eGain Corporation

Good afternoon and welcome to the EGain Fiscal 2025 Third 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 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Jim Byers, Pondell Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Welcome to EGain's Fiscal 2025 Third 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 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 on the company's reports filed with the Securities and Exchange Commission. EGain is making these statements as of today, May 14, 2025, and assumes no obligation to 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 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 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 our third quarter, we exceeded our profitability projections and delivered solid operating cash flow. Bookings for the quarter, however, were impacted by the extended sales cycles we had mentioned last quarter. Despite this, we continue to grow our pipeline as demand for our AI knowledge offering continues to gather momentum. Having said that, we're very excited to report that we secured one of our largest deals ever soon after the quarter closed. This deal is with the U.S. consumer group of the U.S. Megabank, one of the big four. Like most innovative businesses, they have concluded that they needed an enterprise knowledge foundation to deliver trusted content to customers, employees, and AI. We started out in this account by establishing a beachhead with the client over a year ago in one of their fast growing international divisions. Shortly thereafter, we replaced their homegrown knowledge solution in one of their U.S. subsidiaries. And now with this third win, which is in the U.S. consumer banking group, which, by the largest business unit, we are going to have our AI knowledge platform used across more than half the bank, over 100,000 users. That's very exciting to us because it exemplifies the vision that we have been pursuing, and that is establishing a single source of truth which delivers trusted content across the business in the AI era. Turning to our products, in March, we launched the EGain AI agent for Contact Center. This is the second of the offerings of our AI agent product capability. The first one was the EGain AI agent for customer self-service. Now, this Contact Center solution is a breakthrough conversational assistant that guides Contact Center agents to resolve customer issues across all touch points, so phone, chat, email. Unlike other solutions, the EGain AI agent delivers proactive real-time guidance beyond simple FAQs or narrow, pre-programmed domain interactions. And it does so by using the trusted answers from our EGain Knowledge Hub. The solution connects out of the box with Amazon Connect, Genesis Cloud, and Salesforce. Plus, it has APIs to integrate with other CRM and CCAS platforms. Now, we are seeing very good interest in the solution, particularly from businesses who in the past have struggled to get value out of the first wave of AI solutions in the market. One of our banking clients, existing ones, is already rolling out the solution for their contact centers. They are keen to reduce the variability of agent performance and improve compliance in the flow of service rather than policing for compliance and performance after the FAQ. Interestingly, they had tried out a couple of AI assistant solutions from their CCAS provider and another vendor, but they could never scale it beyond the prototype. So we are very excited about these AI agent offerings. We have two of them now, one, as I mentioned, for customer self-service and now for the contact center agents.

The

easy try and use models that we have created, we believe, will accelerate new logo acquisition and innovation consumption among our clients. I am also excited to note that during the quarter, Gartner published their first emerging market quadrant for generative AI knowledge management apps. It is a mouthful, but this is a category that they have created. In this category, they rated E-Gain a leader, so in the upper right quadrant. This emerging category, as they call it, is defined by Gartner as technologies that enable companies to better retrieve and contextualize information and insight from the knowledge basis, including search and insight engines, conversational AI and productivity tools, all toward communication and content development. In the AI era, as Gartner states, knowledge management is no longer a -to-have capability. It is a must-have infrastructure. An enterprise-wide system of record for trusted answers that empower AI and empower all employees and customers. In this emerging market opportunity, we are focused. We are investing in it and we are capitalizing on it. To conclude, while macro uncertainty impacted the timing of closing new deals during the third quarter, we are seeing good deal closure in the current quarter. Starting with the mega bank deal that I mentioned. We launched our breakthrough AI agent for contact center offering during the quarter. We are seeing very good customer interest. Finally, our strategic efforts and increased R&D investments over the past year are starting to show results. We are starting to establish E-Gain as the trusted knowledge foundation for the AI enterprise. With that, I will ask Eric Smith, our chief financial officer, to add more color around our financial operations. Eric?

Great. Thank you. Thanks, everyone, for joining us today. As Ashu noted, our third quarter results included profitability that exceeded our projections and solid operating cash flow. Let me share more details about our financial results for Q3 before discussing our outlook and guidance for Q4 and fiscal 2025. Looking at our revenue, total revenue for the third quarter was $21 million, which was within our guidance but down 6% year over year. As previously discussed, the year over year decline reflects the impact of the two large client losses last year. One at Conversation Hub customer and the other at Analytics customer. This will be the final quarter with year over year comparisons affected by these former customers. Looking at the revenue in more detail, our SaaS revenue in the quarter accounted for 93% of total revenue. The remainder was professional services revenue. As I've noted before, with the recent product improvements, our PS attach rates on new implementations decreases by design. The improvements we are making to our products have resulted in foster deployment and quicker time to value for clients, which means less need for low margin professional services, which is good for our business. Looking at non-gap gross profit and gross margins, SaaS gross margin for the quarter was 77% compared to 78% a year ago. And total gross margin for the quarter was 69% compared to 71% a year ago. Now turning to our operations, non-gap operating costs for the third quarter were $13.8 million, down 6% sequentially and flat compared to the year-ago quarter. R&D was up 15% year over year as we continued to invest in product innovation to capitalize on the significant emerging market opportunity that I should just talk about. Looking at our bottom line, non-gap net income was $765,000 or 3 cents per share and ahead of the high end of our guidance range for the quarter. This compared to non-gap net income of $2.6 million or 8 cents per share in the year-ago quarter. Adjusted EBITDA margin for the quarter was 6% compared to 10% in the year-ago quarter. Turning to our balance sheet and cash flows, for the third quarter we generated $2.2 million in cash flow from operations, or an 11% operating cash flow margin, up from $1.7 million generated in the year-ago quarter. During the quarter, under our share repurchase program, we repurchased 895,000 shares at an average price of $5.61 per share totaling $5 million. At the end of the quarter, $5 million of the $40 million of authorized remaining available is remained available under the program. Our balance sheet remains very strong. Total cash and cash equivalents at the end of the quarter were $68.7 million. Now turning to our customer metrics, I've broken out our ARR knowledge metrics from the total metrics to highlight the momentum in our knowledge business. Looking at ARR, SAS ARR for our knowledge customers increased 11% year over year, while the total SAS ARR for all customers decreased 6% year over year. With the strong booking start to Q4, as you mentioned, we expect the SAS ARR for our knowledge customers for fiscal 2025 to increase in the high teens year over year. We also expect year over year growth in the total SAS ARR in fiscal 2025. Turning to our net retention rates, LTM dollar-based SAS net retention for knowledge customers was 97%, while net retention for all customers was 88%. Our LTM dollar-based SAS net expansion rate was 103% for our knowledge customers and 104% for all customers. Looking at our remaining performance obligations, total RPO decreased 2% year over year, and our short-term RPO of $44.3 million was down 7% year over year. The year over year declines was primarily due to the two large customer losses last year, as previously mentioned. Now turning to guidance, for the fourth quarter of fiscal 2025, we expect total revenue of between $22.8 million to $23.3 million. Turning to the bottom line, for Q4, we expect gap net income of $1.1 million to $1.6 million, or $0.04 to $0.06 per share. Which includes stock-based compensation expense of approximately $700,000, and depreciation and amortization of approximately $100,000. We expect non-gap net income of $1.7 million to $2.2 million, or $0.06 to $0.08 per share. For the fiscal 2025 full year, due to the deals taking longer to close than previously projected, we are revising our guidance range for total revenue to between $88 million to $88.5 million, down slightly from the original range of $88.5 to $90 million. With our ongoing cost optimization efforts, we are increasing our bottom line guidance range to gap net income of $2.5 million to $3 million, or $0.09 to $0.10 per share, up from the original guidance range of $1.1 million to $1.7 million, or $0.04 to $0.06 per share. This includes stock-based compensation expense of approximately $2.6 million, and depreciation and amortization of approximately $360,000. We expect non-gap net income of $5.1 million to $5.6 million, or $0.18 to $0.20 per share. In summary, with eGain now increasingly recognized as the knowledge foundation for enterprise AI initiatives, and backed by our profitable core business, we continue to invest in product innovation to capitalize on the emerging market opportunity. Notably, we closed one of the largest deals in the company history shortly after the quarter end, securing a significant expansion of our knowledge offering across the U.S. and the world. We are also seeing strong customer interest and early traction with our newly launched AI agent for Contact Center, which is already demonstrating its potential to enhance service performance and broaden our addressable market. With that, I would like to open the call for questions. Operator?

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 speaker phone, 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. Our first question today is from Richard Baldry with Roth Capital. Please go ahead.

Thanks. Can you talk a little bit more about the mega bank win? I'm sort of curious about the pace to roll out the deployment, how big the expansion is by scale sort of compared to what they were, is it 50% bigger, 2X, and then maybe sort of how unique or repeatable that win was across the rest of your customer base.

Right. Okay. Richard is actually here. So yeah, start with the first one. So let's say the deployment is at pace right now. So I think the customer will be fully deployed on this expansion by the, you know, by late fall. So it's a pretty aggressive schedule between now, you know, when we secured the deal, it's about a six months deployment in multiple phases. And then in terms of the rollout and expansion, I would say we, it's an order of magnitude bigger, right? I would say maybe 10X of what we were before that. So it's a much bigger size than what we were before we got into this third expansion, the second expansion and the third deal. And then as far as the repeatability, I would say it's a pretty common pattern we are seeing in all businesses, as I mentioned earlier, I think maybe two quarters ago, we used to see a lot more functional engagement with customer service and contact centers, mostly for knowledge management. And that still continues to be our primary entry point in businesses. But we are seeing more and more collapse of the functional boundaries because of the AI drivers. And so knowledge is becoming a solution that people are looking to deploy across the business so that they can then have that single source of truth across all functions. So that's kind of the repeatability we are seeing in these sales now.

Thanks. Maybe last for me, you know, you talked about sales cycles have been a bit extended. Do you feel like they, while extended, they've maybe stabilized here? Do you think it's getting, you know, any worse, any better? I'm sort of curious how much

- I would say they're stabilized. They're stabilized. I think the increase has been mostly because of the opportunities as well as the number of groups that need to be involved to go through that process of evaluation and ultimately decision. So yeah, I would say that it's stabilized. So it's probably more like nine to 12 months now on average as opposed to nine months. This is an extra quarter if you will add it to all of this.

Great. Thanks. The next question is from Jeff Van Rhee with Craig Hallam. Please go ahead.

Evening, Ashu. Eric. This is Daniel on for Jeff. Just maybe one more question on the Megabank before we move elsewhere. Just maybe unpack a little bit more, you know, what that ramp up through the fall will look like in terms of the process. You know, is there- is that all, you know, sort of sealed and done? It's going to be a very linear, very easy rollout. Is there, you know, what are sort of the hurdles in terms of implementation, training, you know, approvals? How will that look like? And then, you know, going along with that, the revenue ramp, will that be linear? How will that curve?

Sure. I'll take the first. Maybe you can take the second. So in terms of the implementation, I would say that it's not unusually custom. It's sort of like many other large enterprises we have worked with. The only big difference, I would say, is that this bank is super aggressive on the AI front. So their internal AI teams are much more advanced. And they are pulling- they expect to pull a lot more knowledge content from our knowledge hub to further drive their kind of So that part is kind of new and exciting. But other than that, I would say it's fairly powerful, of course, for a large enterprise deal.

And on the RevRex side, the way the deal is structured, it will be ramped up pretty much from the beginning as opposed to a phased purchase over time.

Okay. That's helpful. And I think that gets sort of to, you know, my next question, which was in the terms of the sequential growth we're looking for from Q3 to Q4, looks like around 10%. You know, what's the visibility? What are the drivers of that? Is there any sort of rebound in PS? Is this, you know, all visibility from this major mega bank deal sort of starting off hot? What's the visibility there?

Yeah, exactly. I think it's a combination. I mean, given the size of this deal and the timing of it, that'll certainly have a meaningful impact on sequential growth. Okay.

And then just as we look a little further out, you know, to 26 and beyond, you know, if a bottom was going to be reached on the growth and sort of a rebound back to positive growth, I mean, how do you think about at a high level what that growth formula would look like? You know, is that analytics and conversation hub, you know, hitting a bottom? Is that, you know, an acceleration in knowledge? Is that, you know, a change in top 10 customers? Just where's sort of the change in that growth formula?

I would say that 26 should be our year of showing real top line impact of the AI knowledge investments that we have been making for the last two years and particularly in the last year, meaning fiscal 25. So I think we'll see at the benefit of that in fiscal 26.

And as I've mentioned on the call, I think obviously with this deal, the ARR, which obviously is the leading indicator, we see that getting up for the knowledge business up into the high teens. And so certainly that's what we'll be targeting in those, in that range as we look to fiscal 26.

Okay, that's helpful. And then just last for me, terms of the results. Just to clarify,

that's for the knowledge, the ARR knowledge side of the business.

Okay, that's helpful, Eric. Thank you. And then just last for me, just in terms of revisiting, you know, the results for this quarter, and obviously, you know, the decline was already called out last quarter and we got to discuss it in terms of, you know, expecting some headwinds in PS and, you know, some push outs in terms of deals slipping, but sort of beyond deals slipping and beyond, you know, PS with subscription down sequentially. Just revisiting, where was, you know, was that churn? Is there something seasonal? Is that, you know, push out of renewals where a deal, you know, temporarily goes suspended and then it comes back? Just the sequential there for this quarter.

Yeah, so I think just sort of highlighted this during the call, just given the fewer number days. If you look back historically, there's often that sequential decline in this quarter, so that certainly accounts for a portion of it. So I think, and then timing of the deals, I think being pushed out, we didn't see any meaningful impact of revenue of deals that closed in the quarter. And I think finally, I think there was some catch up in the previous quarter that we talked about. So I think, as you said, we talked about these items on the previous call.

Okay, thanks, Ahu. Eric, that's it for me.

Again, if you have a follow-up question, please press star then one. Showing no further questions, this concludes our question and answer session. I would like to turn conference back over to management for any closing remarks.

Thanks, Operator, and thanks everybody for listening today and look forward to providing the updates at the end of fiscal 25. Thank you.

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