eGain Corporation Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended March 31, 2014, filed May 9, 2014. The request metadata refers to “2013 Q3,” but the filing is for fiscal 2014 third quarter and compares with the period ended March 31, 2013.
Business context
eGain provides cloud-based and on-premise customer engagement software, including subscription, license, implementation, consulting, training, and maintenance services. The company operates in one reportable segment across North America, EMEA, and Asia Pacific.
Financial performance and liquidity
| Metric | Three months ended March 31, 2014 | Three months ended March 31, 2013 | Nine months ended March 31, 2014 | Nine months ended March 31, 2013 |
|---|---|---|---|---|
| Total revenue | $18.0 million | $15.5 million | $51.4 million | $40.9 million |
| Gross profit | $12.0 million | $10.9 million | $34.0 million | $27.7 million |
| Gross margin | 67% | 70% | 66% | 68% |
| Operating income (loss) | $(0.7) million | $0.9 million | $(3.4) million | $(0.9) million |
| Operating margin | (4)% | 6% | (7)% | (2)% |
| Net income (loss) | $(1.0) million | $1.0 million | $(4.2) million | $(1.2) million |
| Diluted loss per share | $(0.04) | $0.04 | $(0.17) | $(0.05) |
- Subscription and support revenue increased 27% year over year in the quarter and 30% year to date, driven by customer expansion and new cloud contracts.
- License revenue declined 39% in the quarter but increased 14% year to date.
- Professional services revenue increased 62% in the quarter and 24% year to date. Beginning July 1, 2013, certain cloud implementation services were treated as having standalone value and recognized separately as services were performed.
- Sales and marketing expense increased 43% in the quarter and 41% year to date, primarily from higher personnel, commissions, marketing, and international operating costs.
- Research and development expense increased 27% in the quarter and 16% year to date.
- Net cash used in operating activities was $2.5 million for the nine months, compared with $9.0 million of operating cash flow in the prior-year period.
- Capital expenditures were $1.6 million year to date, primarily for equipment supporting employees and cloud operations.
- Cash and cash equivalents were $7.8 million at March 31, 2014, compared with $16.2 million at June 30, 2013. Including restricted cash, total cash was $8.8 million.
- Working capital was negative $4.5 million at March 31, 2014, compared with positive $2.0 million at June 30, 2013.
- Total liabilities were $27.6 million and stockholders’ equity was $3.7 million at March 31, 2014. Bank borrowings totaled $2.7 million, and capital lease obligations totaled $0.4 million. The $2.9 million related-party note payable to the chief executive officer was repaid in July 2013.
Material changes versus the prior comparable period
- Revenue growth shifted toward recurring subscription and support revenue and professional services, while quarterly perpetual license revenue declined substantially.
- Gross margin decreased from 70% to 67% in the quarter and from 68% to 66% year to date because cost of revenue grew faster than revenue, including higher personnel and cloud hosting costs.
- The company moved from quarterly operating profit to an operating loss, primarily because operating expenses increased faster than revenue, particularly sales and marketing.
- The company moved from quarterly net income of $1.0 million to a net loss of $1.0 million; the year-to-date net loss widened to $4.2 million from $1.2 million.
- Operating cash generation deteriorated sharply, partly reflecting a $4.3 million decrease in deferred revenue and other working-capital changes.
- Unbilled deferred revenue declined to $15.7 million from approximately $24.8 million at June 30, 2013. Reported deferred revenue declined to $15.8 million from $19.7 million.
- International revenue represented 47% of quarterly revenue, compared with 39% in the prior-year quarter. Foreign exchange increased reported revenue by approximately $0.6 million in both the quarter and nine-month period.
Guidance, outlook, risks, and unusual items
- Management stated that existing capital resources were expected to support current and planned operations for at least the next 12 months, but noted that additional financing may be needed and may not be available on acceptable terms.
- On April 30, 2014, after quarter-end, Comerica approved a $3.0 million working-capital loan and a revolving credit facility of up to $7.0 million. The filing does not provide the complete terms or availability conditions of the new facilities.
- The Comerica facility is secured by company assets and requires covenant compliance, including minimum cash and liquidity-to-debt requirements. The filing states that the company was compliant as of March 31, 2014, although the risk-factor discussion contains a different liquidity-to-debt ratio than the debt footnote.
- The company faces risks from recurring losses, negative working capital, declining cash balances, customer concentration, lengthy sales cycles, cloud-versus-license revenue mix, competition, international operations, foreign exchange, cybersecurity and system interruptions, intellectual-property claims, and the need to retain key personnel.
- One customer represented 16% of quarterly revenue and another represented 10%; one customer represented 17% of year-to-date revenue. Customer concentration could materially affect results if a significant customer reduces purchases or does not renew.
- eGain is pursuing a declaratory judgment action against Pragmatus Telecom regarding three patents. Management believes current legal matters are not expected to have a material adverse effect, but an unfavorable resolution could affect a future quarter.
- The company reported no material warranty liabilities, no stock repurchases, and no material changes in internal control over financial reporting. Disclosure controls were assessed as effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether the post-quarter-end Comerica financing was fully executed, funded, and sufficient to address negative working capital and operating cash burn.
- The precise applicable liquidity-to-debt covenant, because the filing presents inconsistent ratio requirements in different sections.
- Whether subscription growth and the shift toward cloud revenue can offset lower license revenue and higher hosting, personnel, and sales costs.
- Customer renewal rates, backlog, unbilled deferred revenue, and concentration among major customers.
- The company’s ability to return to positive operating cash flow without additional dilutive equity or debt financing.
- Developments in the Pragmatus patent litigation and any other intellectual-property, transfer-pricing, or indemnification contingencies.
- Exposure to foreign exchange, international staffing and operating risks, cybersecurity incidents, and cloud-service interruptions.