eGain Corporation Form 10-Q Summary
Reporting period: Third quarter and nine months of fiscal 2021 ended March 31, 2021; filed May 14, 2021. The requested “2020 Q3” label does not match the filing, which reports the March 31, 2021 quarter. Financial statements are unaudited.
Business Context
eGain provides SaaS customer-engagement software incorporating digital, artificial intelligence, and knowledge capabilities. It serves primarily large enterprises and operates in the United States, United Kingdom, and India. The company is transitioning from perpetual-license products to a SaaS-only model and is migrating remaining legacy customers to SaaS.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2021 | Year-over-Year Change | Nine Months Ended March 31, 2021 | Year-over-Year Change |
|---|---|---|---|---|
| Total revenue | $19.7 million | Up 8% | $58.0 million | Up 8% |
| SaaS revenue | $16.9 million | Up 14% | $49.0 million | Up 19% |
| Legacy revenue | $1.2 million | Down 43% | $4.5 million | Down 40% |
| Professional services revenue | $1.7 million | Up 16% | $4.5 million | Down 7% |
| Gross profit | $14.9 million | Up 16% | $43.9 million | Up 16% |
| Gross margin | 75% | Up from 70% | 76% | Up from 70% |
| Income from operations | $1.6 million | Down 10% | $5.8 million | Up 20% |
| Operating margin | 8% | Down from 10% | 10% | Up from 9% |
| Net income | $1.3 million | Down from $1.9 million | $4.9 million | Down from $5.1 million |
| Diluted EPS | $0.04 | Down from $0.06 | $0.15 | Down from $0.16 |
| Non-GAAP operating income | $1.9 million | Down from $2.3 million | $7.1 million | Up from $6.4 million |
Cash, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $53.4 million at March 31, 2021, compared with $46.6 million at June 30, 2020. Including restricted cash, total cash was $53.4 million.
- Accounts receivable declined to $16.0 million from $22.7 million; the allowance for doubtful accounts increased to $742,000 from $384,000.
- Net cash provided by operating activities was $5.0 million for the nine months, down from $8.5 million in the comparable period, primarily due to timing of customer prepayments and accrued-liability payments.
- Investing cash outflows were $354,000, primarily for property and equipment. Financing cash inflows were $1.5 million, principally from employee stock-option exercises and the employee stock purchase plan.
- The filing reports no outstanding bank borrowings at March 31, 2021. Operating lease liabilities totaled $2.7 million, with approximately $2.8 million of future minimum lease payments.
- Remaining performance obligations were $62.3 million, of which $50.1 million was expected to be recognized within one year and $12.2 million thereafter.
Material Changes Versus the Prior Comparable Period
- SaaS growth drove the increase in revenue, while legacy maintenance and support revenue continued to contract as customers migrated to SaaS.
- Gross margin improved materially because cost of subscription and professional services revenue declined faster than revenue.
- Sales and marketing expense increased 37% for the quarter and 29% for the nine-month period, primarily due to higher personnel-related expenses and cross-charges.
- Quarterly operating income declined despite higher gross profit because sales and marketing spending increased substantially. Nine-month operating income improved.
- Other income and expense shifted to a net expense of $378,000 for the quarter and $700,000 for the nine months, compared with net income in the prior-year periods, primarily due to foreign-exchange fluctuations.
- Domestic revenue increased 19% for the quarter and 27% for the nine months, while international revenue declined 11% and 19%, respectively.
- Stockholders’ equity increased to $42.6 million from $34.6 million at June 30, 2020, primarily reflecting year-to-date net income, stock issuances, and currency translation gains.
Guidance, Outlook, Risks, and Unusual Items
- Management expects SaaS revenue to continue increasing year over year and legacy revenue to continue declining as the SaaS migration proceeds.
- Management expects subscription gross margins to improve, while subscription cost of revenue is expected to increase in absolute dollars. Research and development and general and administrative expenses are expected to remain relatively consistent as percentages of revenue; sales and marketing expense is expected to increase as a percentage of revenue.
- COVID-19 had not materially adversely affected results through March 31, 2021. The company continued work-from-home, travel restrictions, and virtual sales and marketing measures, but stated that future effects remain uncertain.
- Key risks include customer concentration, subscription renewal uncertainty, lengthy sales cycles, intense competition, implementation delays, cybersecurity and service interruptions, privacy and data-transfer regulation, foreign-exchange exposure, Brexit-related uncertainty, international operations, and reliance on personnel in India.
- Two customers that are also partners accounted for 23% and 13% of quarterly revenue and 20% and 12% of nine-month revenue, creating material concentration risk.
- The company is involved in ordinary-course intellectual-property, commercial, employment, and tax-related matters. Management does not expect current proceedings or transfer-pricing assessments to have a material financial impact, but adverse outcomes could increase costs or liabilities.
- The company maintains a full valuation allowance against U.S. deferred tax assets. It estimated $2.1 million of GILTI income inclusion as of March 31, 2021 and used net operating losses to offset taxable income.
Most Important Facts for Investors to Verify
- Whether SaaS growth and customer migrations can offset the continuing decline in legacy revenue.
- Subscription renewal rates, customer concentration, and the sustainability of the $62.3 million remaining performance obligation balance.
- Whether higher sales and marketing investment converts into durable revenue growth and improved operating margins.
- Cash conversion and the reasons for the year-over-year decline in operating cash flow.
- Potential effects of COVID-19, foreign exchange, privacy regulation, cybersecurity incidents, and international operating risks.
- The adequacy of doubtful-account reserves and the potential impact of litigation, indemnification obligations, and transfer-pricing assessments.