eGain Corporation

Parallel and welcome to the EGainFiscal 2025 second quarter financial results call. All participants will be in listen-only mode. Did you need assistance? Please signal a conference specialist by pressing the star key followed by zero. After today's presentations, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on your telephone keypad, and to withdraw from the question queue, you may press star, then two. As a reminder, this conference is being recorded. I would now like to hand the call to Jim Byers, Pondell Wilkinson, Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to EGainFiscal 2025 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 contain 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, February 13th, 2025, 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. EGain's earnings press release can be found by clicking the press release's link on the investor relations page of EGain's website at egain.com. 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. In the second quarter, we closed some exciting new enterprise logos for our AI knowledge hub offering. Let me share three examples. First, we signed up a major US airline, one of the largest in the world. They wanted to modernize their knowledge platform to improve customer experience and reduce service cost using AI automation. And we are the selected provider for that. Second, we signed up a leading interactive entertainment company, one that has 800 million player accounts worldwide. This company has a vision of putting knowledge in the game for their players, but they were struggling with the existing knowledge platform they have because it could not provide the necessary APIs and functionality to implement the vision. After a successful innovation and 30 days pilot with us, they selected our solution. The last one, a global money transfer company with 150 million customers across 200 countries. They, incidentally, had successfully, or unsuccessfully, sorry, tried to implement a customer knowledge platform two times before they ended up selecting us. Looking at trends in our overall business, the first trend which continues is knowledge centralization in enterprises. This trend is attracting even greater focus due to its foundational relevance to AI projects. As enterprises push to operationalize meaningful AI use cases, particularly in customer service, they are struggling with content silos and fragmented knowledge, which makes it hard to ensure that AI systems relying on these silos for input can generate correct, consistent, and compliant answers. As a result, having a single source of truth in a knowledge central hub across the business is becoming critical. The other trend we see emerging is that knowledge management projects starting out with a mandate of automating customer service are incrementally adding enterprise-facing use cases for employee service or partner service during the sales process. As a result, we see larger knowledge opportunities in our pipeline. In the last six months, for example, we have seen the number of seven figure deals in our pipeline more than double. This is exciting. At the same time though, the side effect of this trend is more scrutiny on these projects and the vetting process now includes groups like the AI office. So these bigger deals are taking some more time to close. On balance, we see this as a very good thing for us. We have the ability and patience to nurture these deals. We're used to close. Turning to our customers and products, at the end of October last year, we had a very successful E-Gain Solve24 event in Chicago. This is our main US customer event. Many of our clients shared success stories about getting real value from AI capabilities in our platform. One client presentation in particular comes to mind. The head of knowledge management at Specialized Bikes, which is a name brand bike manufacturer for hiring scientists. She was on stage talking about their experience with E-Gain AI knowledge hub. And she said, I quote, E-Gain AI is like having an army of interns on Red Bull. Our content team is really freaking happy, end quote. At the event, we also announced E-Gain AI agent, a new omni-channel conversational product that guides and resolves customer and agent questions using documents, websites, and our knowledge base. Customer interest in E-Gain AI agent is very strong. We see the pressure in enterprises all the way up or coming down from the board and the CEO to show real business value with AI this year. Most of our clients are actively looking for full-stack AI solutions to quickly move the needle in customer service, both in cost and experience. And we are on track to launch our E-Gain AI agent in the current quarter as planned. To conclude, our AI knowledge hub solution is driving growth on our pipeline. We are actively investing and leading and shaping the AI knowledge hub market to automate business operations starting with customer service. And E-Gain AI agent, our omni-channel conversational solution that we announced at our solved event will be available this quarter. With that, I'll ask Eric Schmidt, our chief financial officer, to add more color around our financial operations.

Eric? Thanks, Ashu, and thanks everyone for joining us today. As Ashu mentioned, we won several new enterprise logos in the quarter that resulted in a 17% increase in AI knowledge hub ARR year over year. Let me share more details about our financial results for Q2 before discussing our outlook and guidance for Q3 and fiscal 2025. Looking at our revenue, total revenue for the second quarter was 22.4 million, which was within our guidance, but down 6% year over year. As discussed on previous calls, the year over year decline was primarily due to the impact of two large client losses last year. One, a Conversation Hub customer, and the other, an analytics customer. Looking at the revenue in more detail, our sales revenue in the quarter was ahead of our internal expectations and accounted for 93% of total revenue. This was offset by our peers' revenue coming in lower than expectations. With the recent product improvements, we are seeing the peers' attach rates for revenue on new implementations go down as designed. This improvement results in faster deployment and quicker time to value for our clients. Based on this, we are lowering our peers' revenue targets for fiscal 2025 by approximately 2.0 million. This will be reflected in our updated guidance which I will cover later on in the call. Looking at the non-GAAP gross profits and gross margins, SAS gross margin for the quarter was 78%, unchanged from a year ago. Total gross margin for the quarter was 71% compared to 72% a year ago. Now turning to our operations, non-GAAP operating costs for the second quarter came in at 14.7 million, up from 9% from 13.5 million in the year ago quarter. R&D was up 21% year over year as we invest in product innovation to capitalize on a significant AI knowledge market opportunity. Looking at our bottom line, non-GAAP net income was 1.3 million or 5 cents per share on a basic basis and 4 cents per share on a diluted basis. Compared to non-GAAP net income of 3.4 million or 11 cents per share on a basic and diluted basis in the year ago quarter. Adjusted EBITDA margin for the quarter was 7% compared to 16% in the year ago quarter. Turning to our balance sheet and cash flows, for the second quarter we generated 6.4 million in cash flow from operations or a 29% operating cash flow margin as compared to 7.7 million generated in the year ago quarter. During the quarter, under our share repurchase program, we repurchased approximately 421,000 shares at an average price of $5.73 per share, totaling $2.4 million. Of the 40 million authorized, $10 million 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 was 70.5 million. By turning to our customer metrics, to highlight the momentum we are seeing in our knowledge business, I've broken out the AI knowledge metrics from the total metrics. First, looking at ARR. The SAS ARR for our AI knowledge customers increased 17% year over year, while total SAS ARR for all customers decreased 3% year over year, was up 2% sequentially. Looking at ARR for our AI knowledge customers, this accounted for 55% of our total SAS ARR at the end of the quarter, and up 46% from a year ago. Turning to our net retention rates, LTM, Valor-based SAS net retention for our AI knowledge customers was 99%, while net retention for our old customers was 89%. Now turning to our net expansion rates, our LTM Valor-based SAS net expansion rate was 104% for our AI knowledge customers, and 105% for all our customers. Looking at our remaining performance obligations, total RPO decreased 5% year over year, which was up 5% sequentially. And our short-term RPO of 51 million was down 9% year over year. Their year over year declines were primarily due to the two large customer losses previously mentioned. Looking at our outlook for the remainder of fiscal 25, two factors are driving the updates to our guidance. First, the change to our PS implementations, as I discussed earlier, are reducing our PS revenue target by 2 million for fiscal year 25. Second, as Ashu mentioned, our AI knowledge hub is becoming a more strategic offering for global 1,000 enterprises focusing on customer service automation. As a result, we are seeing a growing number of seven-figure AR deals in our sales pipeline. However, with this strategic importance comes increased review cycles and extended timelines for final decisions and implementation. As such, we want to give ourselves more cushion in the revenue guidance for fiscal 25 to factor in the additional time that may be needed to close these large strategic deals. Now turning to our guidance for fiscal 2025, full year ending June 30th, 2025. Based on the points I just outlined, we are updating our guidance as follows. We are lowering our total revenue guidance range to 88.5 million to 90 million, down from our original guidance of 92 to 93 million. Our revised expectations is for SAS revenue to equal approximately 93% of total revenue for the year. Turning to the bottom line, we are lowering our non-GAP net income guidance range to 4.1 to 4.7 million or 14 cents to 16 cents per share, but down from our original guidance range of 5 million to 6 million or 17 cents to 20 cents per share. And we are raising our GAP net income guidance range to 1.1 million to 1.7 million or 4 cents to 6 cents per share up from our original guidance range of break even to 1 million or zero to 3 cents per share. We now estimate share-based compensation expense of approximately 3 million for the year and depreciation and limitation expense of approximately 350,000. Looking at weighted average shares outstanding, we expect approximately 28.5 million for the third quarter and 28.6 million for the full fiscal year. Turning to our guidance for the third quarter of fiscal 2025, we expect total revenue of between 21 million to 21.5 million. As a reminder, the fewer number of days in Q3 has an approximate 330,000 negative impacts on the revenue for the quarter. In addition, in our Q2 revenue, included approximately 600,000 of usage-based revenue which we do not expect to recur in Q3. Turning to the bottom line for Q3, we expect GAP net loss of 300,000 to 800,000 or one cent to three cents per share, which includes stock-based compensation expense of approximately 800,000 and depreciation and amortization expense of approximately 80,000. We expect non-GAP net income of great even to 500,000 or zero to two cents per share. In summary, we want several new enterprise logos in the second quarter that drove our AI knowledge ARR up 17% year over year. We see our AI knowledge have becoming more strategic, resulting in a growing number of seven-figure ARR deals in our sales pipeline. The strategic importance of these opportunities is extending the sales cycle but we believe it sets us up well for continued acceleration in the growth of our AI knowledge business going forward. Lastly, on the investor relations calendar, Egan will be meeting with investors at the annual ROC conference on March 17th. We'll provide 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 very much. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Today's question comes from Jeff Van Rhee with Craig Hallam. Please go ahead.

Great, thanks for taking my questions, guys. A couple, just obviously professional services, as you described the bulk of the reduction to the guide. You just talk about the evolution of what's gone on there. I have it, you did a couple million Q1, a million FQ2, and a two million cut for what two quarters remaining. It's pretty substantial given the scope of that organization. So talk about just kind of what's played out there. It seems pretty rapid, whatever's playing out there. And then along with that question, obviously, if the revenue base is that substantially reduced, any staffing adjustments you need to make there or you expect that to come back at some point?

Right, I guess it's actually here. So yeah, let's start with the driver for the reduction. So as Eric mentioned, it's two things. The primary one is what Eric said, which is we keep trying to add more and more connectors and pre-built capabilities in the product so that the effort required for custom integration goes down. So that's something which we are driving more and more. Also on the front end, we're building out more and more templates that are out of the box so that people can consume the knowledge faster without having to build custom interfaces to use it. So that's the primary driver. But the second one, which is also I think important, is that we are also developing some partnerships and that's still something we want more and more of, to try to create third-party capabilities to implement our solution. So the combination of those two is creating that big reduction that, like I said, outside of the estimation adjustment, this is a desirable thing for us.

I think from the cost side, we'll certainly look to look at those spins appropriately. We'll see if those resources can be reallocated or reduced to align with the revised numbers.

OK. All right, Alfa, and then the US airline, it sounds like a pretty compelling, obviously, large customer, large potential customer. Talking about the operating environment, what were they using on the knowledge managing side? Where did you displace? What was the competitive landscape in winning that deal?

Yeah, so a couple of points. One, they had multiple knowledge systems. I didn't get into the detail in the prepared remarks, but they had multiple knowledge systems. They had a legacy solution, which was a standalone solution. They also had a CRM platform, in this case Microsoft, where they had a knowledge capability added to that as part of that as well. They had lots of SharePoint also, because, as you can imagine, a large organization. So this was as much a replacement as it was a consolidation player for them.

OK, got it. I'll leave it there. Thank you.

Thank you. As a reminder, to ask a question, you may press star and then one. At this time, we are showing no further questions. I would like to turn the call back over to management for closing remarks.

Thanks, operator, and thanks, everyone, for listening to the call. We look forward to providing you an update on the next conference call. I hope to see some of you at the ROTH event in March. Thank you.

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