eGain Corporation: Fiscal Q2 2021 Form 10-Q Summary
Business context and reporting period
eGain provides cloud-based customer engagement software, including digital interaction, knowledge management, AI-based process guidance, analytics, implementation, consulting, and training. The company operates in the United States, United Kingdom, and India and reports one operating segment.
The filing covers the three and six months ended December 31, 2020, corresponding to the second quarter and first six months of fiscal year 2021. Comparative periods are the three and six months ended December 31, 2019. The company has transitioned to a SaaS-only model for new customers and is migrating remaining perpetual-license customers to SaaS.
Key financial metrics
| Metric | Three months ended Dec. 31, 2020 | Year-over-year change | Six months ended Dec. 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $19.2 million | Up 6% | $38.3 million | Up 8% |
| Subscription revenue | $17.7 million | Up 8% | $35.4 million | Up 11% |
| SaaS revenue | $16.2 million | Up 15% | $32.1 million | Up 21% |
| Legacy revenue | $1.5 million | Down 34% | $3.3 million | Down 39% |
| Professional services revenue | $1.5 million | Down 15% | $2.8 million | Down 17% |
| Gross profit | $14.5 million | Up 12% | $29.0 million | Up 17% |
| Gross margin | 76% | Up from 71% | 76% | Up from 70% |
| Income from operations | $1.9 million | Down 5% | $4.2 million | Up 37% |
| Operating margin | 10% | Down from 11% | 11% | Up from 9% |
| Net income | $1.6 million | Down 19% | $3.7 million | Up 14% |
| Diluted EPS | $0.05 | Down from $0.06 | $0.11 | Up from $0.10 |
Six-month operating expenses increased 14% to $24.7 million. Research and development increased 12% to $9.0 million, while sales and marketing increased 24% to $11.9 million. General and administrative expense declined 7% to $3.8 million.
Non-GAAP operating income, excluding stock-based compensation and acquired-intangible amortization, was $2.3 million for the quarter and $5.2 million for the six-month period, compared with $2.6 million and $4.2 million, respectively, in the prior-year periods.
Cash flow, liquidity, debt, and balance sheet
- Cash, cash equivalents, and restricted cash were $54.2 million at December 31, 2020, compared with $46.6 million at June 30, 2020.
- Six-month operating cash flow was $5.9 million, down from $8.0 million in the prior-year period, primarily due to the timing of customer prepayments and accrued-liability payments.
- Investing cash outflow was $0.3 million, primarily for property and equipment. Financing cash inflow was $1.3 million, primarily from stock-option exercises and the employee stock purchase plan.
- Accounts receivable declined to $16.6 million from $22.7 million at June 30, 2020; the allowance for doubtful accounts increased to $0.6 million from $0.4 million.
- Total liabilities were $53.2 million, including $38.5 million of current and noncurrent deferred revenue. Stockholders’ equity was $40.8 million.
- The filing reports no significant bank borrowings outstanding. Operating lease liabilities totaled $2.4 million, with approximately $2.5 million of remaining minimum lease payments.
- Remaining performance obligations were $67.8 million, of which $53.5 million was expected to be recognized within one year and $14.3 million thereafter.
Material changes versus the prior comparable period
- SaaS revenue was the principal growth driver, increasing 15% for the quarter and 21% year to date. SaaS represented 84% of total revenue in both periods, compared with 77% and 75%, respectively, in the prior-year periods.
- Legacy revenue continued to contract as customers migrated from perpetual licenses to SaaS. Professional services revenue also declined because product deployment improvements reduced implementation time.
- Gross margin improved substantially as subscription and professional-services costs declined faster than revenue.
- Operating income declined modestly in the quarter because higher research and development and sales and marketing costs offset gross-profit growth. Year-to-date operating income improved because of the stronger gross margin and lower general and administrative expense.
- International revenue declined 16% for the quarter and 23% year to date, while North American revenue increased 20% and 31%, respectively.
- Cash increased despite lower operating cash flow, supported by financing proceeds and favorable foreign-currency translation.
Guidance, outlook, commentary, and risks
- Management expects SaaS revenue to continue increasing year over year and legacy maintenance and support revenue to continue declining.
- Management expects subscription gross margins to improve, although subscription cost of revenue may increase in absolute dollars as the business grows.
- Research and development expense is expected to remain relatively consistent as a percentage of revenue. Sales and marketing expense is expected to increase as a percentage of revenue under the current business plan.
- The filing does not provide specific quantitative revenue or earnings guidance.
- Management stated that COVID-19 had not materially adversely affected the business during the quarter or six-month period. Employees generally worked remotely, travel was suspended, and sales and marketing events were moved online; future effects remain uncertain.
- Two customers that are also partners accounted for 19% and 13% of quarterly revenue and 19% and 12% of year-to-date revenue, creating customer-concentration risk.
- Key risks include subscription-renewal uncertainty, lengthy sales cycles, intense competition, reliance on distribution partners and systems integrators, implementation delays, service interruptions, cybersecurity breaches, data-privacy and cross-border-transfer regulation, foreign-currency exposure, COVID-19 effects, and intellectual-property litigation.
- Approximately 46% of the workforce was employed in India, exposing operations to labor-market, infrastructure, geopolitical, currency, and pandemic-related risks.
- The company maintains a full valuation allowance against U.S. deferred tax assets. It recorded income-tax provisions of $0.1 million for the quarter and $0.3 million year to date.
- Stock-based compensation was $0.4 million for the quarter and $0.9 million year to date. Foreign-exchange movements increased comprehensive income by $0.2 million for the quarter and $0.4 million year to date.
Most important facts for investors to verify
- Whether SaaS growth and customer migrations are sufficient to offset the continuing decline in legacy revenue and professional services.
- Subscription renewal rates, customer concentration, and the financial condition of the two major partner-customers.
- Whether higher sales and marketing investment converts into sustained revenue growth and operating leverage.
- Trends in subscription gross margin, deferred revenue, remaining performance obligations, and operating cash conversion.
- Potential effects of COVID-19, foreign-currency movements, cybersecurity incidents, privacy regulation, Brexit-related developments, and intellectual-property claims.
- The utilization and potential expiration of U.S. net operating losses and the continuing valuation allowance against U.S. deferred tax assets.