eGain Corporation — Fiscal 2020 Second Quarter Form 10-Q
Reporting period: Quarter and six months ended December 31, 2019; fiscal year ends June 30. The filing is unaudited. eGain provides cloud-based customer engagement software, including digital interaction, knowledge management, AI-based guidance, analytics, and related professional services, with operations in the United States, United Kingdom, and India.
Financial performance and position
| Metric | Three months ended Dec. 31, 2019 | Prior year | Six months ended Dec. 31, 2019 | Prior year |
|---|---|---|---|---|
| Total revenue | $18.2 million | $17.7 million | $35.3 million | $33.4 million |
| SaaS revenue | $14.0 million | $11.8 million | $26.5 million | $21.4 million |
| Subscription revenue | $16.3 million | $15.8 million | $31.9 million | $29.6 million |
| Professional services revenue | $1.8 million | $1.9 million | $3.4 million | $3.9 million |
| Gross profit | $12.9 million | $12.2 million | $24.8 million | $22.6 million |
| Gross margin | 71% | 69% | 70% | 68% |
| Income from operations | $2.0 million | $2.1 million | $3.1 million | $2.9 million |
| Operating margin | 11% | 12% | 9% | 9% |
| Net income | $2.0 million | $2.0 million | $3.2 million | $2.6 million |
| Diluted EPS | $0.06 | $0.07 | $0.10 | $0.09 |
- SaaS represented 77% of quarterly revenue and 75% of year-to-date revenue, compared with 67% and 64%, respectively, in the prior-year periods.
- Cash, cash equivalents, and restricted cash totaled $40.3 million at December 31, 2019, up from $31.9 million at June 30, 2019. Accounts receivable was $14.2 million.
- Net cash provided by operating activities was $8.0 million for the six months, compared with $4.2 million in the prior year. Capital expenditures were $0.1 million.
- The former bank term loan was fully repaid before its November 21, 2019 maturity. No bank debt remained at December 31, 2019. Operating lease liabilities totaled $4.0 million, including $1.7 million current and $2.3 million noncurrent.
- Total deferred revenue was $36.4 million, including $30.3 million current and $6.1 million noncurrent. Remaining performance obligations were $65.3 million, of which $41.3 million was expected to be recognized within one year.
- Stock-based compensation expense was $0.5 million for the quarter and $0.9 million year to date. Non-GAAP operating income was $2.6 million for the quarter and $4.2 million year to date.
Material changes versus the prior comparable periods
- Quarterly revenue increased 3%, while year-to-date revenue increased 6%, driven primarily by SaaS growth of 19% and 24%, respectively.
- Legacy revenue declined 42% for the quarter and 33% year to date as perpetual-license customers continued migrating to SaaS. Management expects legacy revenue to continue declining.
- Professional services revenue declined 4% for the quarter and 11% year to date, primarily because improved deployment processes reduced implementation time.
- Gross margin improved by two percentage points in both the quarter and year-to-date period, reflecting lower professional-services costs and improved mix. Management expects subscription gross margins to improve, although cost of subscription revenue is expected to increase in absolute dollars.
- Quarterly operating income declined 6% because research and development and sales and marketing expenses rose faster than revenue. Year-to-date operating income increased 7%.
- Interest expense changed to interest income following repayment of bank borrowings and higher cash balances.
- Domestic revenue increased 9% for the quarter and 11% year to date; international revenue declined 6% and 1%, respectively. Foreign exchange movements affected reported results.
- Adoption of ASC 842 effective July 1, 2019 added approximately $3.7 million of right-of-use assets and $4.0 million of lease liabilities at December 31, 2019; prior balance-sheet periods are not directly comparable.
Guidance, outlook, commentary, and risks
- Management expects SaaS revenue to increase year over year as new customers are added and remaining perpetual-license customers migrate to SaaS. No specific revenue or earnings guidance was provided.
- Management expects research and development expense to remain relatively consistent as a percentage of revenue, sales and marketing expense to increase as a percentage of revenue, and general and administrative expense to increase or remain relatively consistent as a percentage of revenue.
- The company stated that existing capital resources should support current and planned operations for the next 12 months, subject to assumptions regarding revenue growth, customer retention, contract mix, and collection timing.
- Key risks include lengthy and unpredictable sales cycles, customer concentration, renewal and retention risk, intense competition, reliance on international operations and India-based personnel, foreign exchange exposure, cybersecurity and service interruptions, privacy and data-protection regulation including GDPR and CCPA, Brexit-related uncertainty, intellectual-property claims, and the company’s history of cumulative losses.
- Two customers that are also partners accounted for 18% and 10% of quarterly and year-to-date revenue, respectively. The filing notes that loss of a significant customer could materially affect results.
- The company maintains a full valuation allowance against U.S. deferred tax assets and has not completed a Section 382 ownership-change study; utilization of tax attributes could therefore be limited.
- Ordinary-course legal claims, including intellectual-property, commercial, employment, and tax-related matters, were not expected by management to have a material impact, although adverse outcomes could increase costs or liabilities.
Investor verification checklist
- Verify that SaaS growth and customer migrations are sufficient to offset the continuing decline in legacy revenue.
- Assess customer concentration, renewal rates, contract additions, and the conversion of the $65.3 million remaining performance obligation into recognized revenue.
- Reconcile operating cash flow growth with working-capital movements, particularly collections, deferred revenue, and accounts payable.
- Monitor whether increased research and development and sales and marketing spending supports sustainable revenue growth and operating-margin expansion.
- Review lease obligations, foreign-exchange sensitivity, and the absence of bank debt alongside the company’s cash-burn and capital requirements.
- Evaluate cybersecurity, service availability, data-privacy compliance, intellectual-property claims, and the potential effect of customer or partner concentration.
- Confirm the impact of the ASC 842 adoption when comparing fiscal 2020 balance-sheet and cash-flow metrics with prior periods.