eGain Corporation: Fiscal 2016 Form 10-K Summary
Reporting period: The provided filing is an annual report for the fiscal year ended June 30, 2016, not a standalone 2015 fourth-quarter filing. eGain provides cloud-based and on-premise customer engagement software and related professional services. Operations span the United States, United Kingdom, and India, with approximately 507 full-time employees and more than 300 global enterprise customers.
Financial performance
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Total revenue | $69.4 million | $75.9 million | Down 9% |
| Subscription and support revenue | $42.8 million | $42.3 million | Up 1% |
| License revenue | $14.5 million | $18.3 million | Down 21% |
| Professional services revenue | $12.1 million | $15.3 million | Down 21% |
| Gross profit | $45.7 million | $46.8 million | Down 2% |
| Gross margin | 66% | 61% | Up 5 percentage points |
| Operating loss | $5.9 million | $11.3 million | Improved $5.4 million |
| Operating margin | (8%) | (15%) | Improved 7 percentage points |
| Net loss | $6.2 million | $12.4 million | Improved $6.2 million |
| Basic and diluted loss per share | $0.23 loss | $0.47 loss | Improved |
| Adjusted EBITDA | $1.9 million | $1.4 million loss | Improved $3.4 million |
| Cash provided by operations | $1.9 million | $10.5 million used | Improved $12.4 million |
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $11.8 million at June 30, 2016, compared with $8.6 million at June 30, 2015. Including nominal restricted cash, total cash, cash equivalents, and restricted cash were approximately $11.8 million.
- Working capital remained negative at $0.9 million, improving from negative $2.0 million.
- Total liabilities were $52.3 million versus total assets of $48.1 million, resulting in stockholders’ deficit of $4.3 million.
- Bank borrowings totaled $21.6 million before deferred financing costs, consisting of an $8.9 million term loan and a $12.7 million revolving loan. The debt facility matures November 21, 2019.
- The Wells Fargo facility was amended to increase revolver capacity from $10.0 million to $15.0 million. Substantially all company assets secure the facility.
- Management stated that existing capital resources were expected to support current and planned operations for at least the next 12 months, subject to revenue, collections, renewals, and financing conditions.
- Contractual obligations totaled $32.7 million, including $21.6 million of bank borrowings, $8.8 million of operating leases, and $0.5 million of capital leases.
Material changes versus fiscal 2015
- Revenue declined primarily because of a 21% decrease in perpetual license revenue and a 21% decrease in professional services revenue. Management attributed the license decline to the shift toward cloud delivery and the services decline to shorter implementation times resulting from improved deployment processes.
- Subscription and support revenue increased modestly and represented 62% of revenue, up from 56%, reflecting the transition toward recurring cloud revenue.
- Gross margin improved to 66% from 61%, mainly because of lower professional services costs and reduced personnel-related expenses.
- Operating expenses declined 11% to $51.6 million. Sales and marketing expense fell 15%, general and administrative expense fell 17%, and research and development expense was essentially flat.
- Interest expense increased 135% to $2.0 million because of higher bank borrowings and capital lease obligations.
- Cash flow from operations improved substantially to positive $1.9 million, while financing activities provided $1.7 million. The company borrowed $11.8 million and repaid $9.5 million of bank borrowings during the year.
- Unbilled deferred revenue increased to $31.1 million from $26.5 million, while reported deferred revenue was broadly stable at $15.7 million.
- Fiscal fourth-quarter revenue was $17.6 million, with operating income of $0.1 million and net income of $1.4 million. The quarterly tax benefit of $1.5 million materially contributed to the fourth-quarter net income.
Guidance, outlook, risks, and unusual items
- Management expected subscription and support revenue to increase in fiscal 2017 as the business continued shifting from perpetual licenses to cloud delivery. License revenue was expected to decline, while professional services revenue was expected to increase or remain relatively constant.
- Management anticipated lower cloud delivery costs and improved subscription gross margins as operations were streamlined, and expected sales and marketing and general and administrative expenses to decline as a percentage of revenue.
- The business remains exposed to unpredictable enterprise sales cycles, customer renewal and upgrade rates, the mix between subscription and license transactions, and concentration among a small number of customers. Two customers represented 14% and 10% of fiscal 2016 revenue.
- The Wells Fargo credit agreement includes restrictive covenants, minimum EBITDA and liquidity requirements, and collateral rights over substantially all assets. The company reported compliance as of June 30, 2016, but disclosed discussions with Wells Fargo regarding the basis for determining the June 30 minimum EBITDA measure.
- Other principal risks include competition from larger software vendors, foreign currency exposure, reliance on Indian operations, cloud service interruptions, cybersecurity and privacy regulation, intellectual property claims, customer credit risk, and possible need for additional financing.
- The company recorded a $305,000 lease exit liability for vacant Sunnyvale space after a subtenant did not renew. It also recorded $959,000 of severance and related charges and $2.8 million of amortization of acquired intangible assets.
- The fiscal 2016 tax benefit of $863,000 primarily reflected release of a United Kingdom deferred-tax valuation allowance and reversal of Exony-related tax effects. The company maintained an approximately $80.9 million valuation allowance against deferred tax assets.
- The filing identifies Brexit-related uncertainty, following the June 2016 U.K. referendum, as a potential source of economic, regulatory, customer, and operational disruption.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of June 30, 2016.
Important facts for investors to verify
- Confirm the requested period: the source is fiscal 2016, while the request metadata references 2015 Q4.
- Assess whether recurring subscription growth can offset declining license revenue and whether subscription gross margins improve as projected.
- Review the Wells Fargo credit agreement, covenant calculations, interest-rate terms, borrowing capacity, collateral package, and debt maturities.
- Evaluate liquidity against negative working capital, $21.6 million of bank borrowings, and $32.7 million of contractual obligations.
- Examine customer concentration, renewal rates, unbilled deferred revenue, accounts receivable concentration, and collection history.
- Separate the recurring operating improvement from unusual items, including the fourth-quarter tax benefit, severance, acquired-intangible amortization, foreign-exchange effects, and lease exit charge.
- Monitor foreign currency, cybersecurity, privacy and cross-border data-transfer developments, Brexit effects, litigation, and the company’s ability to retain key personnel.