eGain Corporation 2015 Form 10-K Summary
Business context and reporting period
eGain provides cloud-based and on-site customer engagement software, including customer service, contact-center, analytics, knowledge-management and multichannel interaction solutions. The filing covers the fiscal year ended June 30, 2015; the source does not represent a standalone 2014 fourth-quarter filing, although fourth-quarter fiscal 2015 results are disclosed. International revenue represented 52% of fiscal 2015 revenue, compared with 45% in fiscal 2014.
eGain acquired Exony Limited in August 2014 for approximately $17.6 million, consisting of cash, eGain stock and other consideration. Exony contributed $11.0 million of revenue and $793,000 of net income during fiscal 2015.
Key financial metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Total revenue | $75.9 million | $70.3 million | Up 8% |
| Subscription and support revenue | $42.3 million | $40.5 million | Up 5% |
| License revenue | $18.3 million | $14.8 million | Up 24% |
| Professional services revenue | $15.3 million | $15.0 million | Up 2% |
| Gross profit | $46.8 million | $46.8 million | Essentially flat |
| Gross margin | 61% | 67% | Down 6 percentage points |
| Operating loss | $11.3 million | $4.1 million | Loss increased |
| Operating margin | (15%) | (6%) | Down 9 percentage points |
| Net loss | $12.4 million | $5.2 million | Loss increased |
| Adjusted EBITDA | $(1.4) million | $(0.7) million | Declined |
| Cash used in operations | $10.5 million | $4.7 million | Use increased |
Fiscal 2015 fourth-quarter revenue was $17.1 million, gross profit was $10.7 million, operating loss was $2.0 million and net loss was $2.9 million, or $0.11 per diluted share.
Operating expenses were $58.1 million, or 76% of revenue, compared with $50.9 million, or 73%, in fiscal 2014. Research and development increased 61% to $16.0 million, while sales and marketing declined 2% to $32.7 million and general and administrative expense increased 24% to $9.3 million. Stock-based compensation was $2.3 million.
At June 30, 2015, cash and cash equivalents were $8.6 million and restricted cash was $676,000. Working capital was negative $2.0 million. Deferred revenue was $15.8 million and unbilled deferred revenue was $26.5 million. Total assets were $49.7 million and stockholders’ equity was $1.1 million.
Bank borrowings totaled $19.25 million before deferred financing costs, including a $9.75 million term loan and a $9.5 million revolving loan. The Wells Fargo facility matures in November 2019, bears interest at specified floating rates, is secured by substantially all company assets and includes financial and operational covenants. eGain reported compliance with its covenants at June 30, 2015.
Material changes versus the prior comparable period
- Revenue increased $5.7 million, primarily from higher license revenue and subscription and support revenue.
- Revenue growth did not translate into higher gross profit because cost of revenue rose 24% to $29.1 million. Subscription and support gross margin fell to 71% from 79%, and professional services gross margin became negative 11% from positive 1%.
- The operating loss widened by $7.2 million. Principal cost drivers included Exony-related personnel costs, company-wide compensation increases, acquired-intangible amortization of $2.5 million, $844,000 of acquisition costs, and higher cloud expenses.
- Cash used in operations increased to $10.5 million from $4.7 million, while financing activities provided $13.6 million, primarily from new bank borrowings.
- Shares outstanding increased to 27.0 million from 25.5 million, partly reflecting 1.2 million shares issued in connection with the Exony acquisition.
- Goodwill increased to $13.2 million from $4.9 million and intangible assets increased to $7.6 million from zero, primarily because of the Exony acquisition.
Guidance, outlook, risks and unusual items
Management expected fiscal 2016 revenue to decrease, primarily because of the shift from perpetual licenses toward cloud delivery, although subscription and support revenue was expected to increase or remain relatively constant and professional services revenue was expected to increase or remain relatively constant. Management also expected continued investment in sales, marketing, product development, technology and cloud infrastructure.
Management stated that existing capital resources were expected to support current and planned operations for at least the next 12 months, but this expectation depended on maintaining or exceeding fiscal 2016 revenue levels and timely customer payments. The filing warns that additional financing may be required and may be unavailable on acceptable terms.
On September 2, 2015, after year-end, eGain amended its Wells Fargo facility. The revolving commitment increased from $10 million to $15 million, term-loan amortization increased, and minimum EBITDA and liquidity requirements were revised. The amendment required minimum liquidity of $10.0 million beginning December 31, 2015 and thereafter, creating a significant liquidity and covenant-monitoring consideration relative to the $8.6 million of unrestricted cash reported at June 30, 2015.
- Revenue is exposed to the timing and mix of perpetual-license, subscription and cloud transactions, lengthy sales cycles, renewals and customer concentration.
- The recurring-revenue transition may reduce near-term revenue and has historically produced lower gross margins than perpetual-license sales.
- Cloud outages, security breaches, data privacy regulation, service-level credits and customer indemnification obligations could result in financial or reputational damage.
- International operations create foreign-exchange, regulatory, data-transfer and employee-retention risks; approximately 41% of the workforce was employed in India.
- eGain faces competition from larger and better-capitalized providers, including Microsoft, Oracle, Salesforce.com, Verint/KANA and other contact-center software vendors.
- The company is involved in ordinary-course intellectual-property, commercial, employment and other legal claims; the filing does not provide a clear quantified exposure.
- Unusual fiscal 2015 items included Exony acquisition costs, acquired-intangible amortization and a $359,000 translation adjustment from liquidation of inactive subsidiaries.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of June 30, 2015.
Most important facts for investors to verify
- Whether the fiscal 2016 revenue decline from the cloud transition was realized and whether subscription growth offset lower license revenue.
- Whether recurring-revenue and professional-services gross margins improved as management expected.
- Compliance with the amended Wells Fargo EBITDA and liquidity covenants, including the $10.0 million minimum liquidity requirement.
- Cash burn, available borrowing capacity, debt maturities and the need for additional financing.
- Customer renewal rates, concentration, accounts receivable collectability and the conversion of $26.5 million of unbilled deferred revenue.
- Integration results and impairment risk related to Exony’s $8.3 million of goodwill and $10.1 million of acquired intangible assets.
- Potential effects of litigation, intellectual-property claims, data-security incidents, foreign exchange and regulatory changes.