eGain Corporation — Form 10-Q Summary
Business Context and Reporting Period
eGain provides cloud-based and on-premise customer engagement software, including subscription and support, perpetual licenses, and professional services. The company operates in the United States, United Kingdom, Germany, France, South Africa, and India, and reports one operating segment.
This filing covers the quarter and six months ended December 31, 2016, within fiscal 2017. Comparisons are with the corresponding periods ended December 31, 2015, and balance-sheet comparisons are with June 30, 2016.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2016 | Year-over-Year Change | Six Months Ended Dec. 31, 2016 | Year-over-Year Change |
|---|---|---|---|---|
| Total revenue | $15.0 million | Down 21% | $29.7 million | Down 16% |
| Subscription and support revenue | $11.0 million | Up 2% | $21.8 million | Up 1% |
| License revenue | $1.4 million | Down 72% | $3.1 million | Down 59% |
| Professional services revenue | $2.6 million | Down 17% | $4.8 million | Down 24% |
| Gross profit | $9.9 million | Down 24% | $19.6 million | Down 15% |
| Gross margin | 66% | Down from 69% | 66% | Up from 65% |
| Loss from operations | $0.3 million | Improved from $0.5 million loss | $1.6 million | Improved from $3.3 million loss |
| Net loss | $1.0 million | Improved from $1.4 million loss | $3.5 million | Improved from $4.6 million loss |
| Adjusted EBITDA | $0.7 million | Down from $1.0 million | $0.8 million | Up from $0.3 million |
| Net loss per share | $0.04 | Improved from $0.05 | $0.13 | Improved from $0.17 |
For the six months, operating cash flow improved to a use of $1.3 million from a use of $3.2 million. Investing cash flow was a use of $0.2 million, primarily for equipment purchases, compared with $0.3 million of investing cash inflow in the prior period. Financing cash flow was a use of $0.5 million, compared with $4.0 million of inflow in the prior-year period.
Cash and cash equivalents were $9.7 million at December 31, 2016, down from $11.8 million at June 30, 2016. Total deferred revenue was $16.9 million, up from $15.7 million, while unbilled deferred revenue decreased to $29.5 million from approximately $31.1 million.
Bank borrowings were $21.3 million at December 31, 2016, compared with $21.6 million at June 30, 2016. Including capital lease obligations, total debt-related obligations were approximately $21.3 million. The company had total liabilities of $47.6 million and stockholders’ deficit of $7.2 million at December 31, 2016.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because customers continued shifting from perpetual licenses to cloud delivery, which increased recurring revenue only modestly while reducing near-term license revenue.
- Professional services revenue decreased as product deployment improvements reduced the time and effort required per project.
- Subscription and support revenue increased slightly, reflecting growth in the cloud business.
- Operating expenses declined: research and development decreased 20% for the quarter, sales and marketing decreased 27%, and general and administrative expense decreased 23%.
- Operating and net losses improved despite the revenue decline, aided by lower personnel costs, lower amortization, reduced foreign-exchange-related costs, and lower interest expense.
- International revenue represented approximately 49% of quarterly revenue and 50% of six-month revenue. Foreign-exchange movements reduced reported revenue by approximately $1.5 million in the quarter and $2.8 million for the six months.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide a specific revenue or earnings forecast in the filing. Management expected subscription and support costs and gross margin to remain relatively constant in fiscal 2017, excluding foreign-exchange effects and severance changes; research and development expense was expected to remain relatively constant, sales and marketing expense to increase moderately, and general and administrative expense to decrease in dollar terms.
The company stated that existing capital resources were expected to support current and planned operations for the next 12 months, but emphasized that this depends on maintaining revenue levels and timely customer collections. Continued operating losses, cash usage, and dependence on bank financing create liquidity risk.
The Wells Fargo credit agreement is secured by substantially all company assets and includes restrictive covenants and financial requirements. The company stated it was in compliance as of December 31, 2016. A January 27, 2017 amendment reduced the minimum liquidity requirement from $10 million to $4 million, modified minimum EBITDA thresholds, and set LIBOR margins of either 5.5% or 7.0% based on trailing recurring revenue.
A two-year sublease for approximately 22,000 square feet began January 1, 2017. The arrangement allowed the company to reverse the remaining $305,000 lease-exit liability recorded in fiscal 2016, producing a credit to rent expense.
Principal risks include the transition from perpetual licenses to subscriptions, unpredictable sales cycles and renewals, customer concentration, competition, foreign-currency exposure, reliance on international and India-based operations, cloud-service interruptions and cybersecurity incidents, intellectual-property claims, privacy and regulatory requirements, and the possibility that additional financing may be required. One customer represented 10% of quarterly revenue; two customers each represented 10% of six-month revenue.
The filing identifies ordinary-course legal proceedings, including intellectual-property, commercial, employment, and other claims, but does not describe a specific matter with a clearly quantified material exposure. The filing also notes adoption planning for new revenue recognition, lease, stock compensation, and cash-flow accounting standards.
Important Facts for Investors to Verify
- Whether cloud and subscription growth can offset the continuing decline in perpetual license revenue.
- Whether the company can achieve sustained positive operating cash flow and meet amended EBITDA and liquidity covenants.
- The availability of borrowing capacity under the Wells Fargo facility and the effect of its high interest margins and collateral requirements.
- Subscription renewal, customer concentration, unbilled deferred revenue conversion, and accounts-receivable collection trends.
- The effect of foreign-exchange movements, Brexit-related uncertainty, and international operating costs on revenue and margins.
- Whether reported Adjusted EBITDA remains positive after considering cash interest, taxes, capital expenditures, and working-capital needs.
- Potential exposure from intellectual-property, transfer-pricing, privacy, cybersecurity, warranty, indemnification, and other legal or regulatory matters.