Good day, and welcome to the eGain Fiscal 2021 First Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jim Byers of MKR Investor Relations. Please go ahead, sir.

Thank you, operator and good afternoon, everyone. Welcome to eGain's first quarter fiscal 2021 financial results conference call. On the call today are eGain's Chief Executive Officer, Ashu Roy and Chief Financial Officer, Eric Smit. Before we begin, I would like to remind everyone that during this conference call, management will make certain forward-looking statements which convey management's expectations, beliefs, plans, and objectives regarding future financial and operational performance. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate or similar expressions. Forward-looking statements are protected by Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a wide range of risks and uncertainties that could cause actual results to differ materially. Information on various factors that could affect eGain's results are detailed in the company's reports filed with the Securities and Exchange Commission. eGain is making these statements as of today, November 10, 2020, and assumes no obligation to publicly update or revise any of the forward-looking statements or information in this conference call. And in addition to GAAP results, we will discuss certain non-GAAP financial measures such as non-GAAP operating income. Our earnings press release can be found on the news release link on the Investor Relations page at eGain's website at www.egain.com. The tables included with the earnings press release include a reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. And lastly, a replay of this conference call will also be available at the Investor Relations section of eGain's website. And now with that said, I'd like to turn the call over to eGain's CEO, Ashu Roy.

Thank you, Jim and good afternoon, everyone. We achieved another solid quarter for the company in Q1. Our SaaS revenue grew 29% year-over-year and in the high end of our guidance. We generated $5.8 million of operating cash in the quarter, operating margin of 31% and we ended the quarter with a cash balance of $53 million and no debt. This strong financial position gives us increased confidence in continuing to execute our growth plans despite the COVID uncertainty. We see fiscal 2021 as an investment year for eGain. Given the typical nine-month enterprise sales cycle, which has been somewhat extended in the current environment. We expect our investments to have a meaningful impact only in fiscal 2022 on our top line. Let me share some more details around our investment plans and execution to-date. As I've mentioned before, we're focusing our investments on the four pillars. First, is brand awareness. This fiscal year we have significantly increased our digital marketing programs, participating in virtual events, increasing app-based spend and overall thought leadership activities. In fact, in Q1, we doubled the number of events and digital marketing activities compared to the same quarter last year. We are also starting to see some early returns which are positive. For example, traffic to our website, egain.com, more than doubled in Q1 year-over-year, this is a big jump in brand awareness. Our marketing generated leads were up nearly 90% in the US in Q1 year-over-year. Overall worldwide leads grew by 53%. The second pillar in which we're investing is partner enablement. First off, we have expanded our contact center partner teams with more technical and sales resources especially in the US. Our pipeline with Cisco and Avaya is growing nicely, especially around new logos. Secondly, we are now building our go-to-market plans with some of the CRM ecosystem platforms. We have staffed up our business development team to focus on three of those CRM platforms, Salesforce, Microsoft, and ServiceNow. We see growing demand from our customers to integrate our customer engagement platform with multiple CRM systems of record in the enterprise because we go over the top and provide one consistent layer of engagement. Underneath that, across different brands, different business units typically have different CRM systems. So it works well for the front to have one layer of engagement working across these different CRM systems. Third, we're striking new vertical-based partnerships starting with financial services. These partnerships will be in the form of jointly developed, jointly branded customer engagement solutions targeting clients in financial services that will need turnkey capabilities to implement conversational customer engagement with AI technology. We expect to share more progress on this front next quarter. All these investments are starting to show some results. The number of partner-driven opportunities in our pipeline at the end of Q1 was up more than 50% year-over-year. That's good. The third pillar for us is direct sales. Before I share the progress on our investment and sales, let me share some relevant metrics. At the end of Q1, our sales pipeline was up 35% in dollar terms year-over-year. New logos now make up nearly two-thirds of our sales pipeline compared to about 50% a year ago. We see new logo opportunities continuing to trend up, thanks to the investments we just talked about. This is very exciting because new logo wins are key to our top line growth in the medium term. Now back to our sales investments. We intend to double our sales capacity in fiscal 2021, and we're executing that expansion in two phases. On the first phase, we're on track to complete that direct sales team hiring by the end of November, and we're substantially done with the selections, and most of the people have joined. But we expect the remaining ones to join by the end of November. This team, once ramped, will boost our sales capacity by about 50%. The second half of that, we plan to bring the next cohort of sales reps in the March-April timeframe of this fiscal year, of course assuming the markets continue to operate the way they are. In terms of geographic focus, two-thirds of our sales capacity expansion that we are targeting is in the US and the rest is in Europe. As a side note, we're very pleased with the sales talent we're attracting now. The excitement around our market opportunity, our product leadership, and growth ambition are all fueling this talent that we're able to attract. The fourth pillar is continued commitment to our customer success. We see a big opportunity in our installed base to continue to grow. Our clients are looking at us as an enterprise-wide system of engagement, across brands and customer segments connecting back into systems of record and communication. More and more of our clients are now taking advantage of our Innovation in 30 days program to try out our new capabilities. At the same time, given our current size and relatively small SaaS customer base of roughly 150 clients, we're susceptible to the large, small numbers phenomenon. In Q1, we had a couple of out of plan attritions - one attrition and one termination, which together will negatively impact our quarterly SaaS revenue by $750,000 in Q2. One of the clients decided to implement an on-premise solution in their private cloud, while the other consolidated our capabilities onto a larger CRM platform, though these two put together represent a significant amount in dollar terms. We do see them as somewhat isolated incidents. This sort of volatility in our relatively concentrated client base makes the need for expanding our new logos even more urgent. And here we have good news to report. In Q1 we doubled the pace of our new logo wins year-over-year. We expect the strength to continue in Q2, thanks to our growing pipeline and increase in new logo percentage. Based on our new logo wins so far in Q2, we believe that we will again double our new logo count year-over-year and we expect that this momentum will continue. This is very exciting. Equally exciting is the fact that the quality of new logos are impressive. In Q1, for example, we were selected by a global automotive brand to modernize their digital customer engagement capabilities. Another one was a leading US-based hospital system where we were selected as one of the providers in their large contact center modernization program. Lastly, a multinational manufacturer based in the US, a household name, recently engaged with us to execute digital transformation. These new clients all start relatively small and they scale the investment based on success. As we build our sales momentum with new logos, we're confident that we will translate them into larger accounts just like we did with a US-based health insurance client we won late last year. They started with a pilot opportunity and since then, that client has standardized on our platform for their enterprise-wide knowledge-powered engagement, now with a seven-figure ARR account for us. So these new logos are a key indicator of our top line growth. Turning to products and trends, we announced our eGain Messaging Hub in Q1 and it has been very well received. Our ability to deliver a one-stop solution to connect, solve, and optimize for messaging-based engagement is unique. Unlike other solutions, we're allowing businesses to bring their own bot and their own messaging channels. If they have their own private implementations or desktop, they don’t need to bring all of it. We offer all of them together and the convenience that combines comprehensive capability with openness is unique. In fact, the automotive client I referred to as a new logo win was particularly impressed with our open and comprehensive Messaging Hub, that’s why they partnered with us. Just this morning, we launched another exciting new capability, eGain Smart IVR. What we're offering here is simple and radical. Simple because a business can modernize their existing IVRs without throwing their existing technology investments. Radical because they can deliver digital service through IVR to all smartphone users with virtual assistance and AI guidance in a matter of days without huge upfront investments. As contact centers get digitalized, IVRs are a huge pain point for our clients. They don’t easily integrate their existing IVRs into their digital transformation plans. With eGain's Smart IVR, they can do just that. In fact, we have a US-based retailer who is now implementing the Smart IVR solution from us and will go live later this month just in time for their holiday season. Very exciting. Looking at the market, the need to automate customer engagement continues to grow, especially with the COVID effect on contactless commerce and remote work. We are thrilled with our new logo momentum in Q1 and we're confident that we can sustain it moving forward. Now that we see our sales investment showing early results in brand awareness, pipeline health, and new logo wins, we're increasingly comfortable in our ability to execute our ambitious growth plan, and this is a great place for our team to be. With that, I'll ask Eric Smit, our Chief Financial Officer, to add more color around financial operations. Eric?

Great, thanks Ashu. Thanks very much and thanks everybody for joining us today. As Ashu noted, we're pleased to report another strong quarter which includes solid SaaS revenue growth year-over-year along with solid bottom line results and strong cash flow from operations. As I've noted on prior calls, we believe the combination of SaaS revenue and Professional Services revenue or what we call our SaaS business revenue is a useful measure to value our business on a forward-looking basis and is one that I'll highlight on this call. Looking at our financial highlights for the first quarter, SaaS revenue was up 29% year-over-year, and our non-GAAP gross margins was 76% for the quarter, a 600 basis point improvement year-over-year. Non-GAAP net income was $2.5 million or $0.08 per share and cash provided by operations was $3.7 million or an operating cash flow margin of 30%. Looking at the quarterly results in more detail, SaaS and Professional Services revenue was up 23% and comprised 91% of total revenue. For the first quarter, our SaaS revenue was $16 million, up 29% year-over-year. The legacy revenue was $1.8 million, down 44% from a year ago driven by the continued migration of our remaining legacy customers to the cloud and the sunset of our legacy non-cloud offering. Professional Services revenue was $1.3 million for the quarter, down 19% from the first quarter last year and accounted for 7% of total revenue. Continued product innovation is driving increased efficiencies on our service delivery, causing the professional services numbers to decline so much, allowing us to redeploy key professional services resources to assist in winning the new logos that Ashu talked about. Now turning to our non-GAAP gross profits and gross margins. Gross profit for the first quarter was $14.5 million or a gross margin of 76%, up from a gross profit of $12 million or a gross margin of 70% a year ago. This was driven by a solid improvement in our subscription gross margin, which was 82%, up from 76% in the first quarter last year. Professional Services gross margin was a negative 1% compared to 5% in the first quarter last year. Now turning to operations, non-GAAP operating costs for the first quarter came in at $11.7 million compared to $10.4 million in the year-ago quarter. The increase was primarily driven by our investments in sales and marketing which were up 20% year-over-year and accounted for 29% of revenue, up from 27% in the year-ago quarter. As Ashu stated, we've made good progress in expanding our sales and marketing efforts and expect this level of spend to increase sequentially as many of the new hires joined towards the end of the quarter. Our non-GAAP operating income in the first quarter was $2.8 million or an operating margin of 15% compared to an operating margin of 9% in the year-ago quarter. Looking at net income, non-GAAP net income for the first quarter was $2.5 million or $0.08 per share. This compares to non-GAAP net income of $1.7 million or $0.06 per share on a basic basis and $0.05 per share on a diluted basis in the year-ago quarter. GAAP net income for the first quarter was $2 million or $0.07 per basic share and $0.06 per diluted share compared to GAAP net income of $1.2 million or $0.04 per basic and diluted share in the year-ago quarter. Turning to our balance sheet and cash flows, I'm pleased to report that we believe our balance sheet has never been stronger. With our cash flow from operations of $5.7 million, a 108% increase over the prior year quarter. We ended the quarter with cash and cash equivalents of $53.1 million compared to $46.6 million at June 30, 2020. Now onto our financial outlook and guidance. With the tremendous customer engagement in front of us along with the strength of the balance sheet, our plan is to continue to invest in sales and marketing to capitalize on this opportunity. As Ashu indicated, we're encouraged by the early positive signs from this increased investment to-date and given the length of the enterprise sales cycle and the pattern of new logos starting small and expanding. We expect the increased investments in sales and marketing to further accelerate our growth in fiscal 2022. To illustrate this point, the average ARR for new logos signed in Q1 came in around $115,000 whereas if you look at the existing SaaS customers, the average ARR is north of $300,000. With our continued focus on customer success, we believe these new logos present a significant opportunity for expansion as Ashu indicated on some of the recent successes that we've experienced. Finally, before getting into the actual guidance numbers, a few additional comments. To reiterate the point that Ashu made, during the quarter we had two reductions: one reduction and one termination, which would impact our Q2 revenue by about $750,000. Based on the changes in customer contracts which included the increase in minimum payments, we're not expecting the approximately $150,000 increase in seasonal business when looking back to Q2 a year ago. Lastly, as noted on our last call, given the continued level of uncertainty in the current business environment, we've decided to continue providing only quarterly guidance for now, but we'll revisit this as the year progresses. For the fiscal 2021 second quarter ended December 31, 2020, we expect SaaS revenue of between $15.2 million to $15.6 million, which would represent growth of between 8% to 11% year-over-year. Beyond Q2, based on our upcoming renewals for the year and current pipeline activity, we expect SaaS revenue to increase sequentially in Q3 and Q4. Looking at SaaS and Professional Services revenue, we expect that to be between $16.6 million and $17.1 million, representing growth of between 5% and 8% year-over-year. Total revenue is expected to be between $18.1 million to $18.7 million, which would represent growth between $0.00 and $0.03 year-over-year. GAAP net loss of $1 million to breakeven, or negative $0.03 to $0.00 per basic share; and non-GAAP net loss of $0.5 million to net income of $0.5 million, or a negative $0.02 per basic share to $0.02 per diluted share. We assume our diluted share count of $32.8 million for the second fiscal quarter and for the fiscal year. Lastly, on the investor relations front, we will be participating in multiple virtual investor conferences this month. Tomorrow, we will be participating in the ROTH Technology Virtual Conference. The following day we will be participating in the Benchmark Technology One-on-One Investor Virtual Conference and then a week from now on November 17, we will also be participating in the Craig-Hallum Alpha Select Virtual Conference and on the 19th we will be participating in the 10th Annual Needham Virtual SaaS One-on-One Conference. We hope to see some of you virtually at these conferences. This concludes our prepared remarks. Operator, we'll now open the call for questions.

The first question will come from Philip Rigby with D.A. Davidson. Please go ahead.

I wanted to start by circling back on Q2 guidance. I really appreciate the insights and numbers you provided there. Can you just give us a bit more color on the customers on the attrition and termination customer? Maybe what led to that decision, was it cost-based or competitive pressures? Any color you can give there will be really helpful?

Sure, I can take that. This is Ashu here. So the one that we talked about reducing, they use multiple applications from us and they've decided that they wanted to bring the solution into their private cloud because of security reasons. They felt that they were exposing themselves. We obviously have the best security and the best cloud certifications, but their IT organization felt they needed to bring capability in-house. So they still continue to use the other parts of our platforms. But they took a significant chunk of the digital engagement and transitioned to in-house. The second one was, I believe it was more a change in the executive suite of the company; that is our assessment. The CEO changed in that organization, and he brought in a new crew who decided they wanted to standardize. They have done it before, and they wanted to standardize on one CRM platform. They informed us about it, and even though we were doing a really good job, they made the decision to standardize. That was the logic for it based on what they told us.

Very helpful. Thank you. I have a question on your demo initiatives like Fast Track or Innovation 30. Could you talk about what you're seeing in terms of appetite for the demos, maybe relative to what you're seeing in the early innings of the lockdown? Then if you can maybe talk about what you're seeing in terms of conversion. Customers taking advantage of these demos would be really interesting to get insight on that.

I did not really touch on that as much as I could have or should have. The whole - these - both the demo and the Innovation in 30 days are oversubscribed right now. In fact, as Eric mentioned in his remarks, we're moving some of those spare capacity we have on the server into doing more trials and demos because there's a lot of appetite, particularly around two areas: virtual assistance and messaging. Those are really active right now. So we've seen some great results from that, and the conversion we're seeing right now with those is north of 50%. Both initiatives will lead customers to go into investment mode while some are not able to proceed due to budget constraints. We're hearing many clients say they have run out of budget in the second half of this calendar year, so that's something we expect will rebound in the new calendar year.

Thank you. The next question will come from Koji Ikeda with Oppenheimer. Please go ahead.

Nice quarter on the growth line. I wanted to dig deeper on the SaaS revenue growth side for the second quarter. Excluding the customer attrition and the contract change to the prior seasonal business, it looks like the SaaS growth guidance is somewhere mid-teens, which is against an easy comp too. So is there anything else we should be aware of in that fiscal second quarter? Further out, I know you're not guiding to the full year, but about the second half growth comp versus the first half, is there any sort of second half seasonality or large upcoming renewals that we should be aware of?

Hi Koji, this is Eric. I'll take the question. Just for one point of clarification, if you look back and I alluded to the seasonality, last year from Q1 to Q2, there was a significant increase. We found that element has been reduced. So I would say that this is a fairly tough comp in relation to that component. To Ashu's point, we have seen some constraints on the budget spending from our new logos even though the business activity is healthy. We expect this to pick up in Q3 of our fiscal year, which contributed to our guidance. As for upcoming renewals, we don't see anything significant in that regard, and we expect the seasonality has somewhat subsided, so nothing out of the ordinary.

Thanks, Eric, for that. That's actually really helpful. I wanted to ask a question on the Avaya partnership. I recently saw a press release from another vendor in the space expanding its partnership with Avaya. Does this announcement change anything with eGain's relationships with Avaya from a technology partner standpoint, and also from a go-to-market strategy?

Yes, I know what you mean, this is Ashu here, Koji. To be brief, the short answer is no, nothing changes. The long version is that there are two parts to our partnership with Avaya. One is the digital capabilities of our platform, which are private labeled and OEM'd as Avaya CCED, and there is also the resale component for our knowledge and AI solutions which are sold under the eGain branding. Both continue to be active, and we're seeing the pipeline maturing and growing, so we hope to and expect to start sharing results from the Avaya partnership probably in Q2, meaning the quarter we're in right now, and moving forward.

Great, thanks Ashu. Last question from me, and I'll jump back into the queue. I'm just thinking about overall sales ramp today. Where are you at today? And how long do you think it will take this new November sales cohort to become fully ramped in your view? Thanks for taking my questions.

Sure thing. As I said, we're increasing our sales capacity by the end of this fiscal year from where we were at the end of fiscal 2021. The first half of that increase is going to be completed by the end of November, and we expect that cohort will become productive by the end of fiscal 2021, which is roughly a six-month ramp. We see a six-month ramp for most of these sales hires. For the second cohort, we plan to bring them onboard in the March-April timeframe of fiscal 2021.

Thank you. The next question will come from Richard Baldry with ROTH Capital. Please go ahead.

Earlier on the call, I think I heard you say you felt some of the sales cycles are extending. I would have thought COVID would pressure people to make some decisions faster. Can you talk about getting in some smaller deals for new logos and whether it’s smarter to go in first and expand later? I would have thought those would be faster. Can you maybe talk about that a little? I may have just misheard? Thanks.

You're right and you've heard it correct. Let me clarify that. With existing customers, they are doing more with us, and that buying pace has picked up incrementally along with the cadence. With new logos, what we’re seeing is not so much the entire sales cycle extending, but the fact that they're chunking it a little bit. They are starting small and then scaling up. We’re also hearing from clients that they are out of budget for this calendar year; thus opting for smaller deals now with plans to do more later. That kind of an extension is what I referred to regarding new logos.

Okay. Can you maybe talk about the overall platform's completeness in this world of content, where you can bring your own bot? Do you feel there's a need to go and buy solutions like bots for those who want an in-house preference? Could there be different flavors of those things reacting differently in different environments? Against the backdrop of your cash setting a new high in the quarter, thanks.

Sure. I may have conveyed the wrong impression earlier. What I meant when discussing the Messaging Hub is that we have a Messaging Hub solution that offers all those capabilities to begin with as part of our solution. The enterprises we're selling into often already have enterprises-wide initiatives around bots and they like the fact that you have your own bot. They want to ensure that what they’ve built—the domain-specific bots—are compatible. That ability to bring your own domain-specific bot becomes increasingly important. Regarding your second point about exploring gaps in our solutions: we see opportunities and have observed many smaller companies with interesting technologies. We keep looking at that and it's definitely an area of interest to us.

Lastly, the maintenance revenue line, if I back it out, it only fell narrowly in the quarter and has been on a steady downtrend. Is there anything unusual in that? Any change in your expectation for how long it will take to sunset that maintenance revenue base?

Eric, do you have any color on that?

Yes, I do. It was more of a timing issue. We've accelerated our push for that migration. There are plenty of on-premise customers in the pipeline to make that shift, so we certainly expect that to continue to decrease in future quarters.

Thank you. The next question will come from Jeff Van Rhee with Craig-Hallum. Please go ahead.

Several from me. First, on the usage. I think you commented on a decent amount of usage revenue in March, a little bit less in June. Can you continue that trajectory? What did you see with respect to usage in September versus prior quarters?

Eric?

I think we have seen that continue to taper off. Given the pricing model in place, we’ve worked with many of our customers to adjust their overages to now work into a higher minimum, so that usage amount has dropped off. We indicate that last year, we saw that spike up in Q2 but this year, we do not anticipate that same level of spike based on the changes.

That's helpful. On the two customers, one that decided to take the solution in-house: what were they using prior to going in-house? And once they go in-house, is it a build-your-own, or do they use a different premise-based packaged solutions? Just what does that look like?

Good question. Before they started with us, they had an on-prem solution. They kind of moved into the cloud with us. What they are looking to do now is a combination of internal development, as they are a large organization with a significant IT shop, and some on-premise software from an existing vendor. Primarily, they are building out their internal solution.

That makes sense. And then on the CRM, the other customer: what were they using from you? What specific functionality was it? I’m curious—it sounded like the embedded solution in the CRM was ultimately able to consolidate the capabilities you had?

Yes, for digital engagement. So largely chat and self-service, web-based self-service.

One last one from me, the IVR replacement opportunity. I think you had some press out today and you emphasized it again tonight. Can you just talk a little more specifically what that looks like? You've got a legacy IVR solution, and how does that look to the consumer? What exactly are you bringing and how does it extend the lifecycle of IVR?

Sure, there are three parts to it. Let’s take an IVR from a retail business we are working with. They had an existing IVR from one of the big vendors. What we're doing is going into their IVR design studio with a piece of code that plugs into one of the nodes in the IVR tree. Press nine, for instance, detects that the call is from a smartphone and prompts whether the customer would like to chat via SMS. If they say yes, they start chatting on SMS while retaining their position in the IVR. Then they can interact with a virtual assistant for automated responses. If escalated, they can connect with a human chat agent on our desktop, concluding the conversation. We offer analytics regarding IVR, digital and contact center metrics so clients have end-to-end analytics.

Very helpful, thanks so much.

Sure.

Thank you for the question. The next question will come from Mark Schappel with Benchmark. Please go ahead.

Thank you for taking my question. Eric, let me start with you: help me better understand the SaaS revenue guidance for fiscal Q2. It appears that even with the $750,000 reduction and termination, growth appears to be significantly lower than the past 18 months or so. Help me with the factors influencing this?

In addition to the $750,000, I also indicated that there was about $150,000 of seasonal business that we weren’t expecting this quarter, which we saw last quarter. From a business standpoint, we’ve seen an increased focus on the new logos, and some of these initial deals we've been closing have started to be smaller, which is contributing in this environment. However, we’d expect it to pick up over time.

Great, thank you. And then Ashu, regarding the priority or initiative to expand partnerships with CRM vendors: how far along are you with partnerships with the various CRM vendors?

Some are more advanced than others, but I would say we are still probably six months away from seeing meaningful pipeline development from those, so I expect these CRM partnerships will yield new business to us in the second half of calendar 2021, beginning in fiscal 2022.

Thank you. The next question will come from Ryan MacDonald with Needham & Company. Please go ahead.

This is Alex on for Ryan. It was announced the company achieved in-process status with FedRAMP. When do you expect to receive full FedRAMP authorization? Can you give us any sense of what you're seeing with the government from a pipeline perspective?

Our expectation is that we should be certified by calendar Q2 in 2021, though this is dependent on the certification authorities and any necessary remedies we might discover during the certification process.

Okay, great. And with recent shutdowns appearing in EMEA, can you give us a sense of what you're seeing from customers over the past couple of weeks? Do you think the businesses are now better positioned to operate effectively in a lockdown environment? What are you seeing in EMEA regarding elongated sales cycles as well?

Yes, we've seen—I don't know if the last two weeks' change has rippled through our business. But leading up to now, businesses have accommodated operating in EMEA with the new rules. Hard to say how the recent lockdowns, particularly in the UK, will affect things. However, we were observing reasonable business activity mostly around automation and digitalization. So all the things we've discussed in the US, we see that there as well.

Thank you. I'm showing no further questions at this time. I'll turn it back to our speakers.

Great, well thanks operator and thanks everybody for joining us today. We look forward to updating you when we finish up our Q2. Thanks.

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect your lines.