eGain Corporation Form 10-Q Summary
Reporting period: Three months ended September 30, 2012, the first quarter of fiscal 2013. The filing was dated November 14, 2012. eGain provides cloud-hosted and on-premise customer-interaction software and related implementation, maintenance, and support services across North America, EMEA, and Asia Pacific.
Financial Performance and Position
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Total revenue | $10.723 million | $10.384 million | Up 3% |
| License revenue | $0.713 million | $2.886 million | Down 75% |
| Recurring revenue | $7.174 million | $5.781 million | Up 24% |
| Professional services revenue | $2.836 million | $1.717 million | Up 65% |
| Gross profit | $6.379 million | $7.579 million | Down 16% |
| Gross margin | 59% | 73% | Down 14 percentage points |
| Operating income/(loss) | $(2.627) million | $0.932 million | Declined $3.559 million |
| Operating margin | (24%) | 9% | Down 33 percentage points |
| Net income/(loss) | $(2.884) million | $0.516 million | Loss versus profit |
| Net income/(loss) per diluted share | $(0.12) | $0.02 | Declined |
| Cash flow from operations | $0.824 million | $4.347 million | Down $3.523 million |
- Cash and cash equivalents were $10.314 million at September 30, 2012, up from $9.911 million at June 30, 2012. The company also held $1.037 million of restricted cash, including $1.0 million classified as noncurrent.
- Working capital was negative $5.8 million at September 30, 2012, compared with adjusted positive working capital of $2.8 million at June 30, 2012.
- Bank borrowings totaled approximately $2.9 million, consisting of the Comerica term loan. The related-party note payable to CEO Ashutosh Roy was $5.7 million. Total debt was therefore approximately $8.6 million.
- The Comerica term loan bears interest at 4.25% and matures June 15, 2014. The related-party note maturity was extended to July 31, 2013.
- Deferred revenue increased to $11.2 million from $8.1 million at June 30, 2012. Unbilled deferred revenue increased to $21.8 million from approximately $20.7 million.
- One customer represented 14% of quarterly revenue, compared with 18% in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- The revenue mix shifted materially from on-premise licenses toward cloud and recurring offerings. License revenue fell $2.173 million, while recurring revenue rose $1.393 million and professional services revenue rose $1.119 million.
- Cost of revenue increased 55% to $4.344 million, primarily due to higher personnel costs, cloud hosting costs, and outside consulting. Professional-services costs increased faster than related revenue, reducing gross margin.
- Operating expenses increased 36% to $9.006 million. Research and development rose 36%, sales and marketing rose 35%, and general and administrative expense rose 35%.
- The operating loss included $304,000 of stock-based compensation, compared with $130,000 in the prior-year period. Sales and marketing expense also included one-time personnel payments of approximately $340,000 related to organizational changes.
- Cash generated from operations declined substantially, reflecting the net loss and less favorable working-capital movements than in the prior year, partly offset by a $2.946 million increase in deferred revenue.
- Revenue in Europe and Asia Pacific increased 17% to $4.4 million. Foreign-exchange movements reduced current-quarter revenue by approximately $58,000 versus the comparable period.
Accounting Change, Outlook, Risks, and Unusual Items
- Effective this quarter, eGain changed its accounting for sales commissions on new cloud contracts from expensing commissions when incurred to deferring and amortizing them over the related contract term. The change was applied retrospectively. Deferred commissions totaled $2.141 million at September 30, 2012.
- The change reduced reported Q1 FY2013 sales and marketing expense and net loss by $544,000, or $0.02 per share, according to the filing. The prior-year comparative results were also adjusted, including a $58,000 reduction in prior-year net income.
- Management stated that existing capital resources should support current and planned operations for at least the next 12 months based on its fiscal 2013 plan. The company may seek additional capital or exchange some or all of its debt for equity, but provided no assurance that financing would be available on favorable terms.
- eGain was in compliance with Comerica’s minimum cash balance and liquidity-to-debt ratio covenants at September 30, 2012. A covenant breach could permit Comerica to accelerate outstanding amounts and discontinue further credit.
- Key risks include the transition from license sales to cloud services, uncertain demand, competition and rapid technological change, customer concentration, international operations and foreign-currency exposure, data security and system availability, dependence on key personnel, the need for continued sales and marketing investment, and potential need for additional financing.
- The company reported ordinary-course legal proceedings and transfer-pricing assessments but stated that they were not expected to have a material effect. No material warranty liability was recorded.
- No shares were repurchased during the quarter. Management stated that there were no material changes in contractual obligations or material off-balance-sheet arrangements beyond disclosed operating leases and a co-location agreement.
Investor Verification Items
- Verify the sustainability and profitability of the cloud-led revenue mix, particularly whether recurring revenue growth can offset declining license revenue.
- Assess whether professional-services capacity and cloud delivery costs can improve sufficiently to restore gross margins.
- Monitor the $5.7 million related-party note due July 31, 2013 and the $2.9 million Comerica term loan due June 15, 2014, including refinancing or equity-conversion requirements.
- Reconcile reported liquidity with negative working capital, restricted cash, deferred revenue, and the Comerica covenant requirements.
- Evaluate the effect of the sales-commission accounting change on comparability, deferred-commission balances, and future sales and marketing expense.
- Review customer concentration, unbilled deferred revenue of $21.8 million, collection risk, and the allowance for doubtful accounts of $383,000.
- Confirm subsequent-period operating performance and whether management’s expectation of at least 12 months of liquidity remains valid.