Business Context and Reporting Period
eGain Corporation provides customer-engagement software, including conversational AI, analytics, cloud software, implementation, consulting, training, and managed services. The company sells primarily to large enterprises and operates in the United States, United Kingdom, and India. It has transitioned to a SaaS-only model and is migrating remaining perpetual-license customers to SaaS.
This unaudited Form 10-Q covers the quarter and six months ended December 31, 2022, within fiscal year 2023. The comparable periods ended December 31, 2021.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2022 | Three Months Ended Dec. 31, 2021 | Six Months Ended Dec. 31, 2022 | Six Months Ended Dec. 31, 2021 |
|---|---|---|---|---|
| Total revenue | $25.6 million | $23.1 million | $50.4 million | $44.5 million |
| SaaS revenue | $23.4 million | $20.5 million | $46.1 million | $39.6 million |
| Professional services revenue | $2.0 million | $1.8 million | $3.8 million | $3.1 million |
| Gross profit | $18.8 million | $17.0 million | $37.3 million | $33.1 million |
| Gross margin | 74% | 74% | 74% | 74% |
| Income (loss) from operations | $0.2 million | $(0.6) million | $(0.5) million | $0.1 million |
| Operating margin | 1% | (2%) | (1%) | 0% |
| Net loss | $(0.1) million | $(0.8) million | $(0.1) million | $(0.3) million |
| Net loss per share | $(0.00) | $(0.03) | $(0.00) | $(0.01) |
- SaaS revenue represented 91% of total revenue in both the quarter and six-month period, compared with 88% and 89%, respectively, in the prior-year periods.
- Legacy revenue declined 78% to $0.2 million for the quarter and 73% to $0.5 million for the six months, reflecting continued migration from perpetual licenses to SaaS.
- Operating expenses were $18.6 million for the quarter and $37.8 million for the six months. Six-month expenses included $3.8 million of stock-based compensation.
- Non-GAAP operating income, excluding stock-based compensation, was $2.0 million for the quarter and $3.4 million for the six months, compared with $3.2 million and $6.0 million, respectively, in the prior-year periods.
- Cash flow from operations was $8.2 million for the six months, compared with $4.7 million in the prior-year period. Capital expenditures were $0.3 million.
- Cash, cash equivalents, and restricted cash totaled $80.9 million at December 31, 2022, compared with $72.2 million at June 30, 2022.
- Accounts receivable declined to $16.5 million from $27.0 million at June 30, 2022. Total current assets were $101.5 million and total current liabilities were $55.5 million.
- The filing does not report conventional borrowings or debt. Operating lease liabilities totaled $3.0 million, including $1.0 million current and $2.0 million noncurrent.
- Total deferred revenue was $44.7 million, consisting of $41.8 million current and $3.0 million noncurrent. Remaining performance obligations were $92.1 million, of which $56.5 million was expected to be recognized within one year.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 11%, while six-month revenue increased 13%. Growth was driven primarily by SaaS revenue and higher professional services revenue.
- On a constant-currency basis, management stated that quarterly and six-month total revenue would have been approximately $0.9 million and $1.7 million higher, respectively.
- North America revenue increased 18% for the quarter and 22% for the six months. EMEA revenue decreased 8% and 9%, respectively.
- Gross margin remained stable at 74%, although subscription cost of revenue increased 26% for the quarter and 20% for the six months, primarily due to higher cloud-computing costs.
- Research and development expense increased 16% for the quarter and 19% for the six months, while sales and marketing expense increased 9% and 18%, respectively.
- General and administrative expense decreased 22% for the quarter and 6% for the six months.
- The company moved from a quarterly operating loss to operating income, but remained slightly unprofitable for the six-month period. Higher interest income partly offset foreign-exchange expense and income-tax provisions.
- On November 14, 2022, the board authorized a stock-repurchase program of up to $20 million. No shares had been repurchased as of December 31, 2022.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that existing capital resources should support current and planned operations for at least the next 12 months, while noting that additional financing may be considered and may not be available on favorable terms.
- Management expects legacy revenue to continue declining as perpetual-license customers migrate to SaaS. It expects research and development expense to remain relatively consistent as a percentage of revenue, sales and marketing expense to increase as a percentage of revenue, and general and administrative expense to remain relatively consistent as a percentage of revenue.
- Management emphasizes recurring SaaS revenue visibility and believes SaaS customers achieve faster time to value, but the filing provides no formal revenue or earnings guidance.
- Material risks include lengthy and unpredictable sales cycles, customer renewal and concentration risk, intense competition, reliance on distribution partners, implementation delays, cloud-service interruptions, cybersecurity incidents, data-privacy regulation, foreign-currency volatility, international operations, employee retention, and intellectual-property claims.
- Two customers accounted for 19% and 10% of quarterly revenue; one partner accounted for 21% of six-month revenue. One customer represented more than 10% of accounts receivable at December 31, 2022.
- Approximately 43% of the workforce was employed in India, creating exposure to labor-market, infrastructure, geopolitical, and operational risks.
- Foreign-currency exposure affected reported results. Management estimated that a 10% strengthening of the U.S. dollar against relevant currencies would reduce the value of foreign-currency-denominated assets by approximately $1.9 million.
- The company reported no material pending legal proceedings, no significant off-balance-sheet arrangements, and no goodwill-impairment indicators during the period.
- Tax considerations include a full valuation allowance against U.S. deferred tax assets, estimated fiscal-2023 GILTI of $7.9 million, and potential effects from the Inflation Reduction Act.
- Stock-based compensation was $1.8 million for the quarter and $3.8 million for the six months, with approximately $7.5 million of unrecognized compensation cost remaining at December 31, 2022.
Investor Verification Items
- Verify whether SaaS growth and customer migration continue to offset the expected decline in legacy revenue.
- Monitor customer concentration, renewal rates, remaining performance obligations, and the conversion of deferred revenue into reported revenue and cash.
- Assess whether higher cloud, research and development, and sales and marketing costs pressure gross and operating margins.
- Reconcile GAAP profitability with management’s non-GAAP operating income and track the ongoing effect of stock-based compensation.
- Review cash conversion, accounts-receivable collections, and the sustainability of operating cash flow.
- Determine whether the authorized $20 million repurchase program is implemented and how repurchases affect liquidity and share count.
- Evaluate foreign-exchange sensitivity, international operating exposure, cybersecurity and privacy controls, and contractual service-level or indemnification obligations.
- Confirm the status and potential impact of tax assessments, NOL limitations, GILTI, and other tax-related exposures.