eGain Corporation Form 10-Q Summary
Business Context and Reporting Period
eGain provides cloud-based and on-premise customer engagement software, including analytics, contact-center management, subscription and support services, perpetual licenses, and professional services. The filing covers the quarter and six months ended December 31, 2015, eGain’s fiscal second quarter and first six months of fiscal 2016. Results are unaudited and should be read with the fiscal 2015 Form 10-K.
Key Financial Metrics
| Metric | Three Months Ended December 31, 2015 | Year-Ago Quarter | Six Months Ended December 31, 2015 | Year-Ago Six Months |
|---|---|---|---|---|
| Total revenue | $19.0 million | $18.9 million | $35.5 million | $39.6 million |
| Subscription and support revenue | $10.8 million | $11.0 million | $21.6 million | $21.4 million |
| License revenue | $5.1 million | $3.6 million | $7.5 million | $10.3 million |
| Professional services revenue | $3.1 million | $4.4 million | $6.3 million | $7.9 million |
| Gross profit | $13.0 million | $10.7 million | $23.0 million | $24.4 million |
| Gross margin | 69% | 56% | 65% | 62% |
| Operating loss | $(0.5) million | $(5.7) million | $(3.3) million | $(7.1) million |
| Net loss | $(1.4) million | $(5.5) million | $(4.6) million | $(7.1) million |
| Adjusted EBITDA | $1.0 million | $(2.4) million | $0.3 million | $(1.5) million |
| Operating cash flow | Not separately provided | Not separately provided | $(3.2) million | $(7.9) million |
Basic and diluted net loss per share was $0.05 for the quarter and $0.17 for the six-month period, compared with $0.20 and $0.27, respectively, in the comparable periods. The reported six-month loss included $1.4 million of acquired-intangible amortization and $742,000 of stock-based compensation.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $9.8 million at December 31, 2015, compared with $8.6 million at June 30, 2015. Restricted cash declined to $17,000 from $676,000.
- Working capital remained negative at approximately $294,000, although this improved from negative working capital of approximately $2.0 million at June 30, 2015.
- Bank borrowings, net of deferred financing costs, were $23.2 million, compared with $18.8 million at June 30, 2015. Principal balances were $9.4 million on the term loan and $14.4 million on the revolving loan.
- The Wells Fargo facility matures in November 2019. In September 2015, the revolving commitment increased from $10 million to $15 million, and quarterly term-loan amortization increased.
- Total liabilities exceeded assets, resulting in stockholders’ deficit of $2.9 million at December 31, 2015, compared with positive equity of $1.1 million at June 30, 2015.
- Deferred revenue was $12.7 million, down from $15.8 million at June 30, 2015. Unbilled deferred revenue increased to $28.3 million from $26.5 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue was essentially flat, while six-month revenue declined 10%, primarily because of lower license and professional-services revenue.
- Quarterly license revenue increased 41% due primarily to two significant agreements with existing customers through a partner channel. Six-month license revenue declined 27% as the business shifted from perpetual licenses toward cloud delivery.
- Professional-services revenue declined 28% for the quarter and 20% for the six-month period, reflecting the strategy of shifting implementation work to partners and efficiencies from the version 14 product release.
- Gross margin improved to 69% from 56% for the quarter and to 65% from 62% for the six-month period. Lower professional-services costs and reduced related headcount were key contributors.
- Sales and marketing expense declined 21% for both the quarter and six-month period. General and administrative expense declined 26% for the quarter and 25% for the six-month period.
- Interest expense increased to $676,000 for the quarter and $1.0 million for the six-month period, compared with $145,000 and $268,000, respectively, due primarily to higher bank borrowings and related financing costs.
- Exony contributed $2.9 million of revenue and $1.2 million of net income in the quarter, and $5.6 million of revenue and $2.4 million of net income for the six-month period.
Guidance, Outlook, Risks and Unusual Items
- Management stated that existing capital resources are expected to support current and planned operations for at least the next 12 months, but noted that additional financing or debt-for-equity transactions may be considered.
- Management expects subscription and support costs to increase as the company invests in cloud infrastructure, while professional-services costs are expected to decline and related gross margins improve. Research and development and general and administrative expenses are expected to decline as a percentage of revenue; sales and marketing is expected to decline or remain relatively constant as a percentage of revenue.
- At December 31, 2015, the company complied with its financial covenants except for the $10.0 million U.S.-bank-account liquidity requirement, for which Wells Fargo granted a waiver. Management stated that consolidated liquidity met the requirement.
- The company continues to report operating and net losses and used $3.2 million of cash in operations during the first six months. Future liquidity depends on revenue performance, customer collections, renewal rates, revenue mix and continued access to debt financing.
- Major risks include covenant compliance and potential debt acceleration, dependence on a limited number of customers, lengthy and unpredictable sales cycles, competitive pressure, transition to cloud revenue, lower cloud gross margins, foreign-exchange exposure, international operations, service interruptions, cybersecurity and data-privacy requirements, intellectual-property claims, and the need to retain qualified personnel.
- International revenue represented approximately 53% of quarterly revenue and 48% of six-month revenue. Foreign-exchange movements reduced reported revenue by approximately $445,000 for the quarter and $1.0 million for the six-month period.
- No material subsequent events were reported. No shares were repurchased during the quarter. The filing states that no significant change occurred in contractual obligations or off-balance-sheet arrangements, other than ordinary operating leases and a co-location agreement.
Important Facts for Investors to Verify
- Whether the company can sustain positive operating cash flow while continuing to fund cloud infrastructure and service operations.
- The availability, pricing and covenant requirements of the Wells Fargo credit facility, including the waiver and future liquidity tests.
- Customer renewal, expansion and churn rates, particularly because deferred revenue declined while unbilled deferred revenue increased.
- Whether the shift from perpetual licenses to cloud subscriptions produces durable recurring growth and sufficient gross-margin improvement.
- Concentration risk: two customers represented 28% of quarterly revenue, and one customer represented 17% of six-month revenue.
- Potential effects of foreign-exchange movements, data-transfer regulations following the invalidation of the U.S.-EU Safe Harbor framework, cybersecurity incidents, litigation, and intellectual-property claims.