Earnings Call Transcript - EGAN Q2 2021

Operator, Operator

Good day, and welcome to the eGain Fiscal 2021 Second Quarter 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.

Jim Byers, Investor Relations

Thank you, operator, and good afternoon, everyone. Welcome to eGain's second 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 in material respect. Information on various factors that could affect eGain's results is detailed in the company's reports filed with the Securities and Exchange Commission. eGain is making these statements as of today, February 10, 2021, 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 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 recently directly comparable GAAP financial measures. Our earnings press release can be found on the news release link on the investor relations page of eGain's website at egain.com. And a phone replay of this conference call will be available for one week. Information is in the press release. With that said, I'd now like to turn the call over to eGain's CEO, Ashu Roy.

Ashu Roy, CEO

Thank you, Jim, and good afternoon, everyone. Sorry for the late start. We are very pleased with our performance in the second quarter. Our top and bottom line results exceeded our guidance and we're ahead of consensus. Our SaaS revenue grew 15% year-over-year and 21% year-to-date. On the gross margins, we improved by 500 basis points over the prior year quarter. We were GAAP profitable with net income of $1.6 million, and we were cash flow positive in the quarter. Positive financial results ahead of guidance. As we noted on our last call, we are continuing to increase our investment in sales and marketing. Halfway through the year, it's encouraging to see that we are noticing positive indicators from that investment. Let me share some metrics. Looking at brand awareness, our website traffic is a good metric for this, and at the end of Q2 and through January, that traffic is up more than 90% year-over-year, thanks to significant increases in our marketing investment, particularly in scalable digital channels. Moreover, in Q2, our marketing-generated leads were up 60% year-over-year. Our sales pipeline at the end of Q2 is now worth more than twice as much in dollar terms as it was a year ago. We also have more than twice the total number of opportunities now. Although the average deal size in the pipeline is a little lower than it was before since we're bringing in more new logos, our number one focus this year from a sales perspective, alongside scaling our team and executing change programs, is adding new SaaS logos in the enterprise market. We have acquired 20 new SaaS logos in fiscal '21 compared to seven during the same period last year. This shows that we have more than doubled our pace, and we hope to increase our SaaS logo acquisition even further in the second half of the fiscal year. Some examples of our new SaaS logos include a large North American utility from the East Coast and a top 20 healthcare provider in the US, where we are assisting them with their telehealth solution using our digital-first chat capability combining video and messaging. We are also thrilled about a large global automotive major where we are starting with a small footprint, but there is significant expansion potential in areas like digital engagement and messaging. Another example is a large multinational insurance business from Europe, where we can expand our solution across different geographies. In terms of expansion, we have seen healthy new bookings with new clients. Notable expansions involve a major US telco, which we have now engaged across the entire enterprise with our analytic solution, and a diversified bank where we are now building out our presence across all their business units in the contact centers. Additionally, a fast-growing European financial services business that began with us a year ago with an innovative engagement is now standardizing on our platform for both self-service and agent engagement. During the quarter, we also experienced a nice set of renewals, and our net retention rate remains above 100% with no significant unusual churn. We continue investing in our direct sales front by increasing our sales team's quota capacity. We have completed the first phase of expanding our sales team and will now focus on onboarding and increasing productivity within this new cohort. Once this team ramps up, we anticipate a 50% increase in our quota capacity. The new sales representatives we have hired are concentrating on acquiring new logos, while customer expansion opportunities are being handled by our tenured reps in partnership with the customer success team. We plan to hire our next cohort of reps in Q4 this fiscal year, so from April to June. On the partner front, we have begun investing here at the beginning of the fiscal year. We continue to have productive partnerships with Cisco and have closed several new logos with them in the last six months. Our partnership with Avaya is now producing new logos as well, with some CCAAS wins and enterprise wins. In parallel, Mike Taylor, who joined us at the start of this fiscal year to lead business development, is working to build out new partnerships with systems integrators. In Q2, we onboarded two new SI partners, BT Global Services and Infogain, both of which are significant entities in the industry. We have now formally trained over 50 consultants across these partners, enabling us to scale our implementation capability globally and strengthen our market reach, a strategic objective for this year. Moving to existing customers, I want to share a couple of stories that illustrate the value we provide and the resulting expansion. Moreover, we are excited about how quickly we are able to roll out innovation on our platform, allowing existing clients to consume solutions promptly. I want to highlight a trend we're observing, the four-step cycle of customer acquisition - quick value delivery, client expansion, and then advocacy and marketing. These four components are starting to work in harmony, which is encouraging. For instance, our customer feedback ratings on the Gartner G2 site have improved significantly over the last couple of quarters, thanks to increased customer satisfaction. Let me share a couple of illustrative examples: the first one is an existing client where we began a knowledge management project with a couple of $100,000 in annual recurring revenue (ARR), and it has now grown to over $1 million. This rapid growth shows the effectiveness of our customer expansion strategy. Another example is a large US retailer that implemented our SmartIVR solution, allowing customers who call from smartphones to check their order status and switch to SMS chat if they choose. We activated the solution in just seven days within their existing contact center infrastructure. During the holiday season, they experienced a 30% shift in voice traffic waiting for an agent towards SMS queues. Our digital agents can handle five chats simultaneously, improving both customer experience and efficiency. The quick deployment of the SmartIVR solution enhances our client’s ability to adapt and innovate. After the holidays, the same client reconfigured SmartIVR for handling return questions seamlessly on their own. This showcases the capability of our platform, enabling clients and partners to create new solutions using our modular capabilities in digital messaging, knowledge, AI, and analytics. This flexibly is a significant market differentiator, with businesses increasingly demanding rapid value delivery. It’s one of the major trends highlighted by Gartner in their customer engagement predictions for 2021, and we are pleased to be delivering it today. In conclusion, we continue to invest in our sales and marketing efforts, which will be an increasing percentage of our revenues. We are observing early results in our pipeline growth, from brand awareness to marketing leads and the emergence of new logo acquisitions. We feel positive about our product innovation pipeline: SmartIVR was launched in Q2, and we anticipate more announcements in the spring. Our partnerships, especially with Cisco and Avaya, remain productive as we progress with our partner development program. I would now like to invite Eric Smit, our Chief Financial Officer, to provide additional insights regarding our financial operations.

Eric Smit, CFO

Thanks, Ashu, and thank you everyone for joining us today. As Ashu noted, we are pleased to report another solid quarter with strong SaaS revenue growth year-over-year, increasing gross margins, and positive earnings per share and cash flow. Our top and bottom line results exceeded our guidance and street consensus for the quarter. As highlighted by Ashu, we also saw significant improvement in our new SaaS loaders and pipeline development. Now, regarding our quarterly results in more detail. For the second quarter, SaaS revenue was $16.2 million, up 15% year-over-year, accounting for 84% of total revenue. SaaS revenue came in 5% above our midpoint guidance, partly due to increased seasonal business we experienced in Q2. Over the first six months, SaaS revenue reached $32.1 million, up 21% year-over-year, representing 84% of total revenue. Our trailing 12-month SaaS retention rate, which includes sell and uplift, remains above 100%. Professional services revenue was $1.5 million for the quarter, down 15% from the second quarter last year and accounted for 8% of total revenue. This aligns with our strategy of increasing investments in our products to enable quicker time to value for customers, as Ashu highlighted. Now, looking at our non-GAAP gross profits and gross margins, we reported a gross profit for Q2 of $14.6 million, equating to a gross margin of 76%, which was up from $13 million or a gross margin of 72% in the previous year. The subscription gross margin was 82% for the quarter compared to 79% in the year-ago period. We are pleased with this significant margin expansion, driven by increased automation within our teams. Professional services gross margin remained unchanged at 10%. Moving to our operations, the non-GAAP operating costs for the quarter were $12.3 million versus $10.5 million in the prior year quarter. This increase was primarily due to a 30% year-over-year rise in sales and marketing investments, which accounted for 32% of revenue, up from 26% in the year-ago second quarter. Regarding our bottom line, our non-GAAP operating income for Q2 reached $2.3 million, resulting in an operating margin of 12% versus 14% in the prior year quarter. Non-GAAP net income for the second quarter was $2 million or $0.07 per basic share and $0.06 per diluted share, compared to non-GAAP net income of $2.5 million or $0.08 per share in the year-ago quarter. GAAP net income for Q2 was $1.6 million or $0.05 per share, compared to GAAP net income of $2 million or $0.06 per share in the prior year quarter. Turning to our balance sheet and cash flow, our balance sheet remains robust, with cash flow from operations of $5.9 million for the first six months. We closed the quarter with cash and cash equivalents totaling $54.2 million, marking an increase from $46.6 million at June 30, 2020. Regarding our short-term remaining performance obligation, or RPO, as I noted earlier due to customer concentrations, the timing of renewals can fluctuate from quarter to quarter. However, with healthy renewals in Q2 and over 40 customers renewing with no significant churn beyond two customers lost last quarter, this contributed to our short-term RPO rising to $53.4 million, a 29% year-over-year increase. Now moving on to our guidance and financial outlook. Before discussing the actual numbers, I want to highlight a few items. Our SaaS revenue guidance for Q3 includes an anticipated sequential decline of $300,000 due to fewer days in the fiscal third quarter than in Q2, as well as an expected $400,000 due to seasonal volume increases seen in Q2 that are not predicted to recur in Q3. With our ongoing focus on migrating many legacy customers to SaaS, we expect another sequential decline in our legacy revenue to roughly $1.2 million for Q3. With the encouraging signs of new logo wins and a bolstered pipeline, we are continuing our investments in sales and marketing, now expecting this to represent approximately 36% of total revenue in Q3. Lastly, we estimate stock-based compensation expense of approximately $500,000 and depreciation and amortization of around $100,000, with approximately 32.9 million shares outstanding. For the fiscal third quarter ending March 31, 2021, eGain expects SaaS revenue between $15.8 million to $16.3 million, total revenue of $18.3 million to $18.8 million, a GAAP net loss of $500,000 to $1.5 million or a negative $0.02 to $0.05, and a non-GAAP net loss that ranges from breakeven to a loss of $1 million or zero to $0.03. In summary, we are pleased with our progress this quarter. We plan to invest to grow faster by ramping up our sales and marketing to secure new logos across our 150 SaaS accounts, expand our customer success initiatives, and extend our market opportunity by promoting the standardization of our knowledge hub across client enterprises while developing vertical solutions for mid-markets, starting with financial services. On the investor relations front, later this month, eGain will be participating in a fireside chat with Berenberg Capital Markets. In March, we will be taking part in Jefferies' first-ever Enterprise Communications Summit and presenting at the 33rd Annual Roth Virtual Conference. We hope to see some of you at these virtual events. This concludes my prepared remarks.

Operator, Operator

Thank you. And we'll take our first question today from Ryan McDonald with Needham.

Alex Narum, Analyst

This is Alex on for Ryan. As you lean into the digital go-to-market strategy from an investment perspective, can you talk about the incremental progress that's been made on this front, especially in terms of digital leads moving through the pipeline and any conversions to bookings that may have occurred ahead of schedule?

Ashu Roy, CEO

Our digital marketing efforts are running at 2 to 3 times our previous fiscal year levels, which has significantly boosted brand awareness and led to a 90% increase in website traffic. This has translated into a 60% increase in marketing-generated leads, significantly enhancing our sales pipeline. However, most of these opportunities have yet to convert into deals, as our sales cycle typically spans nine months. Nonetheless, they are actively progressing through the pipeline.

Alex Narum, Analyst

Has there been any notable increase in messaging volumes as demand for the messaging hub has risen?

Ashu Roy, CEO

Yes, messaging is very active. Many companies are pushing to offer a back-connect option to their customers, while also implementing conversational automation to manage the influx of messages. There is a growing demand for solutions that bundle messaging with conversational automation.

Operator, Operator

Next we'll hear from Jeff Van Rhee with Craig-Hallum.

Jeff Van Rhee, Analyst

Regarding the churned customers you mentioned, I think you indicated you were expecting a $750,000 sequential headwind. How did that align with your expectations?

Eric Smit, CFO

Yes, it played out pretty much as we anticipated, with no significant surprises.

Jeff Van Rhee, Analyst

Can you provide more explanation about the short-term remaining performance obligation considering the significant increase? How does it relate to deferred revenues, which seem to have decreased slightly?

Eric Smit, CFO

We're still working through those details, but this variation often arises due to the timing of renewals and contract durations. The growth in short-term RPO is reflective of the strength in renewals, particularly this quarter, where we observed above-normal activity.

Jeff Van Rhee, Analyst

Given the improved clarity around COVID, when do you plan to reintroduce quarterly and annual guidance?

Eric Smit, CFO

We are hopeful that by the beginning of fiscal '22, we will be ready to provide that annual guidance, although we still see elements of deal elongation due to cautious customer sentiment.

Jeff Van Rhee, Analyst

Regarding the SaaS growth, can you provide insights on when you might reach a 20% growth rate?

Eric Smit, CFO

The two losses will affect year-over-year comparisons until Q2 of next year, but we are optimistic about the growth rates as our sales reps ramp up.

Ashu Roy, CEO

Talent acquisition is a challenge, so we may take an extra month or two to onboard recruits. But the ramping speed of our first cohort will determine the timing of the next cohort’s hiring.

Operator, Operator

We’ll now hear from Richard Baldry with ROTH Capital.

Richard Baldry, Analyst

With the new logos being somewhat smaller, can you clarify the typical timeframe it takes for these new logo wins to become operational and impact current revenues?

Eric Smit, CFO

Typically, we aim to activate these accounts within a month post-signature. However, this can be extended in certain cases involving our partners.

Richard Baldry, Analyst

Can you explain the geographic distribution for your sales team and what factors may affect the speed of getting your second cohort up to speed?

Ashu Roy, CEO

We expect our new sales team to ramp within six months. While some may progress faster, that is the current expectation.

Richard Baldry, Analyst

If the ramp-up works out as anticipated, do you plan to sustain this hiring pace in future years?

Ashu Roy, CEO

I would like to maintain this hiring cadence, but we will gauge the situation after launching the second cohort.

Operator, Operator

We’ll now hear from Mark Schappel with Benchmark.

Mark Schappel, Analyst

Can you discuss whether the new logo wins are primarily being driven by partners or direct sales?

Ashu Roy, CEO

Currently, the split is about 50-50 between partner-led and direct sales, which is a solid balance, and we aim to enhance both aspects.

Mark Schappel, Analyst

Are the new logo wins generally competitive? If so, do you observe any common competitors?

Ashu Roy, CEO

Yes, they are largely competitive wins. Salesforce is a prominent competitor due to their installed base. We also see competitors like Oracle and Zendesk frequently appear in these deals.

Mark Schappel, Analyst

What solutions are your sales teams focusing on to secure these new wins?

Ashu Roy, CEO

Our primary focus is on digital solutions that combine messaging and virtual assistants, which are in high demand. We also emphasize knowledge management solutions for contact centers.

Operator, Operator

We will now hear from Philip Rigby with D.A. Davidson.

Philip Rigby, Analyst

Can you discuss the strategies you're using to incentivize customers to migrate to the cloud, and what increases in spending have you observed from these customers post-migration?

Ashu Roy, CEO

We've engaged nearly all our customers regarding cloud migration, increasing incentives for those who sign up before the end of our fiscal year. We offer significant discounts while ensuring we don't compromise profitability. Our larger on-prem customers, paying over $100,000 annually, are all in discussions, highlighting that the query is not if, but when. It typically takes six months for customers to acclimatize to the cloud and activate new capabilities swiftly, leading to multiple expansion opportunities in those accounts.

Operator, Operator

We'll hear from Brett Knoblauch with Berenberg Capital Markets.

Brett Knoblauch, Analyst

Congrats on the strong quarter in terms of new SaaS customer additions. Did you provide an update on the total SaaS customer account?

Eric Smit, CFO

Not at this point. We generally hover around the 150 mark for total SaaS customers. A detailed update will follow.

Brett Knoblauch, Analyst

What seasonal revenues benefited this quarter that won't continue? I don't recall seeing a similar benefit in last year's Q2.

Eric Smit, CFO

We observed an increase in customer usage, often driven by seasonal factors like the holiday push for retail and e-commerce clients. Customers become more active and sometimes exceed their subscription levels, requiring a premium for additional usage. We encourage them to scale their base levels accordingly.

Brett Knoblauch, Analyst

On the topic of Cisco, they made significant announcements, including a revamp of their contact center solution. How does this impact your relationship with them?

Ashu Roy, CEO

Cisco's acquisition of IMImobile and their developments in digital messaging represent a long-term evolution for them. For the next 12 to 24 months, we view this as an excellent opportunity to strengthen our partnership to support their customers successfully with our solutions, both through OEM and resale channels.

Operator, Operator

I see no further questions in the queue. I will now turn the conference over to management for any additional or closing remarks.

Eric Smit, CFO

Thanks, operator. Thank you all for listening, and we look forward to providing you an update when we finish up our Q3. Thanks.

Operator, Operator

This concludes today's call. Thank you for your participation. You may now disconnect.