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, analytics, implementation, and support services. The company operates in the United States, United Kingdom, and India. This unaudited report covers the three months ended September 30, 2017, compared with the three months ended September 30, 2016; fiscal year-end is June 30, 2018.
Key Financial Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total revenue | $14.575 million | $14.745 million | (1%) |
| Recurring revenue | $11.642 million | $10.863 million | 7% |
| Legacy license revenue | $0.188 million | $1.650 million | (89%) |
| Professional services revenue | $2.745 million | $2.232 million | 23% |
| Gross profit | $9.149 million | $9.681 million | (5%) |
| Gross margin | 63% | 66% | (3 percentage points) |
| Loss from operations | $(0.254) million | $(1.265) million | Improved $1.011 million |
| Net loss | $(0.568) million | $(2.411) million | Improved $1.843 million |
| Basic and diluted loss per share | $(0.02) | $(0.09) | Improved |
| Operating cash flow | $5.913 million | $2.443 million | Improved $3.470 million |
Cash and cash equivalents were $10.724 million at September 30, 2017, compared with $10.627 million at June 30, 2017. Total deferred revenue was $26.959 million, including $20.912 million current and $6.047 million noncurrent. Unbilled deferred revenue was $35.2 million, down from $37.0 million at June 30, 2017.
Bank borrowings totaled $10.132 million before deferred financing costs, down from $16.056 million at June 30, 2017. The company had $12.5 million of available revolving credit capacity. Liquidity, as defined under the credit agreement, was $22.6 million. Total liabilities exceeded total assets, resulting in stockholders’ deficit of $9.811 million.
Material Changes Versus the Prior Comparable Period
- Revenue mix continued shifting from perpetual licenses to recurring cloud, term-license, and support revenue. Recurring revenue increased 7%, while legacy license revenue fell 89%.
- Professional services revenue increased 23%, primarily from increased implementation activity.
- Gross margin declined to 63% from 66%, reflecting the lower margins generally generated by the cloud and recurring-revenue model.
- Operating expenses declined 14% to $9.403 million. Research and development declined 7%, sales and marketing declined 20%, and general and administrative expense declined 11%.
- Operating loss narrowed substantially, and the company reported a $161,000 income tax benefit compared with an $832,000 tax provision in the prior-year quarter.
- Operating cash flow increased, primarily because of the lower net loss, improved collections, and increased deferred revenue. Financing cash outflows increased because the company repaid $8.462 million of bank borrowings while drawing $2.538 million.
- On September 19, 2017, the company repriced certain employee stock options to $2.50 per share. The repricing generated $138,000 of incremental stock-based compensation expense in the quarter and an estimated $426,000 of additional unrecognized expense as of September 30, 2017.
Guidance, Outlook, Risks, and Unusual Items
- Management expects recurring revenue to increase during fiscal 2018 as the cloud transition continues, while legacy license revenue is expected to decline. Professional services revenue is expected to increase or remain relatively constant.
- Management expects cost of recurring revenue to remain relatively constant or increase, with gross margin expected to remain relatively constant or improve; however, the filing cautions that the recurring model has lower margins than traditional perpetual licenses.
- Management states that existing capital resources are expected to support current and planned operations for at least the next 12 months, but additional financing or debt-for-equity exchanges may be considered. No assurance is provided that financing will be available on acceptable terms.
- The Wells Fargo credit agreement matures November 21, 2019 and is secured by substantially all company assets. As of September 30, 2017, the Fixed Charge Coverage Ratio and Leverage Ratio conditions required to replace interim financial covenants had not been met. The company stated that it was nevertheless in compliance with the applicable minimum EBITDA and liquidity covenants.
- Principal risks include continued migration away from legacy licenses, lower recurring-revenue gross margins, customer nonrenewals, lengthy and unpredictable sales cycles, customer concentration, competition, cloud-service interruptions, cybersecurity and data-privacy exposure, foreign currency risk, international operating risks, intellectual-property claims, and restrictive debt covenants.
- One customer represented 14% of quarterly revenue. International sales represented approximately 50% of revenue, and approximately 48% of the workforce was employed in India.
- The company has ordinary-course legal proceedings and claims, including intellectual-property, commercial, labor, and employment matters. It also has appealed transfer-pricing assessments and believes they are without merit and not expected to have a significant financial impact.
- The company adopted ASU 2016-09 in the quarter and is evaluating the future effects of the new revenue-recognition standard, Topic 606, which becomes effective in fiscal 2019. No material change in critical accounting policies was reported.
Most Important Facts for Investors to Verify
- Whether recurring-revenue growth and customer migrations can offset the continuing decline in legacy license revenue.
- Whether cloud-related cost increases permit stabilization or improvement of the 63% gross margin.
- Compliance with the Wells Fargo credit agreement’s EBITDA, liquidity, Fixed Charge Coverage Ratio, and Leverage Ratio requirements, including the effect of scheduled debt repayments.
- The sustainability of positive operating cash flow, particularly the contribution from deferred revenue and working-capital movements.
- Customer renewal, concentration, and collection trends, including the 14% revenue contribution from one customer and the $414,000 allowance for doubtful accounts.
- The potential effect of the stock-option repricing, future stock-based compensation, Topic 606 adoption, foreign exchange movements, cybersecurity events, litigation, and data-privacy requirements.