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 process guidance and analytics. The company operates primarily in the United States, United Kingdom and India and reports on a June 30 fiscal year. This filing covers the three months ended September 30, 2020, the first quarter of fiscal 2021, compared with the same period in fiscal 2020. The financial statements are unaudited.
Financial Performance and Position
- Revenue: $19.1 million, up 11% from $17.2 million. Subscription revenue was $17.7 million, up 14%; professional services revenue was $1.3 million, down 19%.
- SaaS revenue: $16.0 million, up 29%, and representing 84% of total revenue versus 72% in the prior-year quarter. Legacy revenue declined 44% to $1.8 million.
- Gross profit and margin: Gross profit was $14.4 million, up from $11.9 million. Gross margin improved to 76% from 69%.
- Operating expenses: $12.1 million, up 12%. Research and development increased 13% to $4.5 million, sales and marketing increased 19% to $5.6 million, and general and administrative expense decreased 5% to $1.9 million.
- Operating income: $2.4 million, up 115% from $1.1 million. Operating margin improved to 12% from 6%.
- Net income: $2.0 million, compared with $1.2 million. Basic and diluted earnings per share were $0.07 and $0.06, respectively, versus $0.04 for both measures in the prior-year quarter.
- Non-GAAP operating income: $2.8 million, compared with $1.6 million, excluding stock-based compensation and acquired-intangible amortization.
- Cash flow: Operating cash flow was $5.7 million, compared with $2.7 million. Investing cash outflow was $79,000, primarily for property and equipment. Financing cash inflow was $488,000, primarily from employee stock-option exercises.
- Liquidity: Cash, cash equivalents and restricted cash totaled $53.1 million at September 30, 2020, up from $46.6 million at June 30, 2020. Cash equivalents included $44.4 million in money market funds.
- Working capital items: Accounts receivable decreased to $15.5 million from $22.7 million at June 30, 2020. Current and noncurrent deferred revenue totaled $38.6 million, down from $41.5 million.
- Debt and commitments: The filing does not report outstanding bank borrowings at September 30, 2020. Operating lease liabilities totaled $2.7 million, with approximately $2.9 million of remaining minimum lease payments.
- Capitalization: Stockholders’ equity was $37.8 million, compared with $34.6 million at June 30, 2020. Approximately 30.9 million common shares were outstanding as of November 11, 2020.
- Remaining performance obligations: $64.2 million at September 30, 2020, of which $44.9 million was expected to be recognized within one year and $19.3 million thereafter.
Material Changes Versus the Prior Comparable Period
- The transition to a SaaS-only model continued to shift revenue toward recurring SaaS offerings. SaaS revenue increased $3.6 million, while legacy revenue decreased $1.4 million.
- Total revenue growth was driven primarily by North America, where revenue increased 44% to $13.8 million. International revenue decreased 30% to $5.3 million.
- Cost of revenue decreased 13% to $4.6 million, reflecting lower cloud-computing and personnel-related costs, contributing to the gross-margin expansion.
- Operating income benefited from higher revenue and lower cost of revenue, partially offset by increased research and development and sales and marketing spending.
- Operating cash flow increased by $3.0 million, primarily due to the timing of customer collections on new and renewed cloud and support arrangements.
- Interest income declined to $3,000 from $147,000 because of lower interest rates. Other income changed to a $163,000 expense from $164,000 of income, primarily due to foreign-exchange fluctuations.
- Foreign-exchange movements increased reported total revenue by approximately $233,000 during the quarter.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expects SaaS revenue to increase year over year as new customers are added and remaining perpetual-license customers migrate to SaaS. Legacy revenue is expected to continue declining.
- Management expects subscription gross margins to improve, although subscription cost of revenue is expected to increase in absolute dollars. Research and development expense is expected to remain relatively consistent as a percentage of revenue, while sales and marketing expense is expected to increase as a percentage of revenue based on the current business plan.
- Management stated that COVID-19 did not have a material adverse impact during the quarter. The company implemented work-from-home and social-distancing policies, suspended employee travel and canceled certain sales and marketing events. Future effects remain uncertain.
- The company believes existing capital resources will support current and planned operations for at least the next 12 months, although additional capital may be considered and may not be available on favorable terms.
- Key risks include customer concentration, subscription-renewal uncertainty, lengthy and unpredictable sales cycles, intense competition, implementation delays, cybersecurity and service interruptions, privacy and data-transfer regulation, foreign-exchange exposure, Brexit-related uncertainty, dependence on international operations and key personnel, and potential intellectual-property claims.
- Two customers that are also partners accounted for 19% and 11% of revenue during the quarter, creating customer-concentration risk.
- Approximately 49% of the workforce was employed in India, including significant research and development personnel, exposing operations to regional labor, infrastructure, geopolitical and regulatory risks.
- Legal proceedings and claims arise in the ordinary course of business, including intellectual-property, commercial, labor and employment matters. Management does not expect currently disclosed matters to have a material impact, but adverse intellectual-property outcomes could result in damages, licensing costs, indemnification obligations or service restrictions.
- The company adopted cloud-computing implementation-cost guidance in the quarter with no reported financial-statement impact. It is evaluating an income-tax accounting update effective for fiscal 2022.
Important Facts for Investors to Verify
- Whether SaaS growth and customer migrations continue to offset the planned decline in legacy revenue and professional services revenue.
- Subscription-renewal rates, customer concentration and the effect of any loss or reduction in business from major customers.
- Whether gross-margin improvement is sustained as cloud usage, personnel and third-party service costs increase.
- The sustainability of operating cash flow, particularly after the favorable timing of accounts-receivable collections in the quarter.
- The effect of COVID-19, macroeconomic conditions, foreign-exchange movements and international operating risks on sales cycles, collections and renewals.
- Potential exposure from cybersecurity incidents, service-level commitments, privacy and cross-border data-transfer requirements, and intellectual-property litigation.
- The company’s ability to maintain liquidity without additional financing and the potential dilution or restrictions associated with future capital raising.