eGain Corporation

Good afternoon, and welcome to the eGain Fiscal 2025 First Quarter Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your 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 2025 First 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 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, November 12th, 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 financial tables included with the earnings press release include 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 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. Ashu Roy Thank you, Jim.

And hello, everyone. We are pleased to report first quarter revenue and profitability ahead of consensus estimates. In what is a seasonably light new bookings quarter for us, our new bookings were up significantly year over year. Returning to business highlights, during the quarter, we booked good new and expansion business. Let me share a couple of examples. We signed up a client who's looking to improve the productivity of its field service engineering team worldwide, about 4,000 plus engineers. They are very large, multi-billion dollar data center builders, and their business is booming in the AI space. This client tried to unsuccessfully solve the knowledge problem a couple of times before we got the mandate. First, they tried to solve it with a homegrown solution. That didn't scale. Then they toyed with the knowledge capability in their CRM platform, but that couldn't handle the complexity and compliance requirements they had. As I've said before, some of our best clients tend to be those who have tried and failed at getting value out of their knowledge management initiatives before they come to us. With our hub, this client intends to create a single source of truth delivering trusted answers using AI and experts in the loop. This is an exciting entry for us into the market for field service, a huge adjacency to our current market focus on B2C customer service. Another one I want to mention is a recent client, one we signed up in Q4 of last year, so about five months ago. they are now expanding the use of our AI knowledge hub based on the quick value we delivered. The client, in the first few months of their deployment, established a solid knowledge foundation in their business focused on customer-facing knowledge. That worked very well. And so now they are centralizing all of their company knowledge in the eGain hub. In fact, this is a trend we see in the market where businesses are increasingly recognizing the value of a centralized knowledge hub that natively uses AI and experts to deliver trusted answers to all stakeholders. Starting with customers and service agents, where the pain point tends to be very high and measurable, these companies then recognize the value and extend out the capability to serve other functions across the enterprise. This, to us, is the Productivity and experience prize that AI knowledge can deliver when done right. And that is transformational impact at speed and scale. In fact, I've discussed this before. I'm sure you're aware of it. The McKinsey data about potential cost savings of 35% in customer operations definitely feels well within reach. Moving to renewals. We saw good renewals in the quarter with no significant churn. Now, as we have entered Q2 of this fiscal year, our deal momentum has picked back up post the seasonal slowdown in the summer. And we have closed some interesting new logos in the current quarter. I just want to talk about a couple of them because they confirm our assessment of the market trends toward enterprise knowledge hubs. One is a hyper-growth energy solutions provider for projects in North America. They are initially starting with knowledge for customer service and field service, and then they plan to scale knowledge across the enterprise. Another one is a very large video games developer and publisher in the U.S. They are initially looking to embed knowledge into the flow of play for their customers, so more self-service, and also empower their trust and safety teams. all from a knowledge hub. And with that knowledge hub, then they intend to take it out to the rest of the enterprise. We see knowledge centralization as a powerful trend in the market, especially as businesses are looking to get more business value out of their AI projects and investments. The centralization of knowledge in the right architecture ensures compliance, improves experience, and boosts productivity all at the same time. Looking at customers and products, I want to talk about our Solve24 event in Chicago last month in October. That was a very, very good event for us. We had clients sharing their success stories of real business impact at scale with AI and knowledge. And I mentioned in my keynote at that event that the excitement around generative AI continues to grow, but also that we all recognize that generative AI is a commodity. It's a commodity that will keep getting faster and cheaper. The big question for every business is how to marshal that commodity in the context of a business to deliver transformational impact. Our clients share their stories about how the eGain AI Knowledge Hub and associated knowledge method process helps them accelerate value realization in an easy, quick, and assured manner. We also, at the event, announced an exciting new solution. We call it eGain AI Agent. It's a conversational self-service offering that can be used across all touchpoints. What's special about it is that it uses trusted knowledge from within the eGain hub and taps into necessary enterprise data using connectors and delivers guidance and customer inquiry resolution going beyond simple FAQs and narrow domain interactions that are pre-programmed. Moreover, it does not require clients to engineer a solution themselves, starting with an AI toolbox. With eGain AI Agent, we will challenge the plateau of poor customer self-service that most businesses are stuck in for many years now. We believe that our AI Agent solution will help clients achieve significant incremental customer self-service adoption. This solution-oriented approach that we have taken, using AI and knowledge, is very different from the tools approach that most providers offer today. We intend to deliver working AI agent solutions and then partner with clients to drive effective adoption. We do not want to sell a DIY AI toolbox and walk away. An approach that is commonly offered and we believe is causing significant frustration in the market as businesses find themselves in the operationalization gap in trying to go from an AI prototype, which is very exciting, to value at scale. Given the rapid pace of AI technology change now and in the foreseeable future, we believe our full-stack approach to delivering these solutions is an attractive and low-risk proposition for the markets. And that is the value we are pursuing with our increased product investment in partnership with our clients. With that, I'll ask Eric Schmidt, our Chief Financial Officer, to add color around our financial operations. Eric?

Thanks, Ashu, and thanks, everyone, for joining us today. As Ashu noted, both first quarter revenue and profitability came in ahead of consensus estimates. We continue to see positive momentum in our AI knowledge business, and stabilization within our conversation and analytics customer base with strong renewals and no material losses in the quarter. Let me share more detail about our financial results for Q1 before discussing our outlook and guidance for Q2 and fiscal 2025. Looking at our revenue, total revenue for the first quarter was $21.8 million at the high end of our guidance, but down 10% year over year. The decline was primarily due to the impact of the two large client losses in our conversation and analytics business this past year, which we've discussed on prior calls. When looking at revenue by region, North America accounted for 75% of total revenue, down from 79% in the year-ago quarter. Looking at non-GAAP gross profits and gross margins, gross profit for the quarter was $15.4 million, or a gross margin of 70%. compared to a gross margin of 73% a year ago and 71% last quarter. Now turning to operations, non-GAAP operating costs for the first quarter came in at 14.2 million, down 5% from 15 million in the year-ago quarter. R&D was up 16% year-over-year as we invest in product innovation to capitalize on the significant market opportunity. Looking at our bottom line, Non-GAAP net income was $1.3 million, or $0.04 per share, compared to non-GAAP net income of $3.8 million, or $0.12 per share, in the year-ago quarter. Adjustability with our margin for the quarter was 6% compared to 12% in the year-ago quarter. Turning to our balance sheet and cash flows, for the first quarter we generated $954,000 in cash flow from operations, or a 4% operating cash flow margin. This compares to $8.1 million generated in the year-ago quarter. During the quarter, under our share repurchase program, we repurchased approximately 671,000 shares, an average price of $6.84 per share, totaling $4.6 million. Of the $14 million authorized, $12.4 million remain available under the program at the end of the quarter. Our balance sheet remains very strong. Total cash and cash dividends at the end of the quarter was $67.2 million. Now, turning to our customer metrics, to highlight the momentum we are seeing in our knowledge business, I have broken out the knowledge metrics from the total metrics, which, as previously discussed, were impacted by the two conversation and analytics customer losses last fiscal year. Looking at ARR, total SES ARR for knowledge customers increased 16% year over year. while the total SAS ARR for all customers decreased 4% year-over-year, but was up 2% sequentially. Turning to our net retention rates, LTM dollar-based SAS net retention for knowledge customers was 103%, up from 98% at the end of last quarter, while net retention for all customers was 90%, up from 88% at the end of last quarter. Now, turning to our net expansion rates, LTM dollar-based SaaS net expansion rates was 108% for both our knowledge customers and for all our customers. Looking at our remaining performance obligations, total RPO decreased 15% year-over-year, and our short-term RPO of 54.5 million was down 9% year-over-year. The declines were primarily due to the two customer losses previously mentioned. Now onto our financial outlook and guidance. One item I'd like to call out again before providing our guidance is the change in revenue forecasted from our Cisco OEM business, which we discussed on last quarter's conference call. As I mentioned, we are seeing the Cisco OEM business shift to more rateable recognition. which we estimate will result in a deferral of approximately $1.3 million of revenue that could have otherwise been recognized in fiscal 2025. Most of that impact to revenue occurred in the first quarter. And to be clear, we did not lose the revenue, but more of the revenue will be recognized ratably over the term of the contract. Now, turning to guidance, for the second quarter of fiscal 2025, we expect total revenue of between $22.2 million to $22.6 million. Turning to the bottom line for Q2, we expect gap net loss of $400,000 to $900,000 or a loss of $0.01 to $0.03 per share, which includes stock-based compensation expense of approximately $900,000 and depreciation and amortization of $100,000. We expect non-gap net income of breakeven to $500,000 or $0.02 per share. Looking at our fiscal year ending June 30, 2025, we are reiterating our guidance of total revenue of between $92 million to $93 million. But looking at that revenue in more detail, our current expectation is for SAS revenue to equal approximately 90% of that total revenue. And excluding the impact of the two large customer losses and the Cisco OEM revenue recognition timing difference, We expect that SAS revenue to grow in the high single digits this fiscal year, with that growth rate accelerating next fiscal year as we continue to close on deals in our growing pipeline. Now, turning to our bottom line, we expect 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 $29.1 million for the second quarter and $29.7 million for the full fiscal year. In summary, we are seeing continued strong momentum in inbound interest and pipeline activity for our AI knowledge offering. as businesses look to leverage AI and knowledge management to lower their cost of service. This momentum is translating into increased business with our ARR for AI knowledge customers growing 16% year-over-year. As such, we are doubling down on product innovation, partnering with clients to capitalize on the market opportunity created at the intersection of AI and knowledge management. Lastly, on the investor relations calendar, EGAIN will meet with investors at the 13th Annual Roth Technology Conference in New York City on November 20th. We 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 our question and answer session. To ask a question, you may press star then 1 on your touchtone phone. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question will be from Jeff Van Ree from Craig Hallam. Please go ahead.

Hey, good evening, Ashu, Eric. This is Daniel on for Jeff. Just briefly, we could speak to, you know, in previous quarters, you've been talking about some of the improvements we're seeing go to market in terms of, you know, the sales cycles coming down, more RFPs, better conversion rates. just maybe in terms of those green sheets that you guys have been seeing, just any developments, what you can call out compared to 90 days ago, where that's been, and then maybe a two-parter here, kind of in that vein. You mentioned new bookings up substantively year over year. Just any quantification there would be helpful.

Sure. So I can speak to the RFP stuff and maybe to the extent you can talk about any bookings breakdown. So I believe the RFP Pace is quite steady. You know, we have the summer slowdown, which is always there because, you know, summers are slow time. But both paths, so in October, we have seen a big pickup again. So I think the RFP pipeline continues to be quite good for us.

And on the booking side, if you recall, I think this quarter a year ago was probably one of the slowest points in the business. Again, this quarter is seasonally slow, significant improvements from a year ago, but still from a total booking standpoint, certainly not a very strong quarter relative to what we would expect as the year continues. So we certainly expect that booking number to increase as we see the quarters progress.

Helpful. Yeah, then one for you, Eric. Just on the additional investment into marketing and R&D you guys have been looking to make, just kind of update us on how far are we into actioning those R&D changes. And then specifically on S&M, looks like that was down sequentially. Maybe just help us with what's happening there.

Let me take the marketing one. Maybe I can answer this. So the marketing stuff is impacted by our seasonality in terms of some of the big investments we make in our own events. So, for example, we had the big event in October, so you'll see a spike because of that, right? So that is one way to think about marketing. It's not necessarily quarter-on-quarter sequential increase. It's more timing-driven through the year. In terms of R&D, I mean, we are definitely increasing our spend in that, and it'll probably go up a little bit more as we get closer to some new announcements. We will be going GA, for instance, with our AI agent in the first quarter calendar 25. And so you'll see some of the steady pickup on that. Not a huge amount, but you'll see a steady pickup. Okay.

Exactly. I think that's exactly it, actually. Yeah, I think so. That's a number we've made good progress, and, you know, there might be some incremental spending, but I think we've done a good start to the year with those numbers that we've set. Okay, that's helpful.

And then just a high-level question for me. As the company is, you know, pivoting to sort of focusing on these Gen AI projects, you know, products as the tip of the icebreaker on sales in terms of, you know, assist CPT and the new agent product. Just help us understand at a high level where we're at in the evolution for the company as in terms of both product and go to market in making those the drivers and, you know, in terms of the maturity of where we're at in that process.

So a couple of comments I'll make. One is from a product standpoint, I would say we are fairly advanced because we've been investing in it for the last two years. And so I think we have made some very good progress in the product front. It will continue, but you'll start to see results. And as we announced this new AI agent, that was the result of some good investment over the last nine to 12 months. And you'll see a continued string of new things coming up as we announce them. In terms of sales and marketing, we see it as a sort of somewhat of a sequential process, right? So as we are driving more product innovation and announcing new capabilities, we are also seeing our pipeline filling up. And then there are some new things we are working on that will then give us the basis, a platform, if you will, to invest much more effectively in market development and go to market. And I think that's going to be likely to be in the second half of this fiscal year. is when you start it.

That's helpful. And then just the last for me, just in terms of kind of geographical splits, I saw a particularly strong quarter out of EMEA, it looks like, and a little bit lighter in North America. Is that an anomaly? Anything we should read in there as a trajectory? Just any commentary on that would be helpful. Thanks, guys.

In terms of new business, sorry, U.S. is still the engine of growth.

Yeah, and I think just to add to that, this was really more a function of some of those customer losses. So those happened to be U.S.-based businesses. So as the revenue declined, that adjusted that shift as opposed to it being a reflection of a change in the sort of the market demand that Ashu's point is very much still U.S.-focused.

Okay, thank you, Ashu. Thank you, Eric. Congrats on the quarter. Thank you.

And the next question is from Richard Baldry with Roth Capital. Please go ahead. Thanks.

It seems like, you know, AI coming into the market is largely a confusion factor for quite a while. It added to what people wanted to put into their solutions. They didn't know exactly how it would work. Can you talk how much about it's still a confusion factor in the sales cycles? Are there new competitors coming with very small point solutions that are still confusing that? Do they have real offerings? Or is a lot of that slide where I could feel about it. And in the long run, we feel like it should be a driver and a market expander. But how close do you think you are to that sort of a tipping point as opposed to sort of bogging down the processes?

I think the realization in the market that you need more than just a small point you know widget or a very narrow solution that could solve business problems across lots of use cases we are seeing that realization more and more now and and i can see that in the i review some of the rfps that come in and rfis and i can see that at the same time i would say that new entrants continue to enter the market so the confusion factor is not going down but enough people in that churn are exiting that churning drum and saying, okay, let's try to solve this in a more thoughtful way using AI as opposed to just AI as the solution for everything. And we are seeing that the trend that we are seeing intersecting with it positively for us is this centralization of knowledge to deliver trusted content so that AI can in fact do a job that is operationally useful. That is a trend we're seeing more and more now.

Thanks. In some quarters, you've been able to talk about big trialers that are underway, 10 billion plus kind of customers. Any update on that very large opportunity, how those pipelines are looking, how far people are moving through that? Is it changing sales cycles, timings, and you know, how that should play out as fiscal 25 unfolds.

Let's say we are seeing more trials. Well, let me rephrase that. We are seeing more large trials. So that, to me, is a good sign. That tells me that big companies are getting more serious about making a decision in this area, right? Not unseen. In terms of cycle time, it's still pretty much the same, right? nine to 12 months for these large deals. But we have more of these large trials underway.

Last to be still following on that, I think you said before you had something very high, like a 75% conversion of pilots to customers. Maybe that's early into the cycle. What are you seeing about when people trial it extensively, sort of win rate, or the ability to move to a decision as opposed to continuing to look for solutions?

I would say that is still in the ballpark of what we are seeing, yes. It's almost like if we are able to move them into the trial, that's our qualification to the next stage of the fight. Great.

Thanks for your help.

Thank you. And, ladies and gentlemen, this concludes today's question and answer session. I would like to turn the conference back over to eGain Management for any closing remarks.

Thanks, Operator, and thanks, everyone, for listening to the call and look forward to giving you an update for our future results. Thank you.

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