eGain Corporation Form 10-Q Summary
Business Context and Reporting Period
eGain provides cloud-based customer engagement software, including digital interaction, knowledge management, AI-based process guidance and analytics. The company operates in the United States, United Kingdom and India and reports one operating segment.
This report covers the three months ended September 30, 2019, the first quarter of fiscal 2020, compared with the three months ended September 30, 2018. The filing was signed November 12, 2019. The company had 30.5 million common shares outstanding as of November 11, 2019.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $17.190 million | $15.701 million | Up 9% |
| Subscription revenue | $15.572 million | $13.727 million | Up 13% |
| SaaS revenue | $12.418 million | $9.584 million | Up 30% |
| Legacy revenue | $3.154 million | $4.143 million | Down 24% |
| Professional services revenue | $1.618 million | $1.974 million | Down 18% |
| Gross profit | $11.875 million | $10.466 million | Up 13% |
| Gross margin | 69% | 67% | Up 2 points |
| Income from operations | $1.095 million | $0.753 million | Up 45% |
| Operating margin | 6% | 5% | Up 1 point |
| Net income | $1.217 million | $0.604 million | Up 101% |
| Diluted EPS | $0.04 | $0.02 | Improved |
| Non-GAAP operating income | $1.613 million | $1.351 million | Up 19% |
SaaS revenue represented 72% of total revenue, compared with 61% in the prior-year quarter. North America contributed $9.591 million of revenue and EMEA contributed $7.599 million. International revenue represented approximately 44% of total revenue.
Operating expenses were $10.780 million, compared with $9.713 million. Research and development increased 12% to $3.998 million, sales and marketing increased 19% to $4.738 million, and general and administrative expense decreased 5% to $2.044 million. Stock-based compensation was $451,000.
Cash Flow, Liquidity and Capital Structure
- Cash, cash equivalents and restricted cash were $34.370 million at September 30, 2019, up from $31.867 million at June 30, 2019.
- Accounts receivable were $20.217 million; cash and accounts receivable totaled approximately $54.6 million.
- Net cash provided by operating activities was $2.724 million, compared with $3.320 million in the prior-year quarter.
- Net cash used in investing activities was $70,000, primarily for property and equipment.
- Net cash provided by financing activities was $86,000, compared with $3.020 million of net cash used in the prior-year quarter.
- The company stated that it paid down the remaining principal balance on its term loan as of September 30, 2019. The filing does not provide a clear ending principal balance for any remaining revolving or other borrowings.
- The Wells Fargo credit agreement was scheduled to mature on November 21, 2019 and included financial and operating covenants. The company reported compliance with those covenants at September 30, 2019.
- In March and April 2019, the company completed a follow-on offering of approximately 2.1 million shares and received net proceeds of approximately $21.7 million.
- Management believed existing capital resources would support current and planned operations for the next 12 months.
Deferred revenue totaled $38.777 million, including $33.028 million current and $5.749 million noncurrent. Remaining performance obligations were $65.1 million, of which $41.8 million was expected to be recognized within one year and $23.3 million thereafter.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by a $2.834 million increase in SaaS revenue, partially offset by a $989,000 decline in legacy revenue and a $356,000 decline in professional services revenue.
- Management attributed the legacy decline to continued migration of perpetual-license customers to SaaS. Professional services declined as deployment and implementation became more efficient.
- Gross margin improved from 67% to 69%, primarily reflecting the changing revenue mix and lower professional-services costs.
- Operating income improved despite higher research and development and sales and marketing spending.
- Net interest changed from $190,000 of expense to $147,000 of income, primarily because bank borrowings had been repaid and the company held higher cash balances.
- Income taxes changed from a $24,000 benefit to a $189,000 provision. The U.S. deferred tax assets remained subject to a full valuation allowance.
- The company adopted ASC 842 lease accounting on July 1, 2019. This added approximately $4.5 million of operating lease right-of-use assets and $4.8 million of lease liabilities at adoption, making the September 30, 2019 balance sheet not directly comparable with June 30, 2019.
Guidance, Outlook, Risks and Unusual Items
- Management expected SaaS revenue to increase and legacy revenue to continue declining as customer migration progresses.
- Management expected subscription revenue gross margins to improve, although subscription cost of revenue was expected to increase in absolute dollars.
- Research and development expense was expected to remain relatively consistent as a percentage of revenue, while sales and marketing expense was expected to increase as a percentage of revenue under the current plan.
- Management cited lengthy and unpredictable sales cycles, customer renewal and concentration risk, intense competition, implementation delays, cybersecurity and service interruption risks, intellectual-property claims, privacy and GDPR compliance, Brexit-related uncertainty, foreign currency exposure and reliance on personnel in India.
- Two customers, also described as partners, accounted for 19% and 10% of revenue in the quarter, creating customer concentration exposure.
- Foreign exchange movements reduced reported revenue by approximately $432,000. The company had approximately $17.4 million of foreign-currency-denominated assets and did not use derivative hedges.
- Ordinary-course litigation and transfer-pricing assessments were disclosed, but management did not expect them to have a material financial impact. The filing does not provide a clear quantified contingency reserve.
- There were no significant off-balance-sheet arrangements reported.
Most Important Facts to Verify
- Confirm the status and terms of the Wells Fargo credit agreement after its November 21, 2019 maturity date, including any remaining revolving debt or refinancing.
- Track SaaS growth, legacy-revenue attrition, renewal rates and the pace of migration from perpetual licenses.
- Assess whether improving gross margins can offset planned increases in sales and marketing and other operating expenses.
- Review customer concentration, deferred revenue and the $65.1 million remaining performance obligation balance for revenue visibility and collectability.
- Evaluate the impact of ASC 842 lease liabilities and the company’s continuing operating lease commitments.
- Monitor foreign exchange exposure, international operations, cybersecurity, data privacy and intellectual-property contingencies.
- Confirm the effect of the company’s unresolved Section 382 ownership-change analysis on the availability of U.S. net operating losses and tax credits.