eGain Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2013, compared with the corresponding 2012 periods. The filing was signed February 12, 2014. eGain provides cloud-based and on-premise customer engagement software and operates in North America, EMEA, and Asia Pacific.
Financial performance and position
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2013 | Six months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Total revenue | $17.7 million | $14.7 million | $33.3 million | $25.5 million |
| Gross profit | $11.8 million | $10.5 million | $22.0 million | $16.9 million |
| Gross margin | 67% | 71% | 66% | 66% |
| Operating income (loss) | $(1.1) million | $0.8 million | $(2.7) million | $(1.8) million |
| Operating margin | (6)% | 6% | (8)% | (7)% |
| Net income (loss) | $(1.2) million | $0.6 million | $(3.2) million | $(2.2) million |
| Basic loss per share | $(0.05) | $0.03 | $(0.13) | $(0.09) |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $1.2 million | $9.9 million |
- Quarterly revenue increased 20%; subscription and support revenue increased 31% to $10.2 million, professional services increased 24% to $4.4 million, and license revenue declined 11% to $3.1 million.
- Six-month revenue increased 31%. Six-month license revenue increased 67%, while subscription and support revenue increased 32% and professional services increased 6%.
- Sales and marketing expense increased 45% in the quarter and 39% for the six-month period, primarily from higher personnel, commissions, marketing, and consulting costs. Total operating expenses increased to 73% of quarterly revenue from 65%.
- Cash and cash equivalents were $12.5 million at December 31, 2013, compared with $16.2 million at June 30, 2013. Including restricted cash, total cash was $13.5 million.
- Accounts receivable declined to $9.4 million from $12.3 million, while the allowance for doubtful accounts increased to $689,000 from $392,000.
- Deferred revenue was $20.0 million, compared with $19.7 million at June 30, 2013. Unbilled deferred revenue declined to approximately $17.7 million from $24.8 million.
- Total liabilities were $32.3 million and stockholders’ equity was $4.1 million at December 31, 2013. Working capital was negative $2.9 million.
Debt, liquidity, and cash flow
- Bank borrowings totaled $3.3 million, including $1.8 million current and $1.5 million noncurrent, compared with $4.7 million at June 30, 2013.
- The company repaid $2.9 million owed under the chief executive officer’s related-party note on July 31, 2013; the loan agreement was terminated.
- Six-month operating cash flow fell to $1.2 million from $9.9 million, primarily because of the net loss and a much smaller contribution from deferred revenue and working-capital changes.
- Six-month investing cash outflow was $1.2 million, primarily for equipment supporting new employees and cloud operations. Financing cash outflow was $3.9 million, including debt repayments.
- The Comerica facility required a minimum cash balance of $1.0 million and a liquidity-to-debt ratio of at least 1.50 to 1.00. The company reported compliance at December 31, 2013.
- Management stated that existing capital resources were expected to support current and planned operations for at least the next 12 months, but noted that additional financing may be considered and cannot be assured on favorable terms.
Material changes and unusual items
- Beginning July 1, 2013, the company determined that certain cloud implementation and consulting services had standalone value. These services began being accounted for separately and recognized as performed, contributing to professional services revenue growth.
- Gross margin declined to 67% in the quarter from 71%, reflecting higher personnel, cloud hosting, and outside consulting costs.
- The company recorded $740,000 of stock-based compensation for the six months, compared with $585,000 in the prior-year period.
- In February 2013, unauthorized wire transfers of approximately $3.9 million were discovered at the U.K. subsidiary. Approximately $2.7 million was recovered, and the remaining approximately $1.2 million was recovered through insurance in September 2013.
- The company settled its Lodsys patent litigation on December 18, 2013, including a license to the Lodsys patents. Litigation with Pragmatus Telecom remained pending.
Outlook, commentary, and risks
Management did not provide a specific numeric revenue or earnings forecast in the filing. It stated that fiscal 2014 expectations depend on revenue growth, the mix of cloud and license transactions, customer retention and payment patterns, and expense management.
- Key risks include lengthy and unpredictable sales cycles, fluctuations in the cloud-versus-license mix, subscription renewal uncertainty, customer concentration, intense competition, and the possibility that increased sales and marketing investment will not generate sufficient growth.
- Approximately 49% of quarterly revenue came from international sales, and approximately 49% of the workforce was employed in India. Foreign exchange, regional economic conditions, staffing, infrastructure, and political risks may affect results.
- One customer represented 16% of quarterly revenue and 18% of six-month revenue, creating customer concentration risk.
- The company does not hedge foreign currency exposure with derivatives and reported approximately $14.8 million of identifiable foreign-currency-denominated assets.
- Risks also include cloud-service interruptions, data security and privacy issues, intellectual-property claims, pending and future litigation, collection risk, regulatory changes, and possible covenant breaches under the Comerica facility.
- Management concluded that disclosure controls and procedures were 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 revenue growth, particularly cloud and subscription growth, can offset rising sales and marketing and delivery costs.
- The company’s ability to return to positive operating income and sustain operating cash flow.
- Liquidity after debt repayments, the June 2016 Comerica term-loan maturity structure, and continued covenant compliance.
- Customer concentration, renewal rates, unbilled deferred revenue, and the effect of the new professional-services revenue treatment.
- The status and potential financial impact of the Pragmatus litigation and other intellectual-property matters.
- Exposure to international operations, foreign exchange movements, cybersecurity incidents, and dependence on personnel in India.