eGain Corporation Form 10-Q Summary
Business Context and Reporting Period
eGain provides cloud-based and on-premise customer engagement software, including subscription, license, implementation, consulting, and support services. The company operates in one segment across North America, EMEA, and Asia Pacific. This report covers the quarter ended September 30, 2016, the first quarter of fiscal 2017, compared with the quarter ended September 30, 2015.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total revenue | $14.745 million | $16.476 million | Down 11% |
| Subscription and support revenue | $10.863 million | $10.842 million | Up 0% |
| License revenue | $1.650 million | $2.426 million | Down 32% |
| Professional services revenue | $2.232 million | $3.208 million | Down 30% |
| Gross profit | $9.681 million | $10.004 million | Down 3% |
| Gross margin | 66% | 61% | Up 5 percentage points |
| Operating loss | $1.265 million | $2.810 million | Improved $1.545 million |
| Operating margin | (9%) | (17%) | Improved 8 percentage points |
| Net loss | $2.411 million | $3.237 million | Improved $826,000 |
| Net loss per share | $0.09 | $0.12 | Improved |
| Adjusted EBITDA | $75,000 | $(769,000) | Improved $844,000 |
| Operating cash flow | $2.443 million | $(5.565) million | Improved $8.008 million |
Subscription and support represented 74% of revenue, compared with 66% in the prior-year quarter. Revenue was negatively affected by a $1.2 million foreign-exchange impact, based on management’s constant-currency analysis.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $9.469 million at September 30, 2016, down from $11.780 million at June 30, 2016.
- Bank borrowings were $16.945 million before deferred financing costs, down from $21.577 million at June 30, 2016. Net bank borrowings reported on the balance sheet were $16.463 million, including current maturities.
- Capital lease obligations totaled $389,000, including current and noncurrent amounts.
- Total liabilities were $46.449 million, compared with total assets of $40.115 million, resulting in stockholders’ deficit of $6.334 million.
- Deferred revenue increased to approximately $17.984 million from $15.717 million at June 30, 2016.
- Unbilled deferred revenue declined to $26.8 million from approximately $31.1 million.
- Operating cash flow benefited principally from improved collections, a $4.437 million reduction in accounts receivable, and a $2.496 million increase in deferred revenue.
- Financing cash outflows were $4.720 million, primarily reflecting $5.250 million of bank-debt repayments, partly offset by $618,000 of new borrowings.
Material Changes Versus the Prior Comparable Period
- Total revenue declined because the company continued shifting from perpetual licenses toward cloud delivery and generated less professional services revenue as product deployment became more efficient.
- Subscription and support revenue was essentially flat, while license and professional services revenue fell substantially.
- Gross margin expanded to 66% from 61%, primarily because of lower professional services costs, personnel reductions, lower consulting expense, and favorable cost effects from currency movements.
- Operating expenses declined 15% to $10.946 million. Research and development declined 6%, sales and marketing declined 21%, and general and administrative expense declined 10%.
- Interest expense increased to $422,000 from $333,000 due primarily to higher average borrowings and capital-lease obligations.
- The income tax provision increased to $832,000 from $334,000 and primarily related to foreign and state taxes.
- International revenue increased 9% to $7.483 million and represented approximately 51% of total revenue, while North American revenue declined 24%.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide clear quantitative revenue or earnings guidance. Management expects subscription and support costs and research and development expense to remain relatively constant in dollar terms, sales and marketing expense to increase moderately, and general and administrative expense to decrease, excluding foreign-exchange and severance effects.
- Management expects gross margin to remain relatively constant while continuing to invest in cloud infrastructure.
- Management stated that existing capital resources are expected to support current and planned operations for the next 12 months, but additional financing could be required if revenue, collections, customer retention, or market conditions weaken.
- The company was in compliance with its credit agreement covenants as of September 30, 2016. However, management and Wells Fargo were discussing the basis for determining minimum EBITDA for the quarter, and no minimum EBITDA value was applicable for that period.
- The Wells Fargo facility is secured by substantially all company assets and contains restrictive covenants. A default could permit acceleration of the debt and enforcement against collateral.
- The company recorded a $305,000 lease-exit liability at June 30, 2016 related to approximately 22,000 square feet of vacant Sunnyvale space. Management planned to reevaluate the liability in the second quarter of fiscal 2017.
- Key risks include revenue volatility from the transition to subscriptions, unpredictable sales cycles, customer concentration, subscription renewals, foreign-currency exposure, competition, cybersecurity and service interruptions, intellectual-property claims, international operations, covenant compliance, and potential need for additional capital.
- Two customers accounted for 12% and 11% of quarterly revenue. Reseller license sales increased to approximately 11% of revenue from 6% in the prior-year quarter.
Investor Verification Checklist
- Verify the sustainability of positive operating cash flow and whether it reflects recurring operating improvement or temporary working-capital benefits.
- Track subscription growth, renewal rates, unbilled deferred revenue, and the continuing decline in license revenue.
- Assess the company’s ability to maintain covenant compliance while cash declined and the balance sheet remained in a stockholders’ deficit position.
- Review debt maturities, interest rates, borrowing capacity, and any subsequent amendments or waivers with Wells Fargo.
- Monitor customer concentration, collections, allowance for doubtful accounts, and the $26.8 million unbilled deferred revenue balance.
- Evaluate foreign-exchange sensitivity, particularly the reported $1.2 million quarterly revenue impact and the company’s lack of currency hedges.
- Confirm the outcome of the planned reevaluation of the Sunnyvale lease-exit liability and any subsequent legal, tax, or intellectual-property developments.