eGain Corporation

Good day and welcome to the eGain Fiscal 2024 Fourth Quarter and Full Year 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 1 on the touchtone 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, MKR Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to EGAIN's fiscal 2024 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. 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. Regain is making these statements as of today, September 5th, 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. 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. EGAIN's earnings press release can be found by clicking the press releases 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 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 finished our fiscal year with revenue and profitability ahead of our projections. Total revenue for the year was $92.8 million, and our non-GAAP net income was $12.3 million, or 39 cents per diluted share. Looking at the fourth quarter specifically, we saw increased new logo momentum, in our AI knowledge offering. This included some big brands, for example, a travel management subsidiary of a financial mega brand in the US. Our AI knowledge hub will replace their homegrown knowledge base. Next is a mobility division of a multinational conglomerate in Germany. Here, our AI Knowledge Hub will consolidate their knowledge across multiple silos, which includes Salesforce and other internal knowledge bases. The third logo I want to point out is a global consumer brand based out of London. To support their new product introductions across 84 countries, they have selected eGames AI Knowledge Hub. And the last one I want to highlight is an industry leader for higher education savings in the US. Our AI knowledge hub will replace this client's legacy knowledge systems. Looking at our overall business and the market, we are seeing growing inbound interest in our knowledge AI offerings. In fiscal 2024, our new logo win and RFPs for AI knowledge were up 50% year-over-year. And our pipeline activity remained strong in July and August. In fact, this summer has been the strongest in four years, pretty much since COVID. To give you a good sense of the foundational role of knowledge in delivering value with AI in customer service specifically, let me share verbatim an excerpt from a Gartner report that was recently published in June this year. I quote, 100% of generative AI virtual customer assistant and virtual agent assistant projects that lack integration to modern knowledge management systems will fail to meet their customer experience and operational cost reduction goals. That's a very strong statement coming from Gartner. I'm sure many of you read Gartner reports over the years. You have read many. I cannot recall, and I've been doing this for many years, a prediction like this that has a 100% number on the predictor and a timeframe which is basically 12 months from now or a few months from now and running on an average 12 months. What that means, and we are seeing this, that every CEO of a large business is urgently demanding that their teams apply generative AI technology. And the key is application. Apply generative AI technology to reduce operating costs and do it at scale so they move the needle. As we know, customer service is one of the significant operating line item costs in business. Given that Gen AI needs a solid knowledge foundation to deliver that value, as Gartner points out, not surprising that we are seeing more and more businesses looking to centralize and modernize their knowledge platform. So as we've been saying for a few quarters, we are doubling down on this AI knowledge market opportunity. Currently, half of our revenue comes from AI knowledge offerings. Over the past year, we have increasingly rotated our R&D investments toward AI knowledge products. As you may know, we launched Assist GPT, an eGain product, in February this year, a novel solution to automate and accelerate what are routine but time-taking tasks for customer service agents and knowledge authors. This has been enthusiastically received in the market. Historically, knowledge centralization and creation at scale has been what you would call a proverbial guardian knot, and we are helping clients flash through it with the eGainAI knowledge offerings. Before I ask Eric, our chief financial officer, to add more color to our financial operation, I want to mention that our annual customer event, Solve24, will be held in Chicago on October 29th and 30th. At that event, we'll have many clients sharing success stories using our AI Knowledge Hub, and we'll also announce and demo new product capabilities. So we're very excited about that. And now, over to Eric.

Thanks, Ashu, and thanks, everyone, for joining us today. Let me provide more details about the financial results for the fourth quarter and full year of fiscal 2024 before discussing our outlook and guidance for fiscal 2025. Looking at our revenue, total revenue for the fourth quarter was $22.5 million, ahead of our guidance, but down 9% year over year. The decline was primarily due to the impact of the large Two large client losses we have discussed on our Q2 call, one of them from our conversation hub and the other from our analytics hub. For the fourth year, total revenue was 92.8 million, down 5% year-over-year. And looking at our revenue by region for the full year, North America accounted for 78% of total revenue, the same as in the prior year. Looking at our non-GAAP gross profits and gross margins, gross profit for the fourth quarter was $15.9 million for a gross margin of 71% compared to a gross margin of 74% a year ago and 71% last quarter. For fiscal 2024, gross profit was $66.4 million for a gross margin of 72% compared to 74% for the prior year. Now turning to our operations, non-GAAP operating costs for the fourth quarter came in at 13.7 million, down 8% from 14.9 million in the year-ago quarter, reflecting the expense controls we implemented earlier in the year. Non-GAAP operating costs for the full fiscal year were 56 million, down 13% year-over-year. As we see increased momentum from our AI knowledge offering, we plan to increase investments, particularly in R&D and brand marketing, to capitalize on this very exciting opportunity. Looking at our bottom line, for Q4, non-GAAP net income was $2.5 million, or $0.08 per share, compared to $3.6 million, or $0.11 per share, in the year-ago quarter. Adjusted EBITDA margin for the quarter was 11%, compared to 16% in the year-ago quarter. For the full fiscal year, non-GAAP net income was $12.3 million, or $0.40 per share on a basic and $0.39 per share on a diluted basis, up 47% on a dollar basis from non-GAAP net income of $8.4 million, or $0.26 per share on a basic and $0.25 per share on a diluted basis in the prior fiscal year. Adjusted EBITDA margin for the Fiscal year was 12% compared to 9% in the prior fiscal year. Turning to our balance sheet and cash flows, for the full fiscal year, cash flow from operations was 12.4 million, or a 13% operating cash flow margin. During fiscal 2024, we repurchased approximately 2.8 million shares at an average price of $6.28 per share, totaling $17.3 million. Since inception, we have purchased 3.5 million shares, or 12% of the shares outstanding when we began the buyback program. Of the $40 million authorized, $17 million remained available under the program at the end of the year. Our balance sheet remains very strong. Total cash and cash equivalents at the end of the year were 70 million compared to 73.1 million a year ago. Now turning to our customer metrics, With our focus on AI knowledge, I've broken out the knowledge metrics from the total metrics. As a reminder, total metrics were impacted by the two conversation and analytics customers' losses we had previously discussed. Outside of these losses, I'm pleased to report that all material customer renewals came in as planned during the quarter. Looking at LTM dollar-based SAS net retention for knowledge customers, that came in at 97%, while total net retention was 85%. LTM dollar-based SAS net expansion rate for knowledge customers was 106, while our total net expansion rate was 103. Looking at total ARR, total SAS ARR for knowledge customers increased 8% year-over-year, while total SAS ARR decreased 10% year-over-year. Looking at our remaining performance obligations, total RPO decreased 19% year-over-year, but was up 16% sequentially from last quarter as renewals came in, as I mentioned, and we also had strong new bookings in the quarter. Our short-term RPO was 60.4 million, down 9% year-over-year, but up 26% sequentially. Now on to our financial outlook and guidance. One item I'd like to call out before providing our guidance is the expected change in revenue forecast from our Cisco OEM business. As I mentioned last quarter, we are seeing the shift to more rateable recognition, and we estimate... This change will result in deferral of approximately $1.3 million of revenue that would have otherwise been recognized in fiscal 2025. Just to be clear, we don't expect to lose this revenue, but rather instead recognize it more ratably than upfront that we've done previously. And we see most of that impact taking place in Q1 of 2025. For the first, now onto the guidance. For the first quarter of fiscal 2025, we expect total revenue of between 21.4 million to 21.8 million. Turning to the bottom line, for Q1, we expect net loss of 400,000 to 1.3 million, or a net loss of one cent to five cents per share. which includes stock-based compensation expense of approximately $900,000 and depreciation and amortization of approximately $120,000. We expect non-GAAP net loss of $400,000 to net income of $500,000 or a loss of one cent to a gain of two cents per share for the quarter. Looking at fiscal 2025, full year ending June 30th, 2025, we expect total revenue of between $92 million to $93 million, non-GAAP net income of $5 million to $6 million, or $0.17 to $0.20 per share, and GAAP net income of break-even to $1 million, or $0 to $0.03 per share. We estimate share-based compensation expense of approximately $5 million and depreciation and amortization expense of approximately $400,000. Looking at weighted average shares outstanding, we expect approximately $29.3 million shares for the first quarter and $29.7 million for the full year. So in summary, we are seeing continued strong momentum with new customers for our AI knowledge offering. And while we've doubled down on the AI knowledge market opportunity, we are remaining focused on ensuring high customer satisfaction and delivering full business value to our conversation and analytics customers. Lastly, we will be hosting an Investor and Analyst Day event in conjunction with our upcoming customer event in Chicago on October 29th. This event is a great opportunity for prospective investors and analysts to meet with customers and learn more about our business. You can register for the event on our website. We hope you can join us. This concludes our prepared remarks. Operator, we'll 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 are 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. Our first question comes from Jeff Van Re with Craig Hallam. Please go ahead.

Hey, guys, great. Thanks for taking the questions. Real nice quarter. A handful of questions, if I could. You know, I'm curious on the AI knowledge wins. You know, you talked about two or three specific customers and would love to hear a bit about the competitive landscape. I think you said in one you took out a homegrown solution and in others, I don't recall, I think you might have had a Salesforce competitor in the second, if I recall. But just talk about the competitive landscape. What are you displacing and what are you competing with?

Yeah. So let me maybe take a few seconds to give you a sense of what both in terms of the customer profile we're going after as well as what we are seeing in terms of incumbency, replacement, and competition, right? So who we're going after, as you know, are customers who – At this point, we target companies with 5,000 employees or more. That's our sweet spot is companies that are 5,000 employees or more. So typically, billion-dollar-plus in revenue. Now, we do get customers who are below that, but when these large companies have complex content and compliance needs and where agent turnover is an issue, That's where we do well. That's the need that we are targeting in the size of the companies. In terms of who we end up winning more and more is where there has been a failed knowledge project. Typically, that's getting more and more highlighted because people are recognizing that when they're doing these Gen AI investments in trying to automate customer service, They realize that trusted content and trusted knowledge needs to be fed into the Gen AI tools for them to do their job on the other end. So we are replacing, I would say, number one replacement for us is SharePoint. Homegrown, essentially. That's what it means, right? Number two is Confluence replacement. Again, homegrown. Number three replacement is Salesforce. Salesforce. So people deploy Salesforce knowledge and it's not delivering the value as much as they want, right? And the pressure is on to do more. And the fourth one that we have been replacing is genesis as knowledge. So, but Salesforce and Confluence are the dominant ones in terms of incumbency because they've been around for a while and people are very congruent solutions. And the last part of these responses in terms of competitors, I would say, Broadly, those are the competitors that we are also working up against, right? The people who are trying to retain those knowledge set-ups, and we are in the replacement business.

Okay. That's helpful. And in the presentation, you talk about the conversion of pilots to customers. I think you quote a 75% number in there. Obviously, very, very good number. Give me a sense of sample size here. I mean, what's the quality of that indication and the ability to repeat that?

I would say more than 10 in the last couple of quarters.

And is there anything about those that gives you doubt that you can retain that pace of conversion?

That's hard to say. I feel like we know how to qualify much better now, and that's probably what I would say. So we are, I think part of the reason for the conversion rate being that high is that we are qualifying things well before we put them through the innovation pilot. As long as we do that, I think we should be good. But if we expand that and we're doing that with some partners we're developing, then I expect that some of those partner-led pilots might actually have perhaps a smaller conversion rate, lower conversion rate.

On the sales front, I think you said you're going to spend a bit on sales, if I recall, around branding and then a bit on development. What about quota reps? Are you at the right headcount? Where are you quota rep-wise? Where do you think you'll be in 12 months?

So we feel that the biggest opportunity right now is to drive more pipeline and generate more pipeline. And that's why we are focusing on the brand and front-end sort of market demand investments. We feel that we are in a good place with our reps, especially because our deal sizes are reasonable. We are still talking about north of 200,000 ARR for new logos. So we feel like we can manage that reasonably well with all the growth expectation we have on the AI knowledge booking side.

Mm-hmm. Okay. And one last, if I could squeak it in, obviously you've got a couple things going on here, knowledge on one side, catching a tailwind, and then conversation and then analytics. And obviously your focus there is customer sat and keeping butts in seats, so to speak. You had the two big customers turn off a couple quarters ago. I'm sure you've got your ears really tuned. I mean, how are you getting comfortable in the conversation and analytics hub base today? that you're not at risk with any of your other customers and avoiding future large churn?

Yeah, that's a good point. We are, as you can only expect, we are hyper-focused on that satisfaction, value delivery, and continuing to work with these clients to – find opportunities. And it happens with the sort of cycle time that every one of these customers has as they are investing on the knowledge and AI side, finding ways to get into that slipstream of knowledge and AI opportunity as well, because then that creates a collective stickiness in these accounts.

Got it. Okay, great. Thanks for taking my questions. Appreciate it.

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

Thanks. You guys tended to be pretty conservative on the spending side, so I'm sort of curious that only a couple quarters ago we were talking about cost controls and now we're talking about investments. So could you maybe talk about what you're seeing that's changing there, whether that's top of the funnel, sales cycles, ARPUs? sort of give us some backdrop for why that positive shift in sort of your stance looking forward.

Okay. So I would say two things. One is that there are three things, really. One is that with existing clients, we are seeing a consistent increase in interest in faster rollout of knowledge across other businesses or other functions like self-service or enterprise facing so for those where we are already with no we are in there with agent facing knowledge solutions so that's one right so that's our kind of the the most reliable year to the ground. And the next thing we are seeing is more inbound interest. And that has been consistently edging up, even in the summer months, as I mentioned. It's very unusual for us to be this busy in the summer months on that sort of sales side. This has been unusual. As Eric and I were talking, we felt like the last time we were this active and busy was summer of 2019. So it's been a while. So that's the second item. And then the third thing that has changed is I'm noticing this and our sales leadership is also pointing it out, that we are seeing more and more of these opportunities prosecute all the way to decision much more predictably than before. So people, when they come in, The amount of power ticking is going down. People are executing RFPs, and they say they will execute. It's kind of happening around that time, and eventually they're deciding whether we win or not. So those are the three things we are seeing that's making us change our investment posture. And like Eric said, this is important, Richard. Right now we're saying product investment and then brand marketing investment. Those are the two primary areas we're investing right now. And then as the pipeline gets to a point where it starts to become really not something we can handle with our current sales capacity, we're going to lag with that sales investment at that point.

Got it. And in the past quarter or two, you've gone through some pretty specifics about some of your larger trialers or how they fit into the Fortune 30, etc., Is there any update to that, any changes, any new sort of larger scale pilots going on that are continuing sort of to fill that top of the funnel while others are working their way through? And I know it's hard because it's sort of lumpy, but I'm just curious if there's anything there.

A couple of things I'll say. I think the quality of companies we're engaging with in terms of size and brand continues to be very good. For example, the mega brand, when I said the financial mega brand, I meant a mega brand in the US on the financial side. When I said multinational conglomerate, where we have just got a foot in the door with a a reasonably chunky ARR deal in Germany, specifically this was in Europe. We're talking about a global 100 company. So these are very large companies, even on the lowest that we are acquiring. Then on the pilot side, I feel like if I look at it, there are many large companies. Now, one of the things we do see, and this is a secular thing, We don't see as many multi-million dollar ARR initial purchases anymore. We just don't see that. What we see is the average is pretty good. Like I said, it's north of 200K, right, Eric? North of 200K initial ARR. But the quality of these companies is large. The potential is large. So I feel like that is a good trend for us.

And last for me, you're still sitting on a pretty good amount of cash on the balance sheet, even after doing some pretty meaningful buybacks. Is there anything interesting sort of on the technology side, whether it's to keep wrapping more product around the AI side of the table, or do you think your capital allocation will still remain sort of focused on the buybacks over the near term? Thanks.

So we are increasing our investment guarantee. I know it's not... It's a good thing that it's not burning a big hole in the balance sheet, but we are increasing our investment. In terms of the rotation that we've done in new innovation, we have a very chunky amount of money that we are putting in with people and capability around their knowledge. That is an area that we'll continue to invest in for some time because we think there's a lot of runway to differentiate as well as make a make an attempt to dominate the emerging market of ai knowledge systems so i would say that's our primary focus right now got it thanks includes our question and answer session i would like to turn the conference back over to e-gain management for any closing remarks all right well thanks everybody for taking the time today and uh

I look forward to seeing some of you at our SOL event in Chicago at the end of October. Thank you.

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