eGain Corporation — Form 10-Q Summary
Business context and reporting period
eGain provides cloud-based and on-premise customer engagement software, including subscription, license, implementation, support and analytics solutions. The filing covers the three months ended September 30, 2014, eGain’s fiscal first quarter of fiscal 2015, compared with the quarter ended September 30, 2013. The financial statements are unaudited.
On August 6, 2014, eGain acquired Exony Limited, a U.K.-based provider of contact-center analytics and management software. Exony’s results are included from the acquisition date.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total revenue | $20.7 million | $15.7 million | Up 32% |
| Gross profit | $13.7 million | $10.1 million | Up 35% |
| Gross margin | 66% | 65% | Up 1 percentage point |
| Operating loss | $1.5 million | $1.6 million | Improved $0.1 million |
| Operating margin | (7%) | (10%) | Improved 3 percentage points |
| Net loss | $1.6 million | $2.0 million | Improved $0.4 million |
| Net loss per diluted share | $0.06 | $0.08 | Improved |
| Adjusted EBITDA | $0.9 million | $(1.0) million | Improved $1.9 million |
| Cash flow from operations | $(6.0) million | $2.3 million | Declined $8.3 million |
Revenue mix was subscription and support $10.4 million, license $6.7 million and professional services $3.5 million. License revenue increased 75%, while professional services increased 48% and subscription and support increased 10%.
At September 30, 2014, cash and cash equivalents were $5.1 million and restricted cash was $1.9 million. Accounts receivable were $15.4 million, with an allowance for doubtful accounts of $0.6 million. Deferred revenue totaled $14.8 million, including current and noncurrent balances. Unbilled deferred revenue increased to $30.8 million from approximately $22.6 million at June 30, 2014.
Total liabilities were $43.4 million, including $11.7 million of bank borrowings, $0.8 million of capital lease obligations and $14.8 million of deferred revenue. Stockholders’ equity was $9.7 million. Negative working capital was approximately $3.8 million at quarter-end.
Material changes versus the prior comparable period
- Total revenue increased $5.0 million, primarily from new and expanded license sales, higher professional services revenue and Exony contributions.
- Exony contributed approximately $1.5 million of revenue and $0.7 million of net loss during the post-acquisition period.
- Gross margin improved to 66% from 65%, despite higher subscription and support costs and acquired-intangible amortization.
- Research and development expense increased 78% to $3.7 million, primarily from higher personnel costs and amortization of acquired technology.
- Sales and marketing expense increased 15% to $8.5 million, but declined to 41% of revenue from 47%.
- General and administrative expense increased 33% to $2.9 million, including $0.6 million of acquisition-related costs.
- Operating cash flow turned negative, principally because of increases in accounts receivable, accrued compensation and deferred revenue movements.
- Shares outstanding increased to 26.6 million at November 4, 2014, from 25.5 million at June 30, 2014, mainly reflecting shares issued for the Exony acquisition.
Acquisition, debt, liquidity and outlook
Exony was acquired for preliminary total consideration of $17.6 million, consisting primarily of $7.8 million in cash and $7.7 million in eGain stock, plus other consideration and an estimated working-capital adjustment. The preliminary allocation included $10.1 million of identifiable intangible assets and $8.4 million of goodwill. The purchase accounting remains subject to measurement-period adjustments.
eGain borrowed $7.0 million under its Comerica revolving credit facility to finance most of the acquisition. At September 30, 2014, the revolving line was fully drawn, and term loans outstanding were approximately $4.7 million. The facility is secured by company assets and includes minimum cash and liquidity-to-debt covenants. A waiver of the minimum cash requirement was in place pending completion of Exony’s working-capital acquisition adjustment. The liquidity coverage ratio temporarily changed to 1.25-to-1.00 for July through September 2014 and was scheduled to return to 2.00-to-1.00 from October 31, 2014.
Management stated that existing capital resources were expected to support current and planned operations for at least the next 12 months, based on its fiscal 2015 plan. Management also noted that additional capital may be considered and that financing may not be available on acceptable terms.
The filing provides no formal revenue or earnings guidance figures. Management highlighted the hybrid cloud and license model, the effect of transaction mix and timing, subscription renewals, sales-cycle variability and the intended strategic benefits of Exony.
Risks, contingencies and unusual items
- Liquidity risk is elevated because operating cash flow was negative, working capital was negative and the revolving credit facility was fully drawn.
- Failure to comply with Comerica covenants could permit acceleration of debt and termination of further credit availability.
- Exony integration, acquired-asset valuation, goodwill impairment and ongoing intangible amortization could materially affect future results.
- Two customers accounted for 21% and 11% of quarterly revenue, creating customer-concentration risk.
- License sales to resellers represented approximately 29% of revenue, compared with 17% in the prior-year quarter.
- International revenue represented approximately 41% of total revenue; the company has material exposure to the euro, British pound and Indian rupee and does not hedge foreign exchange exposure with derivatives.
- The company remains exposed to long enterprise sales cycles, renewal uncertainty, competition, system interruptions, cybersecurity and data-privacy issues, intellectual-property claims and changing cloud-related regulation.
- The Pragmatus patent litigation was settled and dismissed with prejudice on September 25, 2014. The company continues to face ordinary-course legal claims, but no material litigation liability is reported.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2014, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Exony achieves the expected revenue, cost-synergy and integration benefits and whether the preliminary purchase-price allocation changes.
- Compliance with Comerica’s minimum-cash and liquidity-to-debt covenants after the temporary waiver and ratio relief expire.
- Cash conversion, collections of the $15.4 million accounts receivable balance and the sustainability of negative operating cash flow.
- The quality and timing of the $30.8 million unbilled deferred revenue balance and the $14.8 million reported deferred revenue balance.
- Future license-versus-cloud mix, subscription renewal rates and customer concentration.
- Potential dilution from acquisition consideration and the company’s substantial outstanding equity awards.
- The effect of acquired-intangible amortization, acquisition costs and other non-GAAP adjustments on reported profitability.