eGain Corporation — Form 10-Q Summary
Business context and reporting period
eGain provides cloud-based and on-premise customer engagement software, including analytics, contact-center management, licensing, implementation, and support services. The filing covers the quarter and six months ended December 31, 2014, the second quarter of fiscal 2015. Results include Exony Limited from its August 6, 2014 acquisition.
Key financial metrics
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Six months ended Dec. 31, 2014 | Six months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Total revenue | $18.9 million | $17.7 million | $39.6 million | $33.3 million |
| Gross profit | $10.7 million | $11.8 million | $24.4 million | $22.0 million |
| Gross margin | 56% | 67% | 62% | 66% |
| Operating loss | $(5.7) million | $(1.1) million | $(7.1) million | $(2.7) million |
| Net loss | $(5.5) million | $(1.2) million | $(7.1) million | $(3.2) million |
| Net loss per share | $(0.20) | $(0.05) | $(0.27) | $(0.13) |
| Adjusted EBITDA | $(2.4) million | $(0.3) million | $(1.5) million | $(1.2) million |
Quarterly revenue consisted of subscription and support of $11.0 million, license revenue of $3.6 million, and professional services revenue of $4.4 million. Six-month revenue consisted of subscription and support of $21.4 million, license revenue of $10.3 million, and professional services revenue of $7.9 million.
Cash and cash equivalents were $8.3 million at December 31, 2014, with restricted cash of $1.0 million. Total assets were $50.0 million and total liabilities were $45.1 million. Current liabilities exceeded current assets by approximately $2.6 million. Bank borrowings totaled $17.0 million, comprising a $10.0 million term loan and $7.0 million of revolver borrowings. Capital lease obligations totaled $0.8 million.
For the six months, operating activities used $7.9 million of cash, investing activities used $3.5 million, and financing activities provided $11.3 million. Cash declined by $0.5 million from $8.8 million at June 30, 2014. Unbilled deferred revenue increased to $29.1 million from approximately $22.6 million at June 30, 2014, while recorded deferred revenue declined to $12.6 million from $13.7 million.
Material changes versus the prior comparable period
- Quarterly revenue increased 7%; six-month revenue increased 19%.
- Quarterly license revenue increased 17%; six-month license revenue increased 49%, primarily from new and existing customers and Exony contributions.
- Exony contributed $2.3 million of quarterly revenue and $3.8 million of six-month revenue, but generated net losses of $1.2 million and $1.9 million, respectively.
- Gross margin declined to 56% from 67% for the quarter and to 62% from 66% for the six-month period, driven mainly by higher personnel, cloud hosting, consulting, and acquired-intangible amortization costs.
- Research and development expense increased 74% for the quarter and 76% for the six-month period, primarily from personnel costs and amortization of acquired technology.
- Operating losses widened substantially, reflecting higher cost of revenue, increased research and development and sales investment, stock-based compensation, severance, acquisition costs, and acquired-intangible amortization.
- Cash flow from operations deteriorated from $1.2 million provided in the prior-year six-month period to $7.9 million used, partly because of the larger net loss and decreases in deferred revenue and accrued liabilities.
- The company issued approximately 1.2 million shares and paid cash consideration in acquiring Exony for total preliminary purchase consideration of $17.6 million, including $8.35 million of goodwill and $10.13 million of identifiable intangible assets.
Guidance, outlook, commentary, risks, and unusual items
Management stated that its fiscal 2015 plan supported the conclusion that existing capital resources would fund current and planned operations for at least the next 12 months. Management also said it may seek additional capital or exchange debt for equity, but gave no assurance that financing would be available on acceptable terms.
Based on its current business plan, management expected professional-services costs, research and development expense, sales and marketing expense, and general and administrative expense to decrease in future quarters, excluding foreign-exchange effects. The filing does not provide specific revenue or earnings guidance targets.
On November 21, 2014, eGain entered into a $20 million Wells Fargo credit facility consisting of a $10 million term loan and a $10 million revolver, maturing November 21, 2019. Borrowings bear interest at variable rates, including LIBOR plus 4.75% for LIBOR loans. The facility includes collateral, mandatory prepayment provisions, financial covenants, restrictions on additional debt, acquisitions, dividends, investments, and other activities, and customary events of default.
Material unusual items included $844,000 of acquisition-related costs, $704,000 of severance and related charges for the six months, $1.1 million of acquired-intangible amortization, $1.3 million of stock-based compensation, and a $191,000 quarterly income-tax benefit. The Exony purchase-price allocation remained preliminary and subject to adjustment.
- Liquidity risk is elevated because the company is loss-making, has negative working capital, consumed significant operating cash, and carries substantial secured debt.
- Failure to meet Wells Fargo financial covenants could restrict credit availability or accelerate repayment obligations.
- Revenue is exposed to the timing and mix of perpetual-license versus subscription transactions, customer renewals, long sales cycles, and customer concentration.
- International operations create foreign-currency, collection, regulatory, political, staffing, and infrastructure risks. The company does not hedge foreign-exchange exposure with derivatives.
- Competition, acquisition integration, cybersecurity, service interruptions, intellectual-property claims, privacy regulation, and dependence on key personnel remain significant risks.
- The filing states that disclosure controls were effective at the reasonable-assurance level and that no material change occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and the increase in unbilled deferred revenue translate into improved recurring cash generation.
- Progress toward reducing the 56% quarterly gross-margin level and the company’s substantially higher operating expenses.
- Compliance with Wells Fargo’s minimum EBITDA, liquidity, leverage, and other credit-facility requirements.
- Exony’s post-acquisition revenue, profitability, integration costs, and the final purchase-price allocation.
- The company’s ability to fund operations without additional financing or equity dilution.
- Customer concentration, renewal rates, license-versus-cloud mix, and the sustainability of recent license growth.
- Potential impairment of the $8.35 million of goodwill and $9.01 million of net acquired intangible assets if acquired operations underperform.