eGain Corporation Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019. The filing also presents unaudited fourth-quarter results for the quarter ended June 30, 2019; it is not a “2018 Q4” filing.
Business context
eGain provides cloud-based customer engagement software, including omnichannel interaction, artificial intelligence, knowledge management, analytics and virtual-assistance applications. Operations are based in the United States, United Kingdom and India. The company completed its transition to a SaaS-only model for new customers in fiscal 2017 and is migrating remaining perpetual-license customers to SaaS.
Revenue is concentrated among large business-to-consumer enterprises and channel partners. Cisco accounted for 17% of fiscal 2019 revenue, compared with 16% in fiscal 2018. Domestic and international revenue represented 56% and 44% of total revenue, respectively.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Total revenue | $67.2 million | $61.3 million | +10% |
| Subscription revenue | $60.0 million | $51.4 million | +17% |
| SaaS revenue | $44.8 million | $32.7 million | +37% |
| Legacy revenue | $15.2 million | $18.7 million | -18% |
| Professional services revenue | $7.2 million | $10.0 million | -27% |
| Gross profit | $45.4 million | $39.0 million | +16% |
| Gross margin | 68% | 64% | +4 percentage points |
| Operating income (loss) | $5.5 million | $(1.0) million | Improved |
| Operating margin | 8% | (2)% | +10 percentage points |
| Net income (loss) | $4.2 million | $(2.0) million | Improved |
| Diluted EPS | $0.14 | $(0.07) | Improved |
| Cash flow from operations | $7.0 million | $6.6 million | +5% |
Fourth-quarter fiscal 2019 revenue was $16.8 million, gross profit was $11.1 million, operating income was $851,000 and net income was $166,000. Fourth-quarter diluted EPS was $0.01.
Cash, cash equivalents and restricted cash totaled $31.9 million at June 30, 2019, compared with $11.5 million at June 30, 2018. Working capital improved to $13.9 million from negative $8.0 million. Deferred revenue increased to $36.5 million from $26.2 million, and remaining performance obligations were $67.6 million, of which $42.7 million was expected to be recognized within one year.
eGain completed a follow-on offering of approximately 2.1 million shares at $11.00 per share, generating $21.7 million of net proceeds. The company paid the remaining term-loan balance by June 30, 2019; bank borrowings and capital lease obligations were zero at year-end. The Wells Fargo credit agreement nevertheless includes a $15.0 million revolving commitment, restrictive covenants and substantially all-assets collateral. The company reported compliance with the agreement and liquidity of approximately $45.0 million under its credit-agreement definition.
Material changes versus fiscal 2018
- SaaS revenue increased $12.1 million and reached 67% of total revenue, up from 53%.
- Legacy revenue declined $3.4 million as perpetual-license customers migrated to the cloud.
- Professional services revenue declined $2.7 million, reflecting shorter implementation periods and improved deployment processes.
- Gross margin expanded from 64% to 68%, primarily due to lower professional-services costs and greater SaaS scale.
- Operating expenses were essentially flat at $39.9 million, with lower research and development and sales and marketing costs offset by higher general and administrative expense.
- Interest expense declined to $319,000 from $983,000 due to reduced borrowings and the expiration of a capital lease obligation.
- The company adopted ASC 606 using the modified retrospective method, recording a $3.8 million increase to opening accumulated deficit. Reported fiscal 2019 net income was $4.2 million versus $3.2 million excluding the accounting standard’s impact.
- Non-GAAP operating income increased to $7.6 million from $2.7 million, excluding stock-based compensation and amortization of acquired intangible assets.
Guidance, outlook and risks
- Management expects SaaS revenue to continue increasing and legacy revenue to continue declining. It expects to substantially migrate significant remaining on-premise customers to the eGain Cloud by the end of calendar 2020.
- Management expects subscription gross margins to improve or remain relatively consistent as revenue grows, while research and development and sales and marketing spending may increase under current plans.
- The company believes existing capital resources will fund current and planned operations for at least the next 12 months, but notes that additional financing may be required or considered.
- Key risks include customer concentration, lengthy and unpredictable enterprise sales cycles, renewal and upsell uncertainty, intense competition, reliance on Cisco and other partners, cloud outages, cybersecurity breaches, data privacy and GDPR compliance, Brexit-related uncertainty, foreign-currency exposure and dependence on personnel in India.
- The company has a history of accumulated losses and maintains a large valuation allowance against deferred tax assets. Federal and state net operating loss carryforwards may be limited by a future ownership-change analysis.
- Ordinary-course litigation includes intellectual-property, commercial, employment and other claims. Management does not expect current matters to have a material impact, but adverse intellectual-property claims could require licensing, technology changes, damages or customer indemnification.
- Contractual commitments at June 30, 2019 totaled approximately $4.3 million, including $3.0 million of operating leases and $1.3 million of other contractual commitments.
Important facts for investors to verify
- Whether SaaS growth and customer migrations offset the planned decline in legacy revenue and professional-services revenue.
- Subscription gross-margin progression as cloud-computing, support and third-party infrastructure costs increase.
- Customer renewal rates, expansion activity and the effect of Cisco’s 17% revenue concentration.
- Compliance with Wells Fargo credit-agreement covenants and the November 2019 maturity provisions described in the filing.
- Cash conversion, accounts-receivable collections and the sustainability of positive operating cash flow.
- The effect of ASC 606, capitalized contract-acquisition costs and remaining performance obligations on future revenue timing.
- Potential limitations on tax attributes, including the incomplete Section 382 ownership-change analysis.
- Exposure to cybersecurity incidents, service-level credits, data-protection regulation, foreign exchange and unresolved legal or intellectual-property claims.