eGain Communications Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2012. The request identifies “2011 Q3,” but the filing itself reports March 31, 2012 results, compared primarily with March 31, 2011. eGain provides cloud and on-premise customer interaction software, hosting, maintenance and support, and professional services across North America, EMEA, and Asia Pacific.
Financial performance
| Metric | Three months ended Mar. 31, 2012 | Year-ago period | Nine months ended Mar. 31, 2012 | Year-ago period |
|---|---|---|---|---|
| Total revenue | $11.5 million | $8.9 million | $32.7 million | $31.5 million |
| Gross profit | $8.0 million | $6.1 million | $23.2 million | $23.4 million |
| Gross margin | 70% | 69% | 71% | 75% |
| Operating income (loss) | $(0.9) million | $0.8 million | $(0.5) million | $7.3 million |
| Net income (loss) | $(1.2) million | $0.6 million | $(1.5) million | $6.4 million |
| Diluted earnings (loss) per share | $(0.05) | $0.02 | $(0.06) | $0.27 |
| Cash flow from operations | Not separately provided | Not separately provided | $1.8 million | $7.4 million |
- Quarterly revenue increased 29%; nine-month revenue increased 4%.
- Quarterly revenue consisted of $2.8 million of license revenue, $5.8 million of recurring revenue, and $2.9 million of professional services revenue.
- For the nine-month period, license revenue declined 25% to $8.8 million, while recurring revenue increased 16% to $17.3 million and professional services revenue increased 36% to $6.7 million.
- Operating expenses increased to $9.0 million for the quarter and $23.7 million for the nine-month period, driven principally by sales-force expansion, higher personnel costs, consulting and professional fees, marketing, and bad-debt expense.
- Stock-based compensation increased to $255,000 for the quarter and $520,000 for the nine-month period, compared with $54,000 and $158,000, respectively.
Liquidity, capital resources, and debt
- March 31, 2012 cash and cash equivalents were $11.2 million; restricted cash totaled $1.0 million, including the minimum cash requirement under the Comerica facility. Total cash and restricted cash were approximately $12.2 million.
- Working capital was negative $820,000 at March 31, 2012, compared with positive working capital of $3.8 million at June 30, 2011. Deferred revenue increased to $6.4 million from $5.8 million.
- Operating cash flow was $1.8 million for the first nine months, compared with $7.4 million in the prior-year period. Investing cash use was $878,000, including $1.5 million of capital expenditures. Financing cash use was $2.1 million, including $1.3 million of bank-debt repayments and the $1.0 million increase in restricted cash.
- Related-party notes payable to CEO Ashutosh Roy were $5.5 million at March 31, 2012. The maturity was extended to June 29, 2012; the face amount was set at $5.6 million beginning April 1, 2012, including $109,000 of interest, with an 8% interest rate and no prepayment penalty.
- Comerica term-loan debt was $3.8 million at March 31, 2012, at 4.25%. The revolving credit line had no outstanding balance. The facility requires a minimum $1.0 million cash balance and a liquidity-to-debt ratio of at least 1.50 to 1.00; the company reported compliance.
- Management stated that existing capital resources should support current and planned operations for at least the next 12 months, while noting that additional financing or debt-to-equity transactions may be considered.
Material changes versus the prior comparable period
- The business mix shifted toward recurring and hosting revenue. New hosting transactions represented 68% of combined new hosting and license business in the quarter, versus 45% a year earlier; the nine-month percentages were 49% and 29%, respectively.
- Sales and marketing expense increased 88% for the quarter and 57% for the nine-month period, primarily from expansion of the worldwide sales organization and related personnel costs.
- General and administrative expense increased 61% for the quarter and 72% for the nine-month period, including higher headcount costs, bad-debt expense, accounting and consulting fees, legal costs, and Nasdaq relisting expenses.
- Gross margin declined to 71% for the nine-month period from 75%, principally because of the lower proportion of high-margin license revenue and increased professional-services costs.
- North American nine-month revenue increased to $18.3 million from $13.0 million, while EMEA revenue declined to $14.2 million from $18.3 million. Asia Pacific remained loss-making and includes corporate support costs.
- The company entered into an additional 7,500-square-foot lease in Slough, England, increasing total leased space there to 15,000 square feet and adding estimated annual payments of approximately $100,000 through December 2016.
Outlook, risks, contingencies, and unusual items
- Management anticipated continued growth in hosting, recurring revenue, and professional services during fiscal 2012, while expecting total license revenue to decline because of the increasing hosting mix and a large one-time license transaction in the prior year.
- Sales and marketing expense was expected to increase with planned sales-team expansion, marketing investment, and partner development. Research and development was expected to increase slightly, and professional-services costs were expected to rise.
- Revenue timing remains sensitive to sales-cycle length, customer acceptance, seasonal buying patterns, revenue-recognition timing, and the mix between license and hosting contracts. Hosting revenue is recognized over contract terms, generally one to two years.
- Foreign currency exposure principally involves the euro, British pound, and Indian rupee. The company does not use derivatives to hedge this exposure.
- One customer represented 17% of quarterly revenue. Customer concentration, international operations, economic conditions, competition, technology changes, sales execution, retention of key personnel, and the need for additional financing are material risks.
- The company’s accumulated deficit was $320.2 million at March 31, 2012, and it maintained a full valuation allowance against most deferred tax assets.
- The prior securities class-action litigation was concluded in January 2012 without company liability. A separate patent-related third-party claim was dismissed in March 2012.
- The company was relisted on Nasdaq in October 2011 and disclosed the risk of delisting if it fails to maintain the required minimum share price.
- Management concluded that disclosure controls and procedures were effective at the reasonable-assurance level as of March 31, 2012, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $5.5 million related-party note was repaid, converted to equity, or otherwise refinanced by its June 29, 2012 maturity.
- Compliance with Comerica’s minimum-cash and liquidity-to-debt covenants, and the status of the facility’s June 27, 2012 revolving-line maturity.
- Whether the expanded sales and marketing investment produces sustainable revenue growth and improves operating leverage.
- The durability of recurring and hosting revenue growth, customer retention, renewal rates, and the effect of the declining license mix on gross margin.
- Cash generation after capital expenditures, debt repayments, and the $1.0 million restricted-cash requirement.
- Exposure to the largest customers, foreign exchange movements, Nasdaq listing requirements, and potential future financing needs.