eGain Corporation — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2018. The supplied filing is a FY2018 Form 10-K, not a 2017 fourth-quarter filing; quarterly data are presented for fiscal Q4 2018 and Q4 2017.
Business context
eGain provides cloud-based customer engagement software for business-to-consumer enterprises, including digital interaction, knowledge management, artificial intelligence, analytics and omnichannel contact-center capabilities. The company operates primarily in the United States, United Kingdom and India.
- eGain completed its transition to a SaaS-only model for new customers and is migrating remaining perpetual-license customers to the cloud.
- Revenue was 52% domestic and 48% international in FY2018.
- Cisco accounted for 16% of FY2018 revenue, compared with 13% in FY2017.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Total revenue | $61.3 million | $58.2 million | +5% |
| Recurring revenue | $50.8 million | $43.6 million | +16% |
| Legacy license revenue | $0.6 million | $4.6 million | -87% |
| Professional services revenue | $10.0 million | $10.1 million | -1% |
| Gross profit | $39.0 million | $37.0 million | +5% |
| Gross margin | 64% | 64% | Flat |
| Loss from operations | $1.0 million loss | $3.7 million loss | Improved |
| Net loss | $2.0 million | $6.0 million | Improved |
| Basic and diluted loss per share | $0.07 loss | $0.22 loss | Improved |
| Cash flow from operations | $6.6 million | $5.4 million | +22% |
- Recurring revenue represented 83% of total revenue, up from 75% in FY2017.
- Recurring-revenue gross margin was 74%, compared with 73% in FY2017; professional-services gross margin was only 8%.
- Non-GAAP operating income was $2.7 million, compared with a $1.0 million loss in FY2017, excluding stock-based compensation and amortization of acquired intangible assets.
- Cash and cash equivalents were $11.5 million at June 30, 2018, compared with $10.6 million a year earlier.
- Working capital remained negative at $8.0 million, versus negative $7.7 million in FY2017.
- Deferred revenue increased to $26.2 million from $23.2 million. Unbilled deferred revenue increased to $51.4 million from $37.0 million.
- Bank borrowings totaled $9.2 million net of deferred financing costs, including $8.9 million classified as long term. The credit facility matures November 21, 2019.
- Stockholders’ deficit improved to $8.7 million from $9.6 million, but remained negative.
Material changes versus the prior comparable period
- The SaaS transition materially changed the revenue mix: recurring revenue increased $7.2 million while legacy license revenue declined $4.0 million.
- Operating loss narrowed by $2.7 million, primarily because of higher recurring revenue and lower sales and marketing costs.
- Sales and marketing expense declined 13% to $17.7 million, while research and development expense increased 7% to $14.7 million and general and administrative expense increased 15% to $7.6 million.
- Interest expense declined 42% to $1.0 million as average debt decreased.
- Financing activities used $5.6 million of cash, including $19.9 million of debt repayments, partially offset by $13.3 million of new borrowings and $1.2 million from stock-option exercises.
- Foreign exchange movements increased reported FY2018 revenue by approximately $1.7 million and affected operating results.
- Stock-based compensation increased to $1.7 million from $0.7 million, including $0.4 million related to repricing certain employee options.
Guidance, outlook, risks and unusual items
- Management expected recurring revenue to increase in FY2019 as the SaaS transition continues, while legacy license and professional-services revenue were expected to decline.
- Management expected research and development expense to remain relatively constant as a percentage of revenue, with sales and marketing and general and administrative expense expected to increase or remain relatively constant as percentages of revenue.
- Management stated that existing capital resources should support current and planned operations for at least the next 12 months, but noted that additional capital or debt-for-equity transactions may be considered.
- The company was in compliance with its credit agreement covenants at June 30, 2018. The facility is secured by substantially all assets and includes restrictions on additional debt, acquisitions, investments, dividends and other corporate actions.
- The company reported a required minimum liquidity level of $4.0 million and liquidity of $18.3 million at June 30, 2018.
- Key risks include continued operating losses, negative working capital and stockholders’ deficit, debt maturity and covenant requirements, customer concentration, uncertain subscription renewals, lengthy sales cycles, intense competition, cloud-service interruptions, cybersecurity and data-privacy exposure, foreign exchange risk, Brexit and dependence on personnel in India.
- GDPR became enforceable during FY2018. The company also disclosed uncertainty regarding cross-border data transfers and potential compliance costs or regulatory exposure.
- The Tax Cuts and Jobs Act reduced the U.S. statutory tax rate and resulted in a $26.6 million reduction to deferred tax assets and the related valuation allowance, with no net tax-expense impact. The company maintained a $57.1 million deferred-tax valuation allowance at year end.
- The company planned to adopt ASC 606 revenue recognition using the modified retrospective method on July 1, 2018. Management expected earlier recognition for certain arrangements and substantially unchanged treatment for cloud, maintenance, support and professional-services revenue, subject to final evaluation.
- Legal proceedings were described as arising in the ordinary course and not expected to have a material impact, but intellectual-property indemnification and infringement claims remain potential exposures.
Most important facts for investors to verify
- Whether recurring SaaS growth and customer renewals offset the continuing decline in legacy license and professional-services revenue.
- The amount and timing of debt repayment due before the November 2019 maturity, including compliance with minimum EBITDA, liquidity and other covenants.
- Whether operating cash flow remains positive after considering customer prepayments, deferred revenue and deferred commissions.
- The effect of ASC 606 adoption on reported revenue, deferred revenue, contract costs and accumulated deficit.
- Customer concentration and dependence on Cisco, as well as the success of Avaya, Amazon Connect and other partner channels.
- Exposure to cybersecurity incidents, service-level credits, GDPR and other privacy or cross-border data-transfer requirements.
- The sustainability of improved profitability after excluding $1.7 million of stock-based compensation and $2.0 million of intangible amortization.
- The company’s ability to eliminate its operating losses and negative stockholders’ deficit without additional financing or equity dilution.