eGain Corporation Form 10-Q Summary
Reporting period: Quarterly period ended March 31, 2020; fiscal third quarter of fiscal 2020. The request metadata states “2019 Q3,” but the filing itself reports 2020 Q3 and compares with the quarter ended March 31, 2019. Amounts are in thousands unless otherwise stated.
Business Context
eGain provides cloud-based customer engagement software, including digital interaction, knowledge management, AI-based process guidance, analytics and contact-center solutions. The company operates in the United States, United Kingdom and India and is transitioning from a hybrid perpetual-license model to a SaaS-only model.
Financial Performance and Position
| Metric | Three months ended March 31, 2020 | Year-over-year change | Nine months ended March 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $18.4 million | Up 8% | $53.7 million | Up 7% |
| Subscription revenue | $16.9 million | Up 10% | $48.8 million | Up 9% |
| SaaS revenue | $14.8 million | Up 26% | $41.3 million | Up 24% |
| Legacy revenue | $2.1 million | Down 40% | $7.6 million | Down 35% |
| Professional services revenue | $1.4 million | Down 15% | $4.9 million | Down 12% |
| Gross profit | $12.9 million | Up 10% | $37.6 million | Up 10% |
| Gross margin | 70% | Up from 69% | 70% | Up from 68% |
| Income from operations | $1.8 million | Down 2% | $4.9 million | Up 4% |
| Operating margin | 10% | Down from 11% | 9% | Flat |
| Net income | $1.9 million | Up 34% | $5.1 million | Up 26% |
| Diluted EPS | $0.06 | Up from $0.05 | $0.16 | Up from $0.13 |
SaaS represented 81% of quarterly revenue and 77% of nine-month revenue, compared with 69% and 66%, respectively, in the prior-year periods. SaaS revenue plus professional services revenue increased 20% for the quarter and 19% for the nine-month period.
Operating expenses increased 12% to $11.1 million in the quarter and 11% to $32.8 million for the nine-month period. Research and development and sales and marketing spending increased, while general and administrative expense declined. Non-GAAP operating income was $2.3 million for the quarter and $6.4 million for the nine-month period, excluding stock-based compensation and acquired-intangible amortization.
Cash Flow, Liquidity and Debt
- Cash, cash equivalents and restricted cash totaled $40.7 million at March 31, 2020, compared with $31.9 million at June 30, 2019.
- Net cash provided by operating activities was $8.5 million for the nine months ended March 31, 2020, compared with $8.0 million in the prior-year period.
- Investing cash use was $0.3 million, primarily for property and equipment.
- Financing cash inflow was $0.8 million, principally from employee stock option exercises and the employee stock purchase plan. Prior-year financing cash flow benefited from a $20.4 million follow-on offering.
- The Wells Fargo bank facility matured in November 2019, and all remaining principal was repaid before maturity. The filing reports no bank borrowings at March 31, 2020.
- Operating lease liabilities totaled $3.6 million, including $1.7 million current and $1.8 million noncurrent. Remaining minimum lease payments were $3.7 million before imputed interest.
- Management states that existing cash and expected operating cash flow are sufficient for anticipated liquidity needs, subject to COVID-19 effects, customer retention and payment patterns.
Material Changes Versus the Prior Comparable Period
- The SaaS transition continued to drive growth, while legacy maintenance and support revenue declined materially.
- Professional services revenue fell as improved deployment processes reduced implementation time.
- Gross margin improved by approximately one percentage point for the quarter and two points for the nine-month period.
- Research and development expense increased 16% for the quarter and 14% for the nine-month period; sales and marketing expense increased 17% and 15%, respectively.
- Interest results shifted from expense to income because bank borrowings were repaid and the company earned interest on cash and money-market investments.
- Accounts receivable declined to $13.4 million from $20.4 million at June 30, 2019, while current deferred revenue declined to $26.0 million from $30.7 million.
- Stockholders’ equity increased to $31.5 million from $24.3 million at June 30, 2019, primarily reflecting year-to-date net income and equity compensation activity.
Guidance, Outlook, Commentary and Risks
- No formal numerical revenue or earnings guidance is provided in the filing.
- Management expects SaaS revenue to continue increasing year over year and legacy fees to continue declining as customers migrate to SaaS.
- Management expects subscription cost of revenue to increase in absolute dollars but expects subscription gross margins to improve. 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.
- Remaining performance obligations were $64.3 million at March 31, 2020, with $41.9 million expected to be recognized within one year and $22.4 million thereafter.
- COVID-19 had not materially adversely affected the quarter, but the company implemented work-from-home policies, suspended travel and canceled certain events. Management cautions that later periods may be more affected and that the ultimate impact is uncertain.
- Key risks include lengthy and unpredictable sales cycles, customer concentration, renewal and collection risk, intense competition, dependence on international operations and Indian personnel, foreign-exchange exposure, cybersecurity and service interruptions, data privacy regulation, Brexit-related uncertainty and intellectual-property claims.
- Two customers, also partners, accounted for 18% and 10% of quarterly and nine-month revenue, respectively. The filing does not identify those customers.
- The company adopted ASC 842 lease accounting in fiscal 2020, adding approximately $4.5 million of opening right-of-use assets and $4.8 million of lease liabilities; prior balance-sheet periods are not directly comparable.
Important Facts for Investors to Verify
- Whether SaaS growth and customer migrations can offset the continuing decline in legacy revenue.
- Whether gross-margin improvement persists as cloud-computing costs rise.
- The effect of COVID-19 on new bookings, renewals, customer collections and sales-cycle duration after March 31, 2020.
- Customer concentration, renewal rates and the identities and financial condition of major customers.
- The sustainability of operating cash generation without another equity offering or debt facility.
- Foreign-exchange sensitivity, including the filing’s estimate that a 10% dollar appreciation would reduce the value of foreign-currency assets by approximately $1.31 million.
- Potential exposure from intellectual-property, transfer-pricing, privacy, cybersecurity and service-level claims; management states existing proceedings are not expected to be material.