EGAIN Corp Q1 FY2023 Earnings Call

Good afternoon, and welcome to the eGain Fiscal 2023 First Quarter Financial Results Conference Call. I would now like to turn the conference over to Jim Byers, MKR Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to eGain's Fiscal 2023 First Quarter 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 in material respects. 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 14, 2022, and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call. In addition to GAAP results, we will also discuss certain non-GAAP financial measures such as non-GAAP operating income. The tables included with the earnings press release include reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. Our earnings press release can be found by clicking the press release's link on the Investor Relations page of eGain's website at egain.com. And along with the earnings release, we have also posted an updated investor presentation to the Investor Relations page of eGain's website. And lastly, a phone replay of this conference call will be available for 1 week. And now with that said, I'd like to turn the call over to eGain's CEO, Ashu Roy.

Thank you, Jim, and hello, everyone. Both our top and bottom line results exceeded our guidance and street consensus for the quarter. Our total revenue was a record $24.8 million, up 20% year-over-year in constant currency. Our SaaS revenue grew 23% year-over-year in constant currency, and our adjusted EBITDA margin was 10%. So a good performance for the quarter. Let me share some notable customer wins in the quarter. The first is a major American airline operating globally. They were a legacy analytics hub customer for us, and they're now moving to the eGain Cloud. With our SaaS solution, they'll enjoy a robust platform to monitor contact center performance and improve customer experiences. Moving them over to our cloud platform also opens up opportunities for them to adopt our knowledge hub and other offerings. The second one is a new logo win, and they are a global leader in licensed sports merchandise. We're creating a next-generation digital sports platform with partners that include many professional sports leagues. They wanted to improve first contact resolution rates in the contact center as well as reduce agent training and onboarding time, especially for seasonal hires during the holiday season. So they selected our knowledge hub, and this is going to give them a single source of knowledge to easily handle all the retail processes personalized by brand and team. We were also looking for an out-of-the-box integration with their Genesis desktop for omnichannel service, and our Genesis connector solves that business need very easily. We had some good customer expansions in the quarter as well. The first one was a U.S. federal agency where we significantly expanded our rollout in their contact center. This expansion order offsets a one-time COVID order they had placed last year that ended in the quarter. Next one is a Fortune 500 business with over 3,000 enterprise clients. They're in the business process outsourcing market. They have now expanded their use of eGain knowledge hub to serve more enterprise clients. The third one is a global B2B travel platform. They expanded their use of eGain across their global contact centers as the business picked back up post-COVID. And the last one I would bring out is a large state agency in the U.S. They've expanded the use of eGain across more of their citizen contact centers. Moving to customer and product updates. Our eGain Solve 22, which is our annual customer conference, which was held last month after a 2-year gap, was a resounding success. Record 8 customers shared their eGain success stories at the conference, including tenured clients like L.L.Bean, customer experience leaders like Navy Fed, and new clients like Liberty Mutual. We received very positive feedback from participants. Customers enjoy sharing best practices with each other in person. While prospects were excited to transparently learn the dos and don'ts from eGain clients. We also heard consistent kudos around the comprehensive product capability and functional richness of our solutions. Clients called out our managed services offering as an effective way to maximize value from their eGain investments. On the platform build-out front, we announced our eGain marketplace, showcasing value-added solutions built by us and our partners. These certified solutions can be used by our clients with ease and confidence. The marketplace has been initially seeded with a list of certified connectors from leading contact center and CRM platforms. In the future, we will expect to see partners publishing solutions for gamification, compliance, analytics and much more. On the product front, our recently introduced instant answers capability, which is part of the eGain knowledge hub, was very well received by attendees. Numerous attendees expressed interest in trying out this capability via our Innovation in 30 Days Offer. Applying state-of-the-art machine learning techniques in conjunction with our core AI capabilities, instant answers easily guide agents to surface the right answer quickly from the knowledge base. This is an exciting experience innovation to further enhance our knowledge hub leadership. Speaking of product leadership, in early October, we earned a perfect score from Gartner in their 2022 market guide for customer service knowledge management systems. That was a nice accolade for our team. And then last week, we were informed that the eGain knowledge hub was the only solution to win the prestigious 2022 Readers' Choice Award from KMWorld. Our team is proud to lead the market in both technical innovation and user choice. Looking at the market and our overall business. New inbound interest remains high for our offerings in the knowledge-powered customer engagement areas. Businesses continue to look for technology to drive down costs while improving agent experience. And our pipeline continues to grow with more knowledge hub opportunities, which now include a record number of seven-figure deals. At the same time, though, we are seeing the impact of the current economic uncertainty on our deals as decision timelines are getting extended and buyers are becoming cautious. Retention and expansion within our U.S. business continues to be relatively healthy. However, we are seeing some challenges in our European business. With the combination of these factors in mind, we plan to take a more balanced approach to growth and profitability for our company. So for now, we are pausing the hiring of the next cohort of sales reps. Instead, we are focusing on making our current reps productive. Overall, we remain very excited about our market opportunity. We are confident that knowledge management and AI-powered automation will continue to grow as a must-have need in the enterprise marketplace. So in summary, we delivered a record revenue quarter. Our new inbound interest remains good. As a result, we have a healthy pipeline, and we continue to see demand for our offerings. However, given the prevailing economic uncertainty, we plan to take a more balanced approach to growth and profitability. As such, we will continue to maintain our product investments focused on experience innovation and ecosystem build-out. With that, I'll ask Eric Smit, our Chief Financial Officer, to add more color around our financial operations.

Thank you, Ashu, and thank you all for being here today. I’d like to share some financial highlights for the quarter before discussing our outlook and guidance for Q2 and fiscal 2023. We’ve noticed that the macroeconomic conditions are having a more significant effect on our European business compared to North America, so I will include regional metrics when applicable. Starting with revenue, total revenue for Q1 reached a record $24.8 million, which is a 15% increase year-over-year, or a 20% increase in constant currency, and a 5% increase sequentially from Q4. SaaS revenue was $22.6 million, an 18% increase year-over-year, or a 23% increase in constant currency, and up 10% sequentially from Q4. Legacy revenue in Q1 fell to $295,000, accounting for less than 2% of total revenue. In terms of regional revenue, North America represented 77% of total revenue, up from 71% in the same quarter last year. Total revenue from North America was $19.1 million, a 26% increase year-over-year, while total revenue from Europe was $5.7 million, down 9% year-over-year. Looking at non-GAAP gross profit and gross margins, gross profit for the first quarter was $18.9 million, up 13% year-over-year, giving us a gross margin of 76%, compared to 78% in the previous quarter but an increase from 75% in Q4. Now, regarding operations, non-GAAP operating costs for the first quarter were $17.5 million compared to $13.9 million in the same quarter last year. These costs include this quarter's annual company-wide compensation adjustments that took effect at the start of the fiscal year. The increase in costs and expenses was mainly due to our investments in product development and sales and marketing over the past year. However, due to the current conditions, we have paused sales hiring. Sales and marketing expenditures in Q1 remained flat sequentially compared to Q4 of '22. On the bottom line, non-GAAP operating income for the first quarter was $1.4 million, yielding an operating margin of 6%, down from 13% in the same quarter last year but up from 3% in Q4 of fiscal '22. Non-GAAP net income for Q1 was $2 million, or $0.06 per share, compared to non-GAAP net income of $2.7 million, or $0.08 per share, in the same quarter last year. Our adjusted EBITDA margin for the quarter was 10%, up from 6% in the preceding quarter. Shifting to our balance sheet and cash flows, cash flow from operations for the quarter was $760,000, resulting in a 3% operating cash flow margin. Our balance sheet remains solid, with total cash and cash equivalents at the end of the quarter at $71.5 million, an increase of 2% from a year ago. Turning to customer metrics, Q1 is typically a seasonally slow quarter for bookings, and this was further influenced by the current macroeconomic conditions, especially in Europe. Our last twelve months dollar-based net retention rate was 103%, compared to 113% a year ago. By region, retention and expansions within our U.S. customer base remained relatively solid with the NRR closer to 110, whereas challenges continued in the European base with the NRR falling below 100. On a positive note, the number of customers with 1 million ARR increased by 31% year-over-year. Our SaaS ARR, excluding OEM, grew by 15% year-over-year. Additionally, our ARR by product hub shows that the knowledge hub now constitutes 50% of our total SaaS ARR, as knowledge deals accounted for two-thirds of new bookings over the last 12 months. Regarding RPO, total RPO rose by 32% year-over-year to $94.5 million, and our short-term RPO increased by 27% year-over-year. Before I move to our financial outlook and guidance, I want to highlight the share repurchase program we announced today, under which eGain may buy back up to $20 million of its common stock at discretionary pricing through open market transactions or privately negotiated deals. Additionally, open market repurchases will be managed under a Rule 10b5-1 plan to allow for shares to be repurchased when the company is otherwise restricted from doing so due to insider trading laws or self-imposed trading limitations. The stock repurchase program is effective immediately, has a one-year term, and does not obligate eGain to acquire a specific number of shares. While our focus continues to be on business growth, we believe that investing in eGain at the current stock price is a prudent use of our excess cash reserves. With a strong balance sheet, we plan to execute the stock repurchase program without hindering our long-term growth strategy. Now turning to our financial outlook and guidance. Considering the current strength of the U.S. dollar against the pound and euro, we will also present revenue estimates on a constant currency basis for better visibility into the underlying business trends. For the second quarter of fiscal 2023, we expect total revenue to be between $25 million and $25.4 million, representing growth of 8% to 10% year-over-year. When adjusted for constant currency, we anticipate Q2 total revenue to be between $25.8 million and $26.2 million, representing growth of 12% to 13%. For the bottom line in Q2, we expect a GAAP net loss of between $700,000 and $1 million, or $0.02 to $0.03 per share, which includes stock-based compensation expense of approximately $2 million and depreciation and amortization of around $130,000. We project non-GAAP net income to be between $1.1 million and $1.4 million, or $0.03 to $0.04 per share, with approximately 32 million weighted average shares outstanding for Q2 of fiscal 2023. For the full fiscal year 2023, taking the current macroeconomic environment into account, we are adjusting our growth and profitability targets by slightly lowering the midpoint of our total revenue guidance by $1 million but adjusting our projected costs and expenses by a greater amount. Consequently, we expect an improvement in our previous guidance for non-GAAP EPS by $0.04 per share at the midpoint. For the full year ending June 30, 2023, we now project total revenue to be between $100 million and $102 million, representing growth of 9% to 11% year-over-year. Adjusted for constant currency, this would equate to $102.1 million to $104.2 million, indicating growth of 11% to 13%. We expect non-GAAP net income to be between $5.3 million and $6.3 million, or $0.16 to $0.19 per share, with a GAAP net loss projected to be between $2.2 million and $3.2 million, or $0.07 to $0.10 per share. We estimate share-based compensation expense to be around $8.5 million, with depreciation and amortization approximately $550,000. Our currency conversion rate assumptions for Q2 2023 and FY '23 are that the USD to British pound will be $1.15 to GBP 1. This is in contrast to Q2 '22, where the USD to British pound rate was $1.35 to GBP 1, and for FY '22, it was $1.33 to GBP 1. To summarize, we have once again delivered a record revenue quarter. Our new business pipeline is promising, with ongoing strong demand. However, in light of the current macro conditions, we are adopting a more balanced approach toward growth and profitability. Our robust balance sheet and ability to generate cash have led us to announce the $20 million stock repurchase program, as we find our stock to be a worthwhile investment at present prices. Lastly, I’d like to mention that this Wednesday we will be in New York for the ROTH Technology event, and if you are attending the conference, we would love to see you there. That concludes our prepared remarks.

Our first question will come from Richard Baldry with ROTH Capital.

I'm sort of curious, are you seeing changes to the top of the sales funnel or really just slower sales cycles overall? Or is it that vary by geography?

Richard, this is Ashu here. I think the delay in decision-making is where we are observing the difference. There still appears to be strong interest at the top end.

Okay. And on the legacy maintenance side, now that that's virtually gone. Can you talk about when that would fully sunset? Are there material costs to keeping that last small amount of revenue up that would go away, sort of would there be a one-time benefit to the P&L if that goes away?

Richard, this is Eric. At this stage, considering the relatively small number of customers, there isn't a significant cost impact. Therefore, we wouldn't expect to see any substantial change in our costs associated with supporting these customers.

Okay. And then I'm sort of curious at the decision to slow down the hiring on the sales cohort because it feels like this is probably a fairly quick recession. That's what it turns into being. So given the long time it takes to bring people on board, sort of train them, bring them up and your balance sheet is considerable in resources. Why not just keep pushing on that so that if when things turn and demand sort of resumes, you've already got sort of a team ready to go.

Yes, that's a reasonable alternative, Rich. We believe that once the decision cycle stabilizes, we will resume that approach. Currently, it's uncertain if the slowdown will continue. There is a perspective that suggests a quick rebound to better economic conditions. However, we want to observe some trends moving upwards before proceeding.

Okay. And then lastly, assuming conditions sort of stay the way we're seeing them now. On the buyback front, would you envision drawing down existing reserves to pursue a buyback? Or do you think you'd prefer sort of using cash from operations on a steadier state basis and sort of hold the reserves where they're at?

So I think we are still evaluating that. However, at the current prices and given the healthy balance sheet, we would definitely consider using current resources instead of just relying on operating cash flow. But again, we haven't made a firm decision on that yet.

Our next question will come from Jeff Van Rhee with Craig Hallum.

Couple. It looks like pretty good execution into some currency headwinds. So congratulations. I guess, first on the EMEA NRR. Obviously, material lower than the core business. Can you just expand on that? How concentrated is that the downturn and did you have a few very large customers go away? And then is the decline really loss of customers? Or are they just cutting back on usage, seats? Like how is that playing out? Maybe a little color there would be helpful.

Yes, of course. I have a few comments. First, due to our focus on the European market, specifically in the U.K., I've noticed that the U.K. has been significantly affected. We've observed a notable change where some of our larger customers, despite finding value in our offerings, are feeling pressured to drastically cut their spending. As a result, a few have opted for alternatives that unfortunately do not meet their needs. At this moment, the main priority for them seems to be cost reduction rather than continuing to derive business value from our solutions. We don't anticipate this becoming widespread among our customer base, but it's something we’ve experienced. We must be cautious and ensure we are adequately planning and working on customer retention as well as staying engaged with these clients. This way, when they realize that the alternatives they are exploring may fall short, we are still positioned to reconnect and support them.

Are these alternatives that you would compete with in other geographies? So that kind of behavior with those specific alternatives is not something you've seen in other geographies? Or is that...

Yes, that's a good question. These alternatives do exist in other regions, but we haven't seen them being regarded as viable options at this time.

And then in terms of the lengthening sales cycles, can you put a little finer point on the timing of how that looked mainly as you progress over the last 90-plus days just in a steady deterioration? Is it substantial recent sort of decline in the health of the end markets? Any other color there would be helpful.

I would say that budgets we expected in fiscal calendar '22 have been pushed to calendar '23, and that's the main reason I see for the extension of the decision-making process.

Okay. And then one last, just any commentary on the channel-related sales momentum traction? Any differences in channel versus the direct efforts?

No. I think both of them seem to have the same change. But we do think that the channel moving forward could be useful in terms of if there is more pressure on vendor consolidation, that channel could be selectively better for us over time. But right now, we don't have any evidence to that.

Our next question will come from Tim Horan with Oppenheimer.

So just to be clear, in Europe, some customers traded down to, I think, kind of lower quality services that were lower priced, I think, is what you're saying. And are these relatively new customers? Have you seen them before? Any thoughts on how much cheaper they were? And I know you said maybe the services don't work as well as yours. Can any way you kind of test the relative productivity or relative quality?

Yes. So I would say that these are not typically our competitors. The one is more like a kind of a solution, which is not what we see in almost any other environment. I think the clients are just feeling the pressure to cut costs in these particular cases. And I think that has led them to almost say, let's go with another way to try to solve this problem, something that used to be done 10 years ago with knowledge management. So we feel that that's a trend we will probably not see in the U.S. market, but that's at least where our view is right now.

And any comparisons on your productivity or quality versus theirs?

I believe we provide value that often goes unmeasured. We focus on the impact on businesses rather than metrics like customer satisfaction scores or first contact resolution times, which these solutions do not address. They mainly concentrate on gathering content and making it searchable without the use of AI or similar technologies. As a result, some clients, for their own business reasons, have opted for a different approach and are likely making decisions based on immediate needs. We still see opportunities with these accounts and intend to maintain a close relationship with them, with the hope of re-engaging in the future.

Got it. And do you think contact center, in general, your comments, do you think they apply to the whole industry? Or is it just Europe, but I guess in Europe, is it pretty prevalent?

I believe this is a macro situation. I'm unsure if it affects contact centers uniformly, but I suspect that spending capacity is being more constrained in Europe than in North America.

Yes, yes. Totally understood. And any more thoughts on what else to do with the free cash flow that you have or just capital structure in general?

For now, I think the decision we have made is a good one that gives us an opportunity to see our stock buyback as a good investment when it presents itself. And so that kind of opens the door for some good use of cash. Beyond that, we haven't really made any public decisions around our cash.

It appears there are no further questions. This concludes your question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Great. Okay. Well, thanks, everybody. I appreciate you listening. And again, anybody in New York this week, we'd be happy to meet in person. Thanks a lot. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.