eGain Corporation Form 10-Q Summary
Reporting period: The supplied filing is for the quarter ended March 31, 2017, eGain’s fiscal third quarter, with nine-month year-to-date comparisons to March 31, 2016. The request metadata identifies “2016 Q3,” but the filing itself clearly reports fiscal 2017 Q3. eGain provides SaaS customer-engagement software and related licenses, implementation, consulting, training, and support services across North America, EMEA, and Asia Pacific.
Key Financial Metrics
| Metric | Three months ended March 31, 2017 | Three months ended March 31, 2016 | Nine months ended March 31, 2017 | Nine months ended March 31, 2016 |
|---|---|---|---|---|
| Total revenue | $13.9 million | $16.3 million | $43.6 million | $51.8 million |
| Gross profit | $8.2 million | $10.6 million | $27.8 million | $33.6 million |
| Gross margin | 59% | 65% | 64% | 65% |
| Loss from operations | $(1.8) million | $(2.7) million | $(3.4) million | $(6.0) million |
| Operating margin | (13)% | (16)% | (8)% | (12)% |
| Net loss | $(2.5) million | $(3.0) million | $(6.0) million | $(7.6) million |
| Basic and diluted loss per share | $(0.09) | $(0.11) | $(0.22) | $(0.28) |
| Adjusted EBITDA | $(0.8) million | $(0.3) million | $(0.1) million | $(0.0) million |
Revenue mix: Third-quarter subscription and support revenue was $10.1 million, license revenue was $1.2 million, and professional services revenue was $2.6 million. Subscription and support represented 73% of total revenue, compared with 63% in the prior-year quarter. For the nine-month period, subscription and support revenue was $32.0 million, license revenue was $4.2 million, and professional services revenue was $7.4 million.
Cash flow and liquidity: Operating activities generated $1.5 million of cash in the first nine months of fiscal 2017, compared with $0.3 million used in the prior-year period. Investing activities used $0.4 million, primarily for equipment and software purchases. Financing activities used $2.4 million after $9.8 million of debt repayments, $7.9 million of new borrowings, $0.4 million of capital-lease payments, and $0.1 million of financing costs. Cash and cash equivalents were $10.3 million at March 31, 2017, down from $11.8 million at June 30, 2016.
Balance sheet and debt: Total assets were $40.8 million, compared with $48.1 million at June 30, 2016. Accounts receivable declined to $7.7 million from $11.9 million. Deferred revenue increased to $19.7 million from $15.7 million, and unbilled deferred revenue increased to $33.8 million from $31.1 million. Bank borrowings, net of deferred financing costs, totaled $19.2 million, including an $8.1 million term loan and an $11.6 million revolving loan. Stockholders’ deficit increased to $9.5 million from $4.3 million.
Material Changes Versus the Prior Comparable Period
- Total revenue declined 15% in the quarter and 16% year to date, primarily because of the transition from perpetual licenses to subscription revenue and lower professional-services activity.
- License revenue declined 64% in the quarter and 60% year to date, while subscription and support revenue was broadly stable on a reported basis and increased excluding foreign-exchange effects.
- Professional-services revenue declined 8% in the quarter and 19% year to date, reflecting reduced effort per implementation and the shift toward subscription delivery.
- Gross margin fell to 59% from 65% in the quarter and to 64% from 65% year to date. Management attributes the lower margin primarily to the recurring-revenue model and continued cloud-infrastructure investment.
- Operating losses improved because operating expenses declined: research and development fell 20% in the quarter, sales and marketing fell 28%, and general and administrative expense fell 18%.
- Net cash from operations improved by $1.8 million year to date, helped by improved collections and higher deferred revenue.
- Foreign-exchange movements reduced reported revenue by approximately $1.2 million in the quarter and $3.9 million year to date.
Guidance, Outlook, Risks, and Unusual Items
Management expects subscription and support costs and overall gross margin to remain relatively stable, subject to foreign-exchange movements and severance-related changes. Professional-services costs are expected to decline, research and development expense is expected to remain relatively constant, sales and marketing expense is expected to decrease or remain relatively constant, and general and administrative expense is expected to increase or remain relatively constant under the current business plan. The filing does not provide formal revenue or earnings guidance.
- Under Amendment No. 2 to the Wells Fargo credit agreement, the required liquidity threshold was reduced from $10 million to $4 million. The company reported compliance with the applicable minimum EBITDA and liquidity covenants as of March 31, 2017, but the Fixed Charge Coverage Ratio and Leverage Ratio required to replace the interim covenants had not been met.
- The credit facility is secured by substantially all company assets and contains restrictions on additional debt, investments, acquisitions, asset sales, dividends, repurchases, and other corporate actions. A covenant breach could permit acceleration of the debt.
- The company states that existing capital resources should support current and planned operations for the next 12 months, but additional financing could be required if revenue, collections, or customer purchasing patterns weaken.
- One customer represented 15% of quarterly revenue and 13% of year-to-date revenue, creating customer-concentration risk. International sales represented 54% of quarterly revenue and 51% of year-to-date revenue.
- The business remains exposed to subscription-renewal risk, lengthy and unpredictable sales cycles, competition, cloud-service interruptions, cybersecurity and data-privacy requirements, foreign-currency volatility, intellectual-property claims, and reliance on international operations, including India.
- A two-year sublease for approximately 22,000 square feet commenced January 1, 2017. The previously recorded $305,000 lease-exit liability was reversed during the quarter ended December 31, 2016; sublease income was $179,000 for the three and nine months ended March 31, 2017.
- The company is involved in ordinary-course legal proceedings and has appealed transfer-pricing assessments. Management states that the assessments are without merit and are not expected to have a significant financial-statement impact.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether subscription growth and renewal rates can offset the continuing decline in perpetual-license revenue.
- Whether the company can improve recurring-revenue gross margins while maintaining cloud infrastructure and service levels.
- Compliance with the Wells Fargo credit agreement’s minimum EBITDA, liquidity, Fixed Charge Coverage Ratio, and Leverage Ratio requirements.
- Debt repayment capacity relative to $10.3 million of cash, $19.2 million of net bank borrowings, and the company’s continuing net losses.
- The sustainability of positive operating cash flow, particularly if deferred-revenue growth or collections slow.
- The effect of foreign-exchange movements, customer concentration, customer renewals, and international operating risks on future results.
- The potential financial impact of pending legal, intellectual-property, transfer-pricing, warranty, indemnification, and data-security matters.