eGain Corporation — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended March 31, 2018; comparisons are to March 31, 2017. The filing was dated May 10, 2018. The supplied request labels the period “2017 Q3,” but the filing covers fiscal 2018 third quarter. Financial statements are unaudited.
Business Context
eGain provides cloud-based customer engagement software, including digital interaction, knowledge management, AI-based process guidance, analytics, implementation, consulting and training services. Operations span the United States, United Kingdom and India. Management is transitioning customers from legacy perpetual licenses to cloud and other recurring-revenue offerings.
Financial Performance and Position
| Metric | Three months ended March 31, 2018 | Three months ended March 31, 2017 | Nine months ended March 31, 2018 | Nine months ended March 31, 2017 |
|---|---|---|---|---|
| Total revenue | $15.7 million | $13.9 million | $45.7 million | $43.6 million |
| Recurring revenue | $13.2 million | $10.1 million | $37.4 million | $32.0 million |
| Legacy license revenue | $0.2 million | $1.2 million | $0.4 million | $4.2 million |
| Professional services revenue | $2.4 million | $2.6 million | $7.9 million | $7.4 million |
| Gross profit | $10.3 million | $8.2 million | $29.3 million | $27.8 million |
| Gross margin | 66% | 59% | 64% | 64% |
| Income (loss) from operations | $0.4 million | $(1.8) million | $(0.2) million | $(3.4) million |
| Net loss | $(0.1) million | $(2.5) million | $(1.5) million | $(6.0) million |
| Operating margin | 3% | (13)% | Approximately 0% | (8)% |
Non-GAAP income from operations was $1.3 million for the quarter and $2.7 million for the nine-month period, compared with non-GAAP operating losses of $1.2 million and $1.2 million, respectively, in the prior-year periods. The adjustments primarily excluded stock-based compensation and amortization of acquired intangibles.
Cash and cash equivalents were $10.9 million at March 31, 2018, compared with $10.6 million at June 30, 2017. Nine-month operating cash flow was $8.3 million, versus $1.5 million in the prior-year period. Investing cash flow used $0.1 million, while financing activities used $8.0 million, principally reflecting debt repayments.
Total deferred revenue was $29.6 million at March 31, 2018, compared with $23.2 million at June 30, 2017. Unbilled deferred revenue increased to $41.5 million from $37.0 million and represents contracted business that had not yet been invoiced or collected.
Bank borrowings, net of deferred financing costs, declined to $7.2 million from $15.6 million at June 30, 2017. The balance consisted of a $3.3 million term loan and $4.2 million of revolving borrowings. Available revolving credit was $10.8 million. The company reported $19.6 million of liquidity and compliance with its applicable financial covenants.
Total assets were $37.6 million and total liabilities were $46.8 million at March 31, 2018. Stockholders’ deficit was $9.2 million. One customer represented 16% of quarterly revenue and 15% of year-to-date revenue.
Material Changes Versus Prior Comparable Period
- Total revenue increased 14% for the quarter and 5% year to date.
- Recurring revenue increased 30% for the quarter and 17% year to date, reflecting the cloud and ratable-revenue transition.
- Legacy license revenue decreased 87% for the quarter and 90% year to date; eGain no longer sells legacy licenses to new customers.
- Gross margin improved to 66% from 59% in the quarter and remained 64% year to date.
- Sales and marketing expense decreased 15% for the quarter and 17% year to date, while research and development expense increased 8% and 5%, respectively.
- The company generated quarterly operating income of $0.4 million, compared with an operating loss of $1.8 million in the prior-year quarter. Year-to-date operating loss narrowed to $0.2 million from $3.4 million.
- Interest expense declined to $0.2 million for the quarter and $0.8 million year to date, primarily because of lower average borrowings.
- Debt repayments materially reduced bank borrowings, while operating cash flow benefited substantially from increases in deferred revenue.
Guidance, Outlook, Risks and Unusual Items
- Management expects recurring revenue to increase during fiscal 2018 as the business shifts toward cloud delivery, while legacy license revenue is expected to decline.
- Professional services revenue is expected to increase or remain relatively constant during fiscal 2018.
- Management expects recurring-revenue costs to increase, with gross margin expected to remain relatively constant or improve, excluding foreign-exchange and severance effects.
- Research and development, sales and marketing, and general and administrative expenses are expected to increase in future quarters under the current business plan.
- Management believes existing capital resources will support current and planned operations for at least the next twelve months, but notes that additional financing may be needed and may not be available on favorable terms.
- The Wells Fargo credit agreement is secured by substantially all company assets and includes restrictive covenants, minimum EBITDA requirements and liquidity requirements. The company was in compliance at March 31, 2018.
- Key risks include customer-renewal uncertainty, lengthy sales cycles, dependence on significant customers, lower gross margins associated with cloud services, foreign-currency exposure, competition, cybersecurity and service interruptions, intellectual-property claims, international operations, and potential financing needs.
- The company does not hedge foreign-currency or interest-rate exposure. Approximately 46% of quarterly revenue and 47% of year-to-date revenue came from international sales.
- Stock-based compensation increased to $1.4 million year to date from $0.6 million. A prior repricing of employee options generated $0.4 million of incremental stock-based compensation expense year to date.
- eGain was evaluating the effects of the Tax Cuts and Jobs Act and expected to adopt the new revenue standard, ASC 606, in fiscal 2019 using the modified retrospective method. The filing does not provide a clear quantified adoption impact.
- Ordinary-course legal proceedings, intellectual-property claims, customer indemnification obligations and transfer-pricing assessments were disclosed; management did not expect the transfer-pricing assessments to have a significant financial statement impact.
Important Facts for Investors to Verify
- Whether recurring-revenue growth and customer renewals offset the continued decline in legacy license revenue.
- Whether cloud economics produce sustained gross-margin improvement and durable GAAP profitability.
- The extent to which operating cash flow depends on increases in deferred revenue rather than net income.
- Compliance with Wells Fargo covenants, scheduled debt repayments and availability of revolving credit.
- The concentration and renewal status of major customers, including the customer contributing 16% of quarterly revenue.
- The eventual effects of ASC 606 and the Tax Cuts and Jobs Act on revenue timing, taxes, accumulated deficit and reported results.
- Potential exposure from currency movements, cybersecurity incidents, service-level obligations, intellectual-property litigation and data-privacy requirements, including GDPR compliance.