Business Context and Reporting Period
eGain Corporation provides cloud-based customer engagement software, including digital interaction, knowledge management, AI-based process guidance, and analytics. The company operates in one segment across the United States, United Kingdom, and India. This unaudited Form 10-Q covers the three months ended September 30, 2018, the first quarter of fiscal 2019; the comparable period is the three months ended September 30, 2017.
eGain continued its transition from perpetual-license products to a SaaS-only model. It adopted ASC 606, Revenue from Contracts with Customers, on July 1, 2018 using the modified retrospective method.
Key Financial Metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Total revenue | $15.7 million | $14.6 million | Up 8% |
| Subscription revenue | $13.7 million | $11.8 million | Up 16% |
| SaaS revenue | $9.7 million | $6.9 million | Up 40% |
| Legacy support revenue | $4.0 million | $4.9 million | Down 18% |
| Professional services revenue | $2.0 million | $2.7 million | Down 28% |
| Gross profit | $10.5 million | $9.1 million | Up 14% |
| Gross margin | 67% | 63% | Up 4 percentage points |
| Income from operations | $0.8 million | $(0.3) million | Improved $1.0 million |
| Operating margin | 5% | (2)% | Up 7 percentage points |
| Net income (loss) | $0.6 million | $(0.6) million | Improved $1.2 million |
| Diluted earnings (loss) per share | $0.02 | $(0.02) | Improved |
| Net cash provided by operating activities | $3.3 million | $5.9 million | Down $2.6 million |
Research and development expense increased 4% to $3.6 million, sales and marketing expense decreased 4% to $4.0 million, and general and administrative expense increased 20% to $2.2 million. Interest expense declined to $0.2 million from $0.3 million.
Cash, cash equivalents, and restricted cash totaled $11.5 million at September 30, 2018. Working capital was negative $7.3 million. Total reported deferred revenue was $36.9 million, while management’s broader total deferred revenue measure, including off-balance-sheet unbilled deferred revenue, was $71.5 million.
Bank borrowings, net of deferred financing costs, were $6.1 million, compared with $9.2 million at June 30, 2018. The company reported $11.8 million of available revolving credit capacity and $18.5 million of liquidity for covenant purposes. Debt matures on November 21, 2019.
Material Changes Versus the Prior Comparable Period
- SaaS revenue increased 40% and represented 62% of total revenue, compared with 48% in the prior-year quarter.
- Legacy support revenue declined 18% as perpetual-license customers migrate to SaaS.
- Professional services revenue declined 28%, partly because cloud customers require less implementation and related services.
- Gross margin improved from 63% to 67%, supported by the changing revenue mix and lower professional-services costs.
- The company moved from an operating loss to operating income and from a net loss to net income.
- Operating cash flow decreased despite improved earnings, primarily because of the timing of customer prepayments and changes in working capital.
- Bank borrowings declined by approximately $3.2 million during the quarter.
- ASC 606 adoption resulted in a $3.8 million decrease to opening accumulated deficit. For the quarter, ASC 606 increased reported revenue by $0.2 million and net income by $0.1 million versus the prior revenue-recognition guidance.
Guidance, Outlook, Risks, and Unusual Items
Management expects SaaS revenue to increase during fiscal 2019, while legacy support and professional services revenue are expected to decline. Management expects subscription gross margins to improve, subscription cost of revenue to increase in absolute dollars, and professional-services cost to decline. The filing does not provide a specific full-year revenue or earnings forecast.
Management believes existing capital resources will support current and planned operations for at least the next 12 months, but notes that additional financing may be considered and may not be available on acceptable terms.
As of September 30, 2018, the company was in compliance with its credit agreement covenants. The minimum EBITDA requirement for the four-quarter period ending September 30, 2018 was $(1.5) million; future thresholds increase to $3.0 million for the period ending June 30, 2019 and $4.0 million for the period ending September 30, 2019. The credit agreement is secured by substantially all company assets.
Remaining performance obligations were $71.5 million, of which $43.0 million was expected to be recognized within one year and $28.5 million thereafter. One customer represented 16% of quarterly revenue.
Material risks include the historical operating-loss profile, dependence on successful SaaS migration and subscription renewals, lengthy sales cycles, customer concentration, negative working capital, debt covenant and refinancing risk, foreign-exchange exposure, cybersecurity and service interruptions, intellectual-property claims, competition, international operations, GDPR and other privacy requirements, Brexit-related uncertainty, and reliance on personnel in India. A 10% strengthening of the U.S. dollar against relevant currencies would reduce the value of identified foreign-currency assets by approximately $1.33 million.
Unusual items included ASC 606 adoption effects, $361,000 of stock-based compensation, $237,000 of acquired-intangible amortization, and a $66,000 loss on disposal of property and equipment. The filing states that ordinary-course legal proceedings and transfer-pricing assessments are not expected to have a material impact.
The filing reports effective disclosure controls as of September 30, 2018 and no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile reported results under ASC 606 with comparable results under the former revenue standard, particularly the $9.1 million increase in accounts receivable and deferred revenue related to uncollected contractual amounts.
- Assess whether SaaS growth and improving gross margins can offset declining legacy support and professional services revenue.
- Monitor cash collections, accounts receivable, negative working capital, and the decline in operating cash flow.
- Verify compliance with escalating EBITDA and other credit agreement covenants and evaluate the November 2019 debt maturity.
- Evaluate customer concentration, renewal rates, and the $71.5 million remaining performance obligation balance.
- Review the effect of foreign exchange, GDPR and Brexit developments, cybersecurity events, service-level obligations, and intellectual-property claims.
- Note that the filing’s non-GAAP reconciliation labels the $604,000 and $(568,000) figures as operating income or loss even though they correspond to net income or loss; this presentation should be clarified against the underlying financial statements.