eGain Corporation Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2017. The request references 2016 Q4, but the supplied filing is the 2017 Form 10-K and includes unaudited quarterly data through June 30, 2017.
Business Context
eGain provides cloud-based customer engagement software for business-to-consumer enterprises, including digital interaction, knowledge management, AI-based process guidance, analytics, contact-center applications, and related implementation and support services. Operations are principally in the United States, United Kingdom, and India. International revenue represented 51% of fiscal 2017 revenue, compared with 50% in fiscal 2016.
The company continued transitioning from perpetual software licenses toward cloud and other recurring revenue offerings. One customer represented 13% of fiscal 2017 revenue; two customers represented 14% and 10% in fiscal 2016.
Key Financial Metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenue | $58.2 million | $69.4 million | Down 16% |
| Recurring revenue | $43.6 million | $42.8 million | Up 2% |
| Legacy license revenue | $4.6 million | $14.5 million | Down 68% |
| Professional services revenue | $10.1 million | $12.1 million | Down 17% |
| Gross profit | $37.0 million | $45.7 million | Down 19% |
| Gross margin | 64% | 66% | Down 2 points |
| Operating loss | $3.7 million | $5.9 million | Improved $2.1 million |
| Operating margin | (6%) | (8%) | Improved 2 points |
| Net loss | $6.0 million | $6.2 million | Improved $0.2 million |
| Basic and diluted loss per share | $0.22 | $0.23 | Improved $0.01 |
| Cash flow from operations | $5.4 million | $1.9 million | Improved $3.5 million |
Recurring revenue increased to 75% of total revenue from 62% in fiscal 2016. Recurring revenue gross margin was 73%, compared with 71% in fiscal 2016, while professional services gross margin improved to 9% from 7%.
Operating expenses declined to $40.7 million from $51.6 million, primarily due to lower personnel costs, international expenses, and acquired-intangible amortization. Research and development expense was $13.8 million, sales and marketing expense was $20.4 million, and general and administrative expense was $6.6 million.
Management reported non-GAAP operating loss of $1.0 million in fiscal 2017, compared with $1.9 million in fiscal 2016, after excluding stock-based compensation and amortization of acquired intangibles.
Liquidity, Debt, and Cash Flow
- Cash and cash equivalents, including nominal restricted cash, were $10.6 million at June 30, 2017, compared with $11.8 million a year earlier.
- Working capital was negative $7.7 million, compared with negative $0.9 million at June 30, 2016.
- Deferred revenue increased to $23.2 million from $15.7 million. Unbilled deferred revenue increased to $37.0 million from $31.1 million.
- Bank borrowings totaled $15.6 million net of deferred financing costs, including $805,000 classified as current; capital lease obligations totaled $150,000.
- The Wells Fargo facility matures November 21, 2019 and is secured by substantially all company assets. The revolving commitment was increased to $15.0 million in 2015.
- Cash provided by operations was $5.4 million, investing cash use was $492,000, and financing cash use was $6.0 million. Financing cash use included $14.0 million of debt repayments, partially offset by $8.5 million of new borrowings.
- Total contractual obligations were $24.3 million, including $16.1 million of bank borrowings and $4.2 million of operating lease commitments.
Material Changes Versus the Prior Comparable Period
- The revenue mix shifted materially toward recurring revenue, but total revenue declined because legacy license revenue fell $9.9 million and professional services revenue fell $2.1 million.
- Operating losses narrowed despite lower revenue because total cost of revenue and operating expenses declined by approximately $13.3 million.
- Cash generation from operations improved substantially, aided by lower accounts receivable and higher deferred revenue from customer prepayments.
- Debt declined from $21.1 million of bank borrowings and capital lease obligations at June 30, 2016 to approximately $15.8 million at June 30, 2017.
- Stockholders’ deficit increased to $9.6 million from $4.3 million, primarily reflecting the fiscal-year net loss.
- The company early adopted ASU 2017-04 for goodwill impairment testing and reported no goodwill impairment. Adoption of the new revenue standard, ASC 606, is planned for fiscal 2019; the transition method had not been selected.
Guidance, Outlook, Risks, and Unusual Items
Management expected recurring revenue to increase in fiscal 2018, excluding future foreign-exchange effects, as the cloud transition continued. Legacy license revenue was expected to decline, while professional services revenue was expected to increase or remain relatively constant. Management expected existing capital resources to support current and planned operations for at least the next 12 months, but noted that additional financing could become necessary.
As of June 30, 2017, the company had not met the Fixed Charge Coverage Ratio and Leverage Ratio conditions required to replace its existing financial covenants. It remained in compliance with the amended minimum EBITDA and liquidity requirements, including the $4.0 million minimum liquidity requirement. The company’s leverage ratio exceeded the threshold that would normally require a $729,000 excess-cash-flow repayment; a bank waiver eliminated that payment requirement.
- Key risks include continued revenue contraction during the license-to-cloud transition, lower recurring-revenue margins, customer renewal and expansion uncertainty, lengthy sales cycles, customer concentration, competition from larger software vendors, and reliance on international operations.
- Cybersecurity incidents, service interruptions, data privacy requirements, intellectual-property claims, and contractual service-level obligations could increase costs or cause customer losses.
- Foreign-exchange exposure is significant. A 10% strengthening of the U.S. dollar against relevant currencies would reduce the value of identified foreign-currency assets by approximately $860,000. The company did not hedge foreign-exchange risk.
- The company reported a full valuation allowance against most U.S. deferred tax assets. The valuation allowance was approximately $83.7 million at June 30, 2017.
- Ordinary-course litigation includes intellectual-property, commercial, employment, and other claims; management stated that these matters were not expected to have a material impact.
- On September 19, 2017, the board approved repricing certain employee stock options with exercise prices above $2.50 to $2.50 per share. The repricing excluded executive officers and directors.
Most Important Facts to Verify
- Whether recurring-revenue growth and renewal rates can offset the continuing decline in legacy license revenue.
- The company’s ability to improve recurring-revenue gross margins while maintaining cloud infrastructure and service levels.
- Compliance with Wells Fargo debt covenants, waiver requirements, and the company’s ability to refinance or repay debt due through 2020.
- Liquidity under negative working capital, including the timing and collectability of deferred and unbilled revenue.
- Customer concentration, renewal exposure, and the effect of any significant customer loss.
- The eventual accounting impact of ASC 606 adoption in fiscal 2019 and other pending accounting standards.
- Progress in addressing data privacy, cross-border data transfers, GDPR compliance, cybersecurity, and service interruption risks.