eGain Corporation Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended March 31, 2015, compared with March 31, 2014; balance sheet comparisons are to June 30, 2014. The request metadata identifies “2014 Q3,” but the filing is the fiscal third-quarter 2015 Form 10-Q, filed May 8, 2015.
Business Context
eGain provides cloud-based and on-premise customer engagement software, including analytics, contact-center management, licensing, implementation, consulting, and support services. The company operates in one segment across the United States, Europe, South Africa, and India. International sales represented 52% of quarterly revenue and 49% of nine-month revenue.
Financial Metrics
| Metric | Three Months Ended March 31, 2015 | Three Months Ended March 31, 2014 | Nine Months Ended March 31, 2015 | Nine Months Ended March 31, 2014 |
|---|---|---|---|---|
| Total revenue | $19.2 million | $18.0 million | $58.8 million | $51.4 million |
| Gross profit | $11.7 million | $12.0 million | $36.1 million | $34.0 million |
| Gross margin | 61% | 67% | 61% | 66% |
| Operating loss | $(2.2) million | $(0.7) million | $(9.3) million | $(3.4) million |
| Operating margin | (11%) | (4%) | (16%) | (7%) |
| Net loss | $(2.4) million | $(1.0) million | $(9.5) million | $(4.2) million |
| Net loss per share | $(0.09) | $(0.04) | $(0.36) | $(0.17) |
| Adjusted EBITDA | $0.3 million | $0.3 million | $(1.1) million | $(1.0) million |
- Revenue mix: Quarterly subscription and support revenue increased 2% to $10.8 million; license revenue increased 108% to $5.2 million; professional services revenue declined 35% to $3.2 million. For nine months, the respective changes were 6%, 65%, and negative 5%.
- Cash flow: Nine-month operating cash use was $6.9 million, compared with $2.5 million in the prior-year period. Investing cash use was $3.4 million, including $1.9 million related to the Exony acquisition. Financing cash provided was $11.2 million, primarily from new borrowings.
- Cash and liquidity: Cash and cash equivalents were $9.2 million and restricted cash was $0.8 million at March 31, 2015. Working capital was negative $3.2 million, compared with negative $1.9 million at June 30, 2014. Deferred revenue increased to $16.0 million from $13.7 million.
- Debt: Bank borrowings totaled approximately $16.9 million, consisting of a $9.9 million term loan and $7.0 million of revolving borrowings. Capital lease obligations totaled $0.8 million. The Wells Fargo facility matures November 21, 2019 and is secured by company assets.
- Balance sheet: Total assets increased to $51.0 million from $32.6 million, primarily reflecting the Exony acquisition. Goodwill was $13.2 million and acquired intangible assets were $8.3 million at March 31, 2015.
Material Changes Versus the Prior Comparable Period
- Revenue grew 7% in the quarter and 15% year to date, driven mainly by higher perpetual-license revenue and the inclusion of Exony results.
- Profitability deteriorated despite revenue growth. Gross margin declined six percentage points in both the quarter and nine-month period, while the operating loss widened substantially.
- Research and development expense increased 55% in the quarter and 68% year to date, primarily from Exony personnel, acquired technology amortization, and consulting costs.
- Professional services revenue declined as eGain shifted implementation and consulting work toward partners and its version 14 product reduced deployment effort.
- Foreign exchange movements reduced reported revenue by approximately $0.7 million in the quarter and $0.6 million year to date.
- Exony contributed $3.3 million of quarterly revenue and $7.1 million of nine-month revenue. The acquisition was funded with cash, borrowings, and 1.2 million shares of eGain common stock; approximately $0.8 million of acquisition costs had been expensed through March 31, 2015.
- Shares outstanding increased to approximately 26.8 million from 25.5 million at June 30, 2014, primarily reflecting acquisition-related stock issuance and option exercises.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that existing capital resources were expected to support current and planned operations for at least the next 12 months, but acknowledged possible future financing needs and no assurance that financing would be available on favorable terms.
- Based on its current business plan, management expected professional-services costs and research and development expense to decrease in future quarters, sales and marketing expense to remain relatively constant as a percentage of revenue, and general and administrative expense to remain relatively constant as a percentage of revenue. No specific revenue or earnings guidance was provided.
- Management cited the hybrid cloud/license model, unpredictable sales cycles, subscription renewals, customer concentration, competition, acquisition integration, international operations, foreign exchange, system interruptions, cybersecurity, privacy regulation, intellectual-property claims, and dependence on key personnel as significant risks.
- The Wells Fargo credit facility contains financial covenants, including minimum EBITDA and liquidity requirements, as well as restrictions on additional debt, acquisitions, asset sales, dividends, investments, and other activities. Covenant noncompliance could result in accelerated repayment or loss of credit access.
- Unusual or nonrecurring items included $844,000 of acquisition-related expense, $1.3 million of severance and related charges year to date, $1.8 million of acquired-intangible amortization, and $1.8 million of stock-based compensation.
- The company reported ordinary-course legal proceedings and transfer-pricing assessments under appeal, but stated that it did not expect the tax assessments to have a significant financial impact. No subsequent events were reported.
- Management concluded that disclosure controls were effective as of March 31, 2015, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether license-driven revenue growth is sustainable and how the mix of license, cloud, and support revenue affects future margins and revenue timing.
- Whether the company can reduce operating losses and achieve positive operating cash flow while servicing approximately $16.9 million of bank debt.
- Compliance with the Wells Fargo facility’s EBITDA, liquidity, leverage, and other covenants.
- The integration and financial contribution of Exony, including the realizability of $8.3 million of goodwill and $8.3 million of acquired intangible assets.
- Customer renewal rates, customer concentration, reseller exposure, and the effect of the reduced annual contract value from a customer renewal.
- The adequacy of liquidity given negative working capital, continuing cash use, restricted cash, and potential need for additional financing.
- Exposure to foreign exchange movements, international operating risks, cybersecurity, service interruptions, privacy regulation, and intellectual-property litigation.