered another quarter of significantly improved profitability and strong cash flow from operations. Both our top and bottom line results exceeded our guidance and street expectations. Let me share more detail about our financial results for Q2 before getting into our outlook and guidance for Q3 and fiscal 2024. Starting with revenue, total revenue for Q2 was $23.8 million, above our expectations, but down 7% year-over-year, reflecting the current cautious spending environment and the tough comparison where last year we benefited from a seasonal volume increase of approximately $1 million that did not repeat this year. In looking at the revenue by region, North America accounted for 79% of total revenue this quarter, up from 77% in the year-ago quarter. Total revenue from North America was 18.8 million, down 5% from last year, whereas in contrast, total revenue from Europe was 5 million, down 14% year-over-year. Looking at non-GAAP gross profits and gross margins, gross profit for the second quarter was 17.1 million, for a gross margin of 72%, compared to 75% for the prior year quarter and 73% last quarter. Now turning to operations, non-GAAP operating costs for the second quarter came in at 13.5 million, a 22% improvement from 17.3 million in the year-ago quarter, reflecting the expense controls we have implemented. Looking at the bottom line, Non-GAAP net income for Q2 was 3.4 million, or 11 cents per share, up 100% on a dollar basis from non-GAAP net income of 1.7 million, or 5 cents per diluted share, in the year-ago quarter. Adjusted EBITDA margin for the quarter was 16%, up 700 basis points from 9% in the year-ago quarter. Turning to our balance sheet and cash flows, we generated very strong cash flow from operations for the quarter of 7.7 million, or a 32% operating cash flow margin. During the second quarter, under our share repurchase program, we repurchased approximately 391,000 shares, or 2.5 million, at an average price of $6.39 per share. Of the 20 million authorized, 11.2 million dollars remain available under the program at the end of the quarter. Our balance sheet remains very strong. Total cash and cash equivalents at the end of the quarter were 86.8 million, up from 18.9 million a year ago. Now turning to our customer metrics, with our continued focus on knowledge as outlined by Ashu this quarter and going forward, I will share some additional customer metrics for our knowledge customers. First, looking at our LTM dollar-based SaaS net retention from knowledge customers was 103%, while our total net retention dropped down to 94%. The LTM dollar-based SaaS net expansion rate for knowledge customers was 113%, 113%. while our total net expansion rate was 106%. Looking at our total ARR, the total SAS ARR for knowledge customers increased 6% year-over-year, while the total SAS ARR decreased 13% year-over-year. Looking at our remaining performance obligation, total RPO decreased 15% year-over-year to 77.9 million, and our short-term RPO was $55.8 million, down 4% year-over-year. Now turning to our guidance, for the third quarter of fiscal 2024, we expect total revenue of between $22.6 million to $23 million. Turning to the bottom line, for Q3, we expect net income of $400,000 to $1 million, or $0.01 to $0.03 per share. which includes stock-based compensation expense of approximately $1.2 million and depreciation and amortization of $100,000. We expect non-GAAP net income of $1.6 million to $2.2 million, or $0.05 to $0.07 per share. For the full year, fiscal 2024, given the increased churn as outlined by Ashu, we are revising our previously provided guidance as follows. For fiscal 2024, Full year ending June 30th, 2023. We now expect total revenue of between 92 million to 93 million. Non-GAAP net income of 9.3 million to 9.8 million or 29 cents to 31 cents per share. And GAAP net income of 4.5 million to 5 million or 14 cents to 16 cents per share. We estimate share-based compensation expense of approximately 4.8 million and depreciation and amortization expense of approximately 500,000 for the year. Looking at weighted average shares outstanding, we expect approximately 31.9 million for the third quarter, and for fiscal 2024, 32 million for the full year. So in summary, while the macro environment remains challenging, we are very pleased with the increased number of new knowledge customer wins in Q2. and we expect to see continued positive momentum in new business activity going forward, given the level of interest for our new assist GPT product offering. The opportunity for e-gain is significant, and with our leadership and focus on knowledge and AI, we remain well positioned to capitalize on the expanding market opportunity with our strong balance sheet and cash flow generation. Lastly, on the investor relations calendar, EGAN will be presenting and meeting with investors at the annual Roth Conference taking place March 17 to March 19 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. 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, press star then one on your touchtone phone. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And our first question comes from Richard Baldry with Roth MKM.

Thanks. In terms of the unexpected attrition, can you talk about, you know, is there any commonality there in terms of, you know, geographies or vertical on markets? And then in terms of the timing, it looks, if I backed it out right, that most of it hits in the fourth quarter. Is that right, or is there some, you know, residual pressures into the September quarter as well? Thanks.

Okay, so let me address the first part, maybe, Richard, and then... No, there's nothing particularly common. One was a direct client. The conversation hub client was a direct client. The analytics hub client was through a partner. By exclusion, I guess, neither of them are knowledge clients, but that's not to say that we may not have customers in that area. There's a usual sort of pattern to that, but... I think both of them are under tremendous cost pressure in their businesses that we see. There's a lot of public news about them looking to reduce cost, headcount reduction. That, I guess, is a commonality right now. Both of them have been using our products well. The operational teams are still very happy with us, seem to be engaged with the product, but they are being given marching orders. That's That's where the outcome is. Eric, you want to talk?

Yeah, I think that you're correct that for both of these accounts, the impact will be felt in the Q4.

Okay. And flipping over to the AI side of the table, you know, could you talk about some of the early deal wins, sort of, you know, how it's impacting deal sizes, deal cycles, you know, Are you seeing a noticeable increase in the pipeline of people evaluating the AI-type solutions? And sort of when do you think that if that becomes a tailwind, when could that start to emerge? Thanks. Yes.

So firstly, I would say that... a couple of things one in terms of the iitd pilots that we do do the innovation in 30 days we are doing more pilots now than we have done in the last several years right so and almost all of those let's say are those ai pilots right around assist GPT or more, at this point, more instant answers, which is part of the assist GPT. And so we're seeing a lot of instant answers pilots right now, both in prospects as well as existing accounts. So that's one thing. Second thing we are seeing, and this is early, but my sense is that the early engagement with prospects, early in the funnel, people seem to be coming in with an AI-oriented budget and AI-oriented interest into knowledge, saying, what can I do with AI? And so that's something different from what we had seen, say, six months ago. There were not a lot of ground-level conversations that started with AI. There was a lot of uh talk about it but but people are not starting their conversations we're just chatting with our uh sdr team and that's one of the trends that we are seeing much more now those are the two things i would point out and maybe last for me is it you know if the ai traction seems to be picking up

and you see sort of an inflection point ahead for growth, but it's not reflected in, you know, current results or maybe arguably your valuation. Do you think you'd find a period where you might be willing to get more aggressive on the buyback front given the strength of the balance sheet? How do you view sort of the trade-offs there? Thanks.

Yep, I think great sets of valid points. I think certainly as we look at the cash generation that we've generated again, certainly something that we'll continue to look at closely for sure.

Thanks.

And our next question comes from Jeff Van Re with Craig Holland.

Great. Thanks for taking the questions. Just maybe high level in terms of the splits of the business. From a revenue – percent of revenue perspective, how much is sitting in – I think you gave some splits in SAS error, but can you give it holistically where the revenue sits with respect to knowledge management versus conversation hub versus analytics so we have a sense of proportion?

I think just roughly speaking, the knowledge business is just under 50%, and then I would say the analytics business is probably in the 15%. percent range, and the conversation hub is in that 35 percent range.

Okay. And then with respect to the two losses, I think it sounded like you had some visibility into where they're going in terms of whatever platforms they're moving over to. They're under cost pressure. Is the move that they're making, is it your impression there's that substantial of a cost benefit by just consolidating onto the platforms of the existing providers? Or are there other motivations? I mean, certainly if they've got a platform provider, maybe there's some cost benefit. Just a little bit more about why the shift and if you know what the cost benefit was, if there was some for their departures.

Yes, I can tell you what we know so far. Yes, we were aware that that was an ongoing battle inside, let's say, the conversation. Let's talk about that first. We were aware that that was a hustle going on between the people who were using the solution from us and were very happy with it and sort of a company-wide agenda to try to reduce number of vendors. Ultimately, I think what we've been told is that they're moving this direction. They'll see how the quality of that service goes in that migration. They are open to the idea and we're still working with them, but no guarantees to see if we can continue to operate as a trusted second source. That's what we know on the first one, the conversation hub one. On the second one, the analytics one, I think the But we don't know enough about that, to be honest, because it's behind a partner and we don't have enough visibility to know what is the economic sort of trade-off between their homegrown and ours.

Okay. All right, that's helpful. And then, Eric, you mentioned on the year-over-year compares, I think you mentioned something about a volume, a million dollars in volume, that didn't repeat. Can you just refresh me on what that was a year ago?

Yes. I think what we had seen was an account that was driving an increase in messaging business that was running a special program at the end of this quarter last year that drove that spike. Increase in volume usage.

Okay. All right. And then just on the AssistGPT, you know, obviously you tried to get it in the hands of a lot of folks to let them use it and get feedback. I realize it's early, but any areas of pushback in places where you've decided to pivot, accentuate, de-emphasize already?

Yeah. A couple of learnings we have got. One is that people are – very in the enterprise, not in the mid-market, but in the enterprise, people are very focused on control, safety, and auditability. So we are enhancing that significantly around generative capabilities. So that is the learning for us. And the second is that the results that people are seeing in the pilots And these pilots are obviously trials, right? They're not production level at scale. They're limited production trials. People seem to be very happy with the solution results. So we're consistently seeing a strong positive feedback saying, yes, we like this, right? So that's the second thing that we are seeing.

Okay, and then maybe just one last, Eric, and we can take this offline if it's easier, just trying to – there's obviously going to be some volatility in results the next couple quarters as you kind of reset to the new revenue level. Do you have a sense of gross margins, Q3, Q4?

So we'll definitely see some pressure, obviously, given that reduction. But, you know, I think one of these accounts actually had – So the profile wasn't at the high level, but yes, I think we'll, maybe I'll have to get back to you on the exact percentage where we see it, but certainly there'll be some pressure.

Yeah, okay, fair enough. I'll leave it there, thank you. Thanks.

Thank you. As a reminder, if you would like to ask a question, please press star then one. And seeing no further questions, we will conclude the question and answer session. I would like to turn the conference back over to management for any closing remarks.

Well, thanks, everybody. Appreciate you taking the time. We look forward to updating you as we continue to proceed with this exciting knowledge driven by the AssistGPT product. Thank you.

Thank you. This concludes the conference. Thank you for attending today's presentation.