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 filing covers the fiscal second quarter and six months ended December 31, 2018; fiscal year-end is June 30, 2019. The financial statements are unaudited.
eGain continued its transition to a SaaS-only model. SaaS revenue includes cloud delivery arrangements, term licenses with substantial cloud functionality, embedded OEM royalties and associated support. Legacy support and professional services are expected to decline as customers migrate to SaaS.
Financial performance and key metrics
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2018 | Six months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Total revenue | $17.7 million | $15.4 million | $33.4 million | $30.0 million |
| Subscription revenue | $15.8 million | $12.6 million | $29.6 million | $24.5 million |
| SaaS revenue | $11.9 million | $7.7 million | $21.6 million | $14.7 million |
| Professional services revenue | $1.9 million | $2.8 million | $3.9 million | $5.5 million |
| Gross profit | $12.2 million | $9.8 million | $22.6 million | $19.0 million |
| Gross margin | 69% | 64% | 68% | 63% |
| Operating income (loss) | $2.1 million | $(0.4) million | $2.9 million | $(0.7) million |
| Operating margin | 12% | (3)% | 9% | (2)% |
| Net income (loss) | $2.0 million | $(0.8) million | $2.6 million | $(1.4) million |
| Diluted EPS | $0.07 | $(0.03) | $0.09 | $(0.05) |
- SaaS revenue increased 53% year over year in the quarter and 47% for the six-month period, reaching 67% and 65% of total revenue, respectively.
- Legacy support revenue declined 19% in both the quarter and six-month period. Professional services revenue declined 32% in the quarter and 30% for the six-month period.
- Operating expenses were $10.0 million for the quarter and $19.7 million for the six-month period. Six-month expenses included $0.7 million of stock-based compensation and $0.3 million of acquired-intangible amortization.
- Non-GAAP operating income, excluding stock-based compensation and acquired-intangible amortization, was $2.5 million for the quarter and $3.9 million for the six-month period, compared with $0.8 million and $1.4 million, respectively, in the prior-year periods.
- One customer represented 17% of quarterly revenue and 16% of six-month revenue, compared with 15% of prior-year quarterly and six-month revenue.
Cash flow, liquidity and capital structure
- Cash, cash equivalents and restricted cash were $11.2 million at December 31, 2018, compared with $11.5 million at June 30, 2018.
- Operating cash flow was $4.2 million for the six months ended December 31, 2018, down from $8.5 million in the prior-year period. The decrease primarily reflected timing of customer prepayments and an $8.9 million increase in accounts receivable.
- Investing cash use was $0.2 million, principally for property and equipment. Financing cash use was $4.1 million, including $11.8 million of debt repayments, partially offset by $7.4 million of new borrowings and $0.3 million from stock-option exercises.
- Bank borrowings, net of deferred financing costs, were $5.0 million at December 31, 2018, down from $9.2 million at June 30, 2018. All borrowings were classified as current because the credit agreement matures on November 21, 2019.
- Available revolving-loan capacity was $10.8 million. Credit-agreement liquidity was $19.0 million versus a required minimum of $4.0 million, and management reported compliance with applicable financial covenants.
- Working capital was negative $12.2 million at December 31, 2018, compared with negative $8.0 million at June 30, 2018. Reported deferred revenue was $35.0 million, while total deferred revenue, including off-balance-sheet unbilled deferred revenue, was $66.4 million.
Material changes versus the prior comparable period
- Revenue increased 15% for the quarter and 11% for the six-month period, driven by SaaS growth and partially offset by declines in legacy support and professional services.
- Gross margin improved five percentage points in both comparison periods, primarily reflecting the changing revenue mix and lower professional-services costs.
- The company shifted from operating losses to operating and net income.
- Sales and marketing expense decreased 7% for the quarter and 6% for the six-month period, while general and administrative expense increased 16% and 18%, respectively.
- Foreign-exchange movements reduced reported revenue by approximately $0.3 million for the quarter and $0.3 million for the six-month period.
- eGain adopted ASC 606 on July 1, 2018 using the modified-retrospective method. The adoption produced a $3.8 million increase to opening accumulated deficit as presented in the adoption reconciliation, changed the presentation of accounts receivable and deferred revenue, and increased reported second-quarter net income by approximately $1.2 million versus the amount under prior Topic 605 guidance.
Guidance, outlook, risks and unusual items
- Management expects SaaS revenue to increase during fiscal 2019, while legacy support fees and professional services revenue are expected to decline.
- Management expects subscription gross margins to improve, subscription cost of revenue to increase in absolute dollars, and professional-services cost to decline in line with lower professional-services revenue.
- Management expects research and development spending to remain relatively consistent as a percentage of revenue. Sales and marketing spending may increase or remain consistent as a percentage of revenue.
- Management believes existing capital resources will support current and planned operations for at least the next 12 months, but notes that additional financing may be considered and may not be available on acceptable terms.
- Remaining performance obligations were $66.4 million at December 31, 2018, of which $41.4 million was expected to be recognized within one year and $25.0 million thereafter.
- Key risks include customer concentration, renewal and SaaS-transition execution, lengthy and unpredictable sales cycles, competition, cybersecurity and service interruptions, data-privacy and GDPR compliance, foreign-exchange exposure, reliance on international operations, intellectual-property claims, and restrictive debt covenants.
- The Wells Fargo facility is secured by substantially all company assets. A covenant breach or default could permit acceleration of the debt and enforcement against collateral.
- The company reported ordinary-course legal claims and appealed transfer-pricing assessments, but stated that these matters were not expected to have a material impact.
- International assets exposed to foreign currency totaled approximately $13.6 million; a 10% strengthening of the U.S. dollar against relevant currencies would reduce their value by approximately $1.36 million. The company does not hedge this exposure with derivatives.
Important facts for investors to verify
- Reconcile reported growth and profitability for the effects of ASC 606, including the $3.8 million opening accumulated-deficit adjustment and the quarter’s approximately $1.2 million net-income impact.
- Monitor whether SaaS growth continues to offset declining legacy support and professional-services revenue.
- Assess collections and working-capital pressure, particularly the increase in accounts receivable and negative working capital.
- Verify the company’s ability to refinance or repay the $5.0 million of borrowings maturing in November 2019 while maintaining covenant compliance.
- Track customer concentration, renewal rates, remaining performance obligations and the reduction in total deferred revenue from $77.6 million at June 30, 2018 to $66.4 million.
- Evaluate exposure to foreign exchange, cybersecurity, data privacy, service-level obligations, litigation and transfer-pricing matters.