eGain Corporation Form 10-Q Summary
Business context and reporting period
eGain provides cloud-based customer engagement software, including knowledge management, digital engagement, contact center analytics, licenses, support, and professional services. The filing covers the quarter and nine months ended March 31, 2016, eGain’s fiscal third quarter of fiscal 2016, despite the request metadata identifying “2015 Q3.” Operations span North America, EMEA, and Asia Pacific.
Financial performance and position
| Metric | Three months ended March 31, 2016 | Three months ended March 31, 2015 | Nine months ended March 31, 2016 | Nine months ended March 31, 2015 |
|---|---|---|---|---|
| Total revenue | $16.3 million | $19.2 million | $51.8 million | $58.8 million |
| Gross profit | $10.6 million | $11.7 million | $33.6 million | $36.1 million |
| Gross margin | 65% | 61% | 65% | 61% |
| Operating loss | $(2.7) million | $(2.2) million | $(6.0) million | $(9.3) million |
| Net loss | $(3.0) million | $(2.4) million | $(7.6) million | $(9.5) million |
| Net loss per share | $(0.11) | $(0.09) | $(0.28) | $(0.36) |
| Adjusted EBITDA | $(0.3) million | $0.3 million | $(0.01) million | $(1.1) million |
- Quarterly revenue declined 15%; nine-month revenue declined 12%.
- Subscription and support revenue declined 5% for the quarter and 1% year to date, while license revenue declined 39% and 31%, respectively. Professional services revenue declined 12% and 17%, respectively.
- Operating expenses totaled $13.2 million for the quarter and $39.6 million year to date. Research and development increased slightly, while sales and marketing and general and administrative expenses declined year to date.
- Quarterly operating margin was negative 16%, compared with negative 11% in the prior-year quarter. Year-to-date operating margin improved to negative 12% from negative 16%.
- Cash used in operating activities was $0.3 million for the nine months, compared with $6.9 million in the prior-year period.
- Cash and cash equivalents were $7.5 million at March 31, 2016, down from $8.6 million at June 30, 2015. Restricted cash declined to $13,000 from $676,000.
- Total bank borrowings were $18.4 million, net of deferred financing costs, at March 31, 2016, compared with $18.8 million at June 30, 2015. Capital lease obligations totaled $547,000.
- Working capital was negative $3.3 million. Deferred revenue was $14.5 million, and unbilled deferred revenue was approximately $23.0 million.
- Stockholders’ equity declined to a deficit of $5.6 million from positive equity of $1.1 million at June 30, 2015.
Material changes versus the prior comparable period
- The revenue mix continued shifting from perpetual licenses toward cloud and subscription delivery, depressing near-term recognized revenue but increasing the recurring component of reported revenue.
- Professional services revenue and related costs declined as eGain reduced direct consulting and implementation activity, shifted work to partners, and benefited from simplified deployment of its version 14 product.
- Gross margin improved four percentage points to 65%, primarily from lower professional-services costs and associated headcount reductions.
- Sales and marketing expense declined 18% year to date, while research and development expense was broadly stable. The resulting year-to-date operating loss improved despite lower revenue.
- Interest expense increased to $1.5 million year to date from $578,000, reflecting the company’s debt and related financing arrangements.
- Foreign exchange reduced revenue by approximately $508,000 for the quarter and $1.5 million year to date.
- Exony contributed $2.7 million of revenue and $1.5 million of net income during the quarter, and $8.3 million of revenue and $3.9 million of net income year to date.
Guidance, outlook, commentary, risks, and unusual items
- Management stated that existing capital resources are expected to support current and planned operations for at least the next 12 months, but noted that additional financing may be needed and may not be available on acceptable terms.
- Management expects subscription and support costs to increase as it continues investing in cloud infrastructure, with gross margin expected to remain relatively constant. Professional-services costs and margins are expected to improve over future quarters.
- Management expects research and development expense to decrease as a percentage of revenue and sales and marketing and general and administrative expense to decrease or remain relatively constant as percentages of revenue, subject to foreign exchange and severance fluctuations.
- The Wells Fargo credit facility was amended to increase revolving commitments from $10.0 million to $15.0 million. Revolver availability was $4.8 million at March 31, 2016. The company reported compliance with applicable financial covenants, although no minimum EBITDA value had been finalized for the month ended March 31, 2016.
- The credit agreement contains restrictive covenants, financial covenants, collateral provisions, and events of default that could permit acceleration of debt and enforcement against substantially all assets.
- Key risks include continued losses, negative working capital, dependence on debt financing, unpredictable license sales and lengthy sales cycles, customer renewal and concentration risk, competition, foreign currency exposure, cloud outages and cybersecurity incidents, data privacy regulation, intellectual-property claims, and reliance on international and offshore operations.
- Two customers represented 16% and 10% of quarterly and year-to-date revenue, increasing customer-concentration risk.
- No material subsequent events were reported. No shares were repurchased during the quarter or the nine-month period.
Important facts for investors to verify
- Whether the planned shift to cloud and recurring revenue produces sufficient growth and sustainable gross-margin improvement to offset declining license revenue.
- Cash-burn trends, available revolver capacity, debt maturities, covenant requirements, and the company’s ability to refinance or raise additional capital.
- Subscription renewal, churn, upgrade, and customer-concentration metrics, which are not fully quantified in the filing.
- The extent to which Exony’s reported contribution remains sustainable and whether acquired intangible assets or goodwill require impairment.
- The effect of foreign exchange, data-transfer regulation following the invalidation of the EU-U.S. Safe Harbor framework, cybersecurity events, service interruptions, and pending or future legal and intellectual-property claims.