eGain Corporation Form 10-Q Summary
Business context and reporting period
eGain provides cloud-based customer engagement software, including digital interaction, knowledge management, AI-based guidance and analytics. The filing covers the quarter and nine months ended March 31, 2019, eGain’s fiscal third quarter of fiscal 2019. The supplied metadata refers to “2018 Q3,” but the filing’s stated reporting period is March 31, 2019. eGain operates primarily in North America, EMEA and India and is transitioning remaining perpetual-license customers to a SaaS-only model.
Financial performance and liquidity
| Metric | Three months ended March 31 | Change | Nine months ended March 31 | Change |
|---|---|---|---|---|
| Total revenue | $17.0 million | Up 8% | $50.4 million | Up 10% |
| SaaS revenue | $11.8 million | Up 31% | $33.4 million | Up 41% |
| Legacy support revenue | $3.5 million | Down 19% | $11.4 million | Down 19% |
| Professional services revenue | $1.7 million | Down 29% | $5.5 million | Down 30% |
| Gross profit | $11.7 million | Up 14% | $34.3 million | Up 17% |
| Gross margin | 69% | Up from 66% | 68% | Up from 64% |
| Operating income | $1.8 million | Up from $0.4 million | $4.7 million | Up from a $0.2 million loss |
| Net income | $1.4 million | Up from a $0.1 million loss | $4.0 million | Up from a $1.5 million loss |
| Operating cash flow | Not provided for the quarter | — | $8.0 million | Down from $8.3 million |
Quarterly operating margin was approximately 11%, versus 3% in the prior-year quarter; nine-month operating margin was approximately 9%, versus approximately breakeven. Quarterly net margin was approximately 8%, and nine-month net margin was approximately 8%.
- Cash and cash equivalents were $31.1 million at March 31, 2019, compared with $11.5 million at June 30, 2018. Cash, cash equivalents and restricted cash totaled $31.1 million.
- Working capital improved to $11.4 million from negative $8.0 million. Accounts receivable rose to $15.1 million, while total deferred revenue was $33.3 million.
- Liquidity under the credit agreement was $41.4 million at March 31, 2019.
- The term loan was fully repaid and the revolving loan balance was approximately $7,000 at quarter-end, compared with total bank borrowings of $9.2 million at June 30, 2018.
- Operating cash flow was $8.0 million for the nine months. Financing cash flow was $11.9 million, including $20.4 million of net proceeds from the March 2019 follow-on offering, partially offset by net debt repayments of approximately $9.4 million.
Material changes versus the prior comparable period
- SaaS revenue growth more than offset declines in legacy support and professional services. SaaS represented 70% of quarterly revenue and 66% of nine-month revenue, compared with 58% and 52%, respectively, in the prior-year periods.
- Gross margin expanded primarily because professional services costs declined faster than related revenue and the business mix shifted toward subscriptions.
- Operating profitability improved through higher revenue, lower professional services costs, lower sales and marketing expense, and reduced amortization of acquired intangibles. General and administrative expense increased 6% for the quarter and 14% year to date.
- eGain adopted ASC 606 on July 1, 2018 using the modified retrospective method. The adoption increased opening accumulated deficit by $3.8 million and changed the presentation and timing of certain revenue and contract-cost balances. For the nine months, reported revenue was $50.4 million versus $49.7 million excluding ASC 606 effects, and reported net income was $4.0 million versus $2.9 million excluding those effects.
- In March 2019, eGain issued 2.0 million shares at $11.00 per share and received net proceeds of approximately $20.2 million. The underwriters purchased an additional 149,000 shares in April 2019 for gross proceeds of approximately $1.6 million.
- Shares outstanding increased to 30.2 million at March 31, 2019 from 27.7 million at June 30, 2018.
Guidance, outlook, commentary, risks and unusual items
- Management expects SaaS revenue to continue increasing as new customers are added and legacy customers migrate to SaaS. Legacy support revenue is expected to continue declining.
- Management expects subscription cost of revenue to increase in absolute dollars but believes subscription gross margins should improve. 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.
- Remaining performance obligations were $63.8 million at March 31, 2019, with $40.2 million expected to be recognized within one year and $23.6 million thereafter.
- Management stated that existing capital resources should support current and planned operations for at least the next 12 months, but additional financing may be pursued and may not be available on favorable terms.
- Key risks include customer concentration, lengthy and unpredictable sales cycles, subscription renewal and migration execution, competition, cybersecurity and service interruptions, data privacy and GDPR compliance, Brexit-related uncertainty, foreign exchange exposure, dependence on international operations and employees in India, intellectual-property claims, and the ability to sustain profitability.
- One customer represented 16% of quarterly revenue and 17% of nine-month revenue. Approximately 44% of nine-month revenue was international.
- The company had ordinary-course legal claims and appealed transfer-pricing assessments, but stated that these matters were not expected to have a material impact. No significant off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Whether SaaS growth and customer migrations can continue to offset declining legacy support and professional services revenue.
- Subscription renewal rates, customer concentration and the collectability of the $15.1 million accounts receivable balance.
- Whether the reported improvement in profitability is sustained after considering stock-based compensation, ASC 606 timing effects and other non-cash charges.
- The terms, covenant compliance and remaining availability under the Wells Fargo credit agreement, including collateral and default provisions.
- The use of the $20.2 million offering proceeds and the dilutive effect of the additional shares issued.
- Exposure to foreign exchange movements, cybersecurity incidents, service-level credits, privacy regulation and intellectual-property litigation.