eGain Corporation Form 10-Q Summary
Business context and reporting period
eGain provides cloud-based customer engagement software, including digital interaction, knowledge management, AI-based process guidance and analytics. The company operates in the United States, United Kingdom and India and reports one operating segment.
This filing covers the fiscal quarter and six-month period ended December 31, 2017, representing fiscal 2018 second-quarter results. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended Dec. 31, 2017 | Year-ago period | Six months ended Dec. 31, 2017 | Year-ago period |
|---|---|---|---|---|
| Total revenue | $15.4 million | $15.0 million | $30.0 million | $29.7 million |
| Recurring revenue | $12.6 million | $11.0 million | $24.2 million | $21.8 million |
| Legacy license revenue | $64 thousand | $1.4 million | $252 thousand | $3.1 million |
| Professional services revenue | $2.8 million | $2.6 million | $5.5 million | $4.8 million |
| Gross profit | $9.8 million | $9.9 million | $19.0 million | $19.6 million |
| Gross margin | 64% | 66% | 63% | 66% |
| Loss from operations | $396 thousand | $298 thousand | $650 thousand | $1.6 million |
| Net loss | $788 thousand | $1.0 million | $1.4 million | $3.5 million |
| Net loss per share | $0.03 | $0.04 | $0.05 | $0.13 |
Six-month operating cash flow was $8.5 million, compared with cash used in operations of $1.3 million in the prior-year period. Capital expenditures were $91 thousand. Financing activities used $8.4 million, principally reflecting $11.2 million of debt repayments, partially offset by $2.7 million of new borrowings and $138 thousand from option exercises.
Cash and cash equivalents were $10.8 million at December 31, 2017, compared with $10.6 million at June 30, 2017. Deferred revenue increased to $29.1 million from $23.2 million, and unbilled deferred revenue increased to $39.3 million from $37.0 million.
Bank borrowings, net of deferred financing costs, declined to $7.2 million from $15.6 million at June 30, 2017. Gross bank borrowings were $7.6 million, consisting primarily of a $7.4 million term loan and $188 thousand of revolving borrowings. The company reported $14.8 million of available revolving credit and $21.7 million of covenant-defined liquidity.
Non-GAAP operating income was $843 thousand for the quarter and $1.4 million for the six-month period, excluding stock-based compensation and amortization of acquired intangible assets.
Material changes versus the prior comparable period
- Total revenue increased 3% in the quarter and 1% for the six-month period.
- Recurring revenue increased 14% in the quarter and 11% for the six-month period, reflecting the transition from perpetual licenses to cloud and ratable offerings.
- Legacy license revenue fell 95% in the quarter and 92% for the six-month period. eGain no longer sells legacy licenses to new customers and is migrating existing customers to cloud delivery.
- Professional services revenue increased 7% in the quarter and 14% for the six-month period.
- Gross margin declined to 64% from 66% in the quarter and to 63% from 66% for the six-month period, primarily because the recurring-revenue model carries lower margins than traditional perpetual licenses and includes higher cloud-related costs.
- Sales and marketing expense declined 15% in the quarter and 17% for the six-month period, while research and development expense increased 15% and 3%, respectively.
- Interest expense declined to $239 thousand in the quarter and $583 thousand for the six-month period, primarily due to lower average borrowings.
- Stock-based compensation increased substantially to $736 thousand in the quarter and $1.1 million for the six-month period. The increase included $276 thousand and $414 thousand, respectively, related to repricing employee options.
Guidance, outlook, risks and unusual items
- Management expects recurring revenue to increase during fiscal 2018 as the cloud-delivery transition continues. Legacy license revenue is expected to decline, while professional services revenue is expected to increase or remain relatively constant.
- Management expects gross margin to remain relatively constant or improve, although recurring revenue currently produces lower margins than perpetual licenses. Research and development, sales and marketing, and general and administrative expenses are expected to increase in future quarters under the current business plan.
- Management believes existing capital resources will support current and planned operations for at least the next twelve months, but states that additional financing may be required depending on revenue growth, customer retention, business mix and payment patterns.
- The Wells Fargo credit agreement contains restrictive covenants and financial requirements. The company was in compliance as of December 31, 2017, but the applicable Fixed Charge Coverage Ratio and Leverage Ratio replacement tests had not yet become applicable. A default could permit acceleration of the debt and enforcement against substantially all company assets.
- The company is exposed to foreign currency risk, principally involving the Euro, British Pound and Indian Rupee, and does not hedge this exposure. International sales represented 44% of quarterly revenue and 47% of six-month revenue.
- One customer represented 15% of revenue for both the quarter and six-month period. Customer concentration, renewals, lengthy sales cycles and implementation delays could affect future results.
- The company continues to face risks related to cloud-service interruptions, cybersecurity, data privacy, intellectual property claims, competition, employee retention, international operations and changing regulations, including the GDPR effective May 25, 2018.
- The Tax Cuts and Jobs Act was enacted on December 22, 2017. eGain was still evaluating the legislation’s effect on its fiscal 2018 financial statements, including deferred taxes and international tax matters.
- Topic 606 revenue recognition becomes effective for eGain’s fiscal year beginning July 1, 2018. The company had not selected a transition method and was still evaluating the financial impact.
Most important facts for investors to verify
- Whether recurring-revenue growth offsets the continuing decline in legacy license revenue.
- Whether recurring-revenue gross margins improve as cloud scale and operating efficiencies develop.
- Customer renewal, expansion and concentration trends, including the impact of the 15% customer concentration.
- Compliance with debt covenants, required liquidity levels and the pace of further debt repayment.
- The sustainability of operating cash flow, particularly the extent to which it depends on increases in deferred revenue.
- The eventual impact and transition method selected for ASC Topic 606, as well as the finalized tax effects of the Tax Cuts and Jobs Act.
- Potential effects of currency movements, cybersecurity or service interruptions, litigation, privacy regulation and GDPR compliance costs.