eGain Corporation 10-Q Summary
Business context and reporting period
eGain provides cloud-based and on-premise customer engagement software, including analytics, customer service, contact-center, implementation, and support solutions. The company operates in one segment across North America, EMEA, and Asia Pacific.
This unaudited Form 10-Q covers the three months ended September 30, 2015, the first quarter of fiscal 2016, compared with the three months ended September 30, 2014. The filing was dated November 6, 2015.
Financial performance and position
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Total revenue | $16.5 million | $20.7 million | Down 20% |
| Subscription and support revenue | $10.8 million | $10.4 million | Up 4% |
| License revenue | $2.4 million | $6.7 million | Down 64% |
| Professional services revenue | $3.2 million | $3.5 million | Down 9% |
| Gross profit | $10.0 million | $13.7 million | Down 27% |
| Gross margin | 61% | 66% | Down 5 percentage points |
| Operating loss | $2.8 million | $1.5 million | Loss increased 91% |
| Operating margin | (17%) | (7%) | Down 10 percentage points |
| Net loss | $3.2 million | $1.6 million | Loss increased 98% |
| Adjusted EBITDA | $(0.8) million | $0.9 million | Down $1.6 million |
| Basic and diluted loss per share | $(0.12) | $(0.06) | Loss increased |
Subscription and support revenue increased primarily because of higher maintenance and support revenue, partly offset by lower cloud revenue from a customer renewal. License revenue declined substantially as customers shifted from perpetual licenses toward cloud delivery. Professional services revenue declined as the company shifted implementation work toward partners and simplified deployment through its version 14 product release.
Operating expenses were $12.8 million, or 78% of revenue, versus $15.2 million, or 73% of revenue, in the prior-year quarter. Research and development increased 4% to $3.9 million, while sales and marketing declined 22% to $6.7 million and general and administrative expense declined 24% to $2.2 million.
Cash flow, liquidity, and debt
| Balance sheet item | September 30, 2015 | June 30, 2015 |
|---|---|---|
| Cash and cash equivalents | $7.3 million | $8.6 million |
| Restricted cash | $0.02 million | $0.7 million |
| Accounts receivable | $11.2 million | $13.1 million |
| Deferred revenue | $13.1 million | $15.8 million |
| Total assets | $44.5 million | $49.7 million |
| Total liabilities | $46.2 million | $48.6 million |
| Stockholders’ equity | $(1.7) million | $1.1 million |
- Operating cash flow was negative $5.6 million, compared with negative $6.0 million in the prior-year quarter.
- Investing activities provided $0.6 million, primarily from a $0.6 million reduction in restricted cash, compared with $4.0 million used in the prior-year period, which included Exony acquisition spending.
- Financing activities provided $3.5 million, including $4.0 million of new bank borrowings, partly offset by debt and capital-lease repayments.
- Cash declined by $1.4 million during the quarter to $7.3 million.
- Gross bank borrowings were $23.1 million, consisting of a $9.6 million term loan and a $13.5 million revolving loan; the balance sheet carrying amount was $22.3 million after deferred financing costs.
- Capital lease obligations totaled $0.5 million.
- Working capital was negative $0.8 million at September 30, 2015, compared with negative $2.0 million at June 30, 2015.
- Unbilled deferred revenue was $26.6 million, compared with approximately $26.5 million at June 30, 2015.
Material changes versus the prior comparable period
- Revenue declined 20%, driven primarily by a $4.3 million reduction in license revenue. Subscription and support revenue grew modestly but did not offset the license decline.
- Gross margin fell to 61% from 66%, reflecting the increasing mix of cloud and recurring-revenue business and continued investment in cloud infrastructure.
- Despite lower sales and marketing and general and administrative costs, the operating loss widened because of lower revenue and higher research and development expense.
- Interest expense increased to $0.3 million from $0.1 million, primarily because of bank borrowings and capital leases.
- Exony contributed $2.7 million of revenue and $1.2 million of net income in the quarter, compared with $1.5 million of revenue and a $0.7 million net loss in the prior-year quarter.
- Foreign exchange movements reduced total revenue by approximately $26,000 and contributed to a $0.2 million other-income benefit in the current quarter.
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 in fiscal 2016 as cloud infrastructure investment continues, with gross margin expected to remain relatively constant under the current business plan.
- Management expects research and development, sales and marketing, and general and administrative expenses to decline or remain relatively constant as percentages of revenue in future quarters, while professional services margins are expected to improve.
- The Wells Fargo credit facility was amended in September 2015: maximum revolving commitments increased from $10 million to $15 million, and term-loan amortization increased. The company reported compliance with its September 30 financial covenants.
- The amended facility required minimum EBITDA no more negative than $1.68 million for the quarter ended September 30, 2015 and minimum liquidity of $5.5 million for September, rising to $10.0 million by December 31, 2015 and thereafter. The filing does not clearly state the precise calculation of covenant liquidity beyond reporting compliance.
- The debt is secured by substantially all company assets and contains restrictive covenants. A covenant breach could permit acceleration of outstanding debt and termination of further borrowing availability.
- Key business risks include the transition from perpetual licenses to lower-margin cloud offerings, customer renewal and upsell uncertainty, lengthy and unpredictable sales cycles, customer concentration, competition, foreign currency exposure, reliance on international operations, cybersecurity and service interruptions, intellectual-property claims, and the need for additional capital.
- The company early adopted accounting guidance for cloud-computing arrangements and debt issuance cost presentation. It is evaluating the future revenue-recognition standard, with no quantified impact provided.
- There were no significant changes to contractual obligations or significant off-balance-sheet arrangements other than previously disclosed operating leases and co-location commitments. No subsequent events were reported in the financial statement notes.
Important facts for investors to verify
- Whether recurring subscription and support growth can offset continuing declines in perpetual license revenue.
- Whether cloud growth can improve or sustain gross margins despite infrastructure investment and the lower-margin recurring-revenue mix.
- Cash burn, borrowing needs, and compliance with the Wells Fargo minimum EBITDA and liquidity covenants, particularly the $10 million liquidity requirement beginning December 31, 2015.
- The company’s ability to maintain customer renewals and manage concentration risk; two customers represented 15% and 11% of quarterly revenue.
- The composition and profitability of Exony’s contribution and the continuing amortization burden from acquired intangible assets, including $6.9 million of net intangible assets at quarter-end.
- Potential effects of foreign exchange, data-transfer and privacy regulation, cybersecurity incidents, service-level obligations, litigation, and intellectual-property claims.
- Whether the company can achieve positive cash flow without issuing additional equity or incurring additional debt.