Earnings Call Transcript - EGAN Q4 2022

Operator, Conference Operator

Hello, and welcome to the eGain 2022 Fourth Quarter and Full Year Financial Results Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Jim Byers of MKR Investor Relations. Please go ahead.

Jim Byers, MKR Investor Relations

Thank you, operator. And good afternoon, everyone. Welcome to eGain's Fiscal 2022 fourth quarter and full year 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, 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, the details on the company's reports filed with the Securities and Exchange Commission. eGain is making these statements as of today, September 8, 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 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 link on the Investor Relations page of eGain's website at egain.com. Along with the earnings release, we have also posted an updated investor presentation to the Investor Relations page of eGain's site. And lastly, a phone replay of this conference call will be available for one week. And now with that said, I'd like to turn the call over to eGain's CEO, Ashu Roy.

Ashu Roy, CEO

Thank you, Jim. And good afternoon, everyone. We finished the year strong, and overall, we are very pleased with our progress this year. Both our top and bottom line results were ahead of our guidance and street consensus. Our total revenue for the year grew 17% year-over-year to $92 million, and we generated good cash flow from operations for the year of over $8 million. That was a good way to end the fiscal year for us. Looking at the last quarter, let me share some notable new wins. The first one is a top 10 airline in the world, and they selected eGain Knowledge as their centralized platform to empower agents across their global contact centers. This is Phase 1. In the second phase, they'll use the same knowledge assets to drive better customer self-service. Interestingly, we are partnering with Deloitte to deliver this solution to the airline client. The next one is a leading U.S.-based provider of health and benefit plans. Their challenge was similar; they were struggling with knowledge silos, and it was showing up in long customer calls and repeat contacts. Again, our Knowledge Hub solution is what they went with. The third one is the Department of Taxation for a state government in the U.S. They selected eGain for knowledge as well as the omnichannel adviser desktop capabilities, and in this case, our FedRAMP authorization was a significant factor in their selection. The last one I want to bring out is one of the clients we won, which is a European-based leading vehicle leasing company, one of the biggest vehicle leasing companies in the world. They plan to deploy the eGain Knowledge Hub as a central platform across 29 countries in 19 different languages. The power of centralization, where there is a need for multilingual and appropriate regulatory personalization, is something which was very important for them. These are really good wins, and I'm excited about those new plans and more. In terms of customer expansion in the quarter, one of the notable ones was a federal agency, an existing customer, who upgraded to the FedRAMP version of the eGain knowledge solution. Looking back at the fiscal year, at the start of the year, we mentioned we were making an effort to scale our sales capacity, and that's something we continue to do through the year. By the end of the year, we had increased our sales capacity by over 50%, and that steady investment increase also ramped up improvement in our bookings and pipeline build. A few metrics to share to show our progress throughout the year. Our new logo-based ARR for fiscal '22 was up 45% year-over-year. In terms of pipeline, the RFP volume from prospects went up by over 50% year-over-year in fiscal '22 compared to fiscal '21. And then we ended the year with our remaining performance obligation, or RPO, at over $100 million, which is again up over 50% year-over-year. These are some relevant metrics. Looking at the market, we continue to see the big opportunity in knowledge management and overall customer engagement powered by knowledge. Even with the economic slowdown, we believe that leaning into this market with the current level of sales investment we have built up to is a good path. We believe that in a tough market, customers will continue to invest in agent experience and self-service automation. Our top two verticals, financial services and insurance as number one, and government now being the second biggest, together comprise over half of our business. These two verticals, we believe, should not be too negatively impacted in the market slowdown. We do anticipate a slowdown in decision-making, which is natural. Therefore, we feel it's prudent for us to plan conservatively while maintaining current levels of sales investment. In fiscal '23, we intend to focus on driving sales productivity as we take a balanced view of growth and profits in the current plan. On the product front, we recently announced our eGain Knowledge Connector for Microsoft SharePoint. As you know, SharePoint is the leading content management tool, and what we are seeing is increasingly, our clients want to modernize their knowledge management, but also want to federate all their legacy content from multiple SharePoint depositories. One of the clients we recently won (not in the last quarter, but a couple of quarters before that) has over 60 SharePoint repositories in their enterprise that they want to integrate into. Yes, they'll have a small bit of curated knowledge in the eGain knowledge platform, but still, the vast majority of legacy content continues to sit in these SharePoint depositories. This is a good opportunity for us to layer our modern knowledge hub alongside the SharePoint installed base. We also announced our connector to IBM Watson yesterday. This leverages our Bring Your Own Bot or BYOB architecture. We are seeing that businesses have built many bots and continue to build their specialized bots using technologies like IBM Watson. Now they want to leverage that specialized bot investment in combination with a modern knowledge platform like ours to deliver better service. Looking ahead, we see businesses continuing to invest in digital transformation. So demand for our solutions is still strong and will likely get stronger while accommodating for the economic slowdown, which is cyclical. At the beginning of the year, we mentioned that a partner had published an annual research paper early in 2022, which outlined the technologies important for enterprises looking to improve customer service. The top technology recommendation at that time for customer service leaders was to invest in knowledge management tools. Fast forward to July, a couple of months ago, another Gartner estimate noted the hype cycle of different technologies, which they refresh every year. In that cycle, the penetration of knowledge management technology for customer service is still rated under 20%. There is definitely a big market ahead of us. The value of this technology is high for enterprises. Their assessment, which we agree with, is that there are three reasons knowledge management is seeing a resurgence of interest in the enterprise. The first two are demand-oriented, and the third one is more about capabilities of technology and solutions. Firstly, there is a proliferation of customer contact points, driving inconsistency in customer service. Secondly, the world of hybrid work and high levels of employee attrition highlight the need for better knowledge and guidance tools for frontline agents. Lastly, new knowledge and AI technologies are making it possible to deliver better solutions and show the value of knowledge and guidance using AI and knowledge technologies. These solution stories and client successes at scale create a virtuous dynamic in the market. With our leading solutions and client successes, we believe we are well-positioned to capture market share with our scale and sales capacity. Before I hand over to Eric, I want to highlight our annual customer conference. After a two-year gap, we are very excited to announce eGain Solve '22 on October 11 and 12 at the MGM Grand in Las Vegas. We have a record number of customer speakers this time around. We've missed it for two years, and we'll also be announcing some exciting capabilities at the conference. Additionally, several leading partners, including Deloitte, will showcase value-added solutions alongside our offerings. In conclusion, the market need for our solutions continues to be strong and relevant, and we are more excited than ever. Given the economic environment, we are adopting a prudent stance, focusing on the productivity of our sales team in fiscal '23 and not necessarily increasing our sales capacity until we see productivity show up, which we expect. Lastly, our product strategy remains unchanged as we continue to build out our platform and grow our partner ecosystem, connectors, APIs, and developer support. So with that, I'll ask Eric Smit, our Chief Financial Officer, to add more color around our financial operations.

Eric Smit, CFO

Thanks, Ashu. And thanks, everyone, for joining us today. As Ashu noted, we finished the year strong with both our top and bottom line results ahead of our guidance and street consensus. Let me share some financial highlights for the quarter and full year before getting into our outlook and guidance for fiscal 2023. Total revenue for the fourth quarter was $23.5 million, up 16% year-over-year or 20% in constant currency. Tax revenue for Q4 was $20.6 million, up 15% year-over-year or 18% in constant currency. For the full year, total revenue was $92 million, up 17% year-over-year or 18% in constant currency. This is an important milestone for us when compared to the 8% growth we realized in fiscal '21 and fiscal '20. For the full year, SaaS revenue was $80.9 million, up 21% year-over-year. Legacy revenue in Q4 was down to $805,000, which was down 14% year-over-year and accounted for 3% of total revenue. Looking at non-GAAP gross profits and gross margins, gross profit for the fourth quarter was $17.6 million or a gross margin of 75% compared to 75% in the prior year quarter. For fiscal 2022, gross profit was $70.5 million or a gross margin of 77% compared to a gross margin of 76% for the prior year. Non-GAAP operating costs for the fourth quarter came in at $16.9 million compared to $13.3 million in the year-ago quarter. The increase was primarily driven by investments in product development and sales and marketing. Non-GAAP operating income for the fourth quarter was $722,000 or an operating margin of 3% compared to an operating margin of 10% in the year-ago quarter. Non-GAAP net income for Q4 was $893,000 or $0.03 per share, which compares to non-GAAP net income of $2.5 million or $0.08 per share in the year-ago quarter. Non-GAAP operating income for the fiscal year was $9.2 million or an operating margin of 10% compared to an operating margin of 4% last year. Non-GAAP net income for the fiscal year was $8.9 million or $0.28 per share on a basic basis and $0.27 per share on a diluted basis. This compares to non-GAAP net income of $8.7 million or $0.28 per share on a basic basis and $0.27 per share on a diluted basis in the prior fiscal year. During the year, we generated cash flow from operations of $8.1 million for a 9% operating cash flow margin. Our balance sheet remains strong with total cash and cash equivalents at the end of the fiscal year at $72.2 million, up 14% from a year ago. Our strong bookings in the quarter reflected both new customer wins as well as expansion and renewals with existing customers. The number of $1 million ARR customers increased 31% year-over-year, given our continued focus on selling to large B2C organizations and government organizations. Our dollar-based SaaS retention rate was 105% compared to 107% a year ago. We saw some of our customers that had increased volume due to the COVID spike reduce their renewals as their volumes normalized, contributing to the slight decline in our retention rates this quarter. Our strategic focus in fiscal 2022 was to invest in sales and marketing with an emphasis on the U.S. market to accelerate the growth of new ARR bookings with a knowledge-led focus. New knowledge ARR bookings were up 69% year-over-year in fiscal '22, comprising 57% of total new ARR, up from 48% in fiscal '21. Bookings from new customer wins were up 102% year-over-year in fiscal '22, comprising 42% of total ARR bookings, up from 30% in fiscal year '21. Bookings in North America were up 75% year-over-year in fiscal '22, comprising 79% of total new ARR bookings in '22, up from 64% in fiscal '21. We are encouraged to see positive results while expanding the sales team's capacity by more than 50%. Now on to our financial outlook and guidance. For the first quarter of fiscal 2023, we expect total revenue of between $24 million to $24.5 million, representing growth of 12% to 14% year-over-year. Adjusted for constant currency, we expect Q1 total revenue of between $25.1 million to $25.6 million, representing growth of 17% to 19%. For Tier 1, we expect a GAAP net loss of $2.1 million to $2.3 million or a loss of $0.07 per share. We expect non-GAAP net income of $200,000 to $400,000 or breakeven to $0.01 per share. The sequential increase in spending in Q1 was primarily driven by annual compensation adjustments, becoming effective in the first quarter and the full impact of hiring that took place in Q4. Given the current macro environment, where we see some deals taking longer to close, we believe that it’s prudent to focus on improving productivity for our current sales team. For fiscal '23 full year ending June 30, 2023, we expect total revenue of between $101 million to $103 million, representing growth of 10% to 12% year-over-year. Adjusted for constant currency, that equals $103.2 million to $105.3 million, representing growth of 12% to 15%. Our current currency conversion rates assumptions are as follows: For Q1 of '23 and FY '23, we are assuming the U.S. dollar to GBP of $1.15 to GBP 1. Looking at the weighted average shares outstanding, we expect approximately 31.9 million for the first quarter; and for fiscal '23, 32 million for the full year. We feel we executed well and are pleased with our strong financial performance this past year. We made significant progress ramping our business in fiscal '22 and are seeing positive results from our strategic investments. For fiscal 2023, we will take a more balanced view of growth and profitability. Demand for our knowledge-led offering continues to be robust, and with our strong balance sheet, we are well-positioned to continue positive momentum and grow our market share this fiscal year. As Ashu mentioned, we will be hosting an Analyst Investor Day as part of the eGain Solve 2022 Conference in Las Vegas on October 11. We look forward to hopefully seeing some of you at the event. This concludes our prepared remarks. Operator, we will now open the call for questions.

Operator, Conference Operator

Thank you. We will now begin the question-and-answer session. Our first question today comes from Richard Baldry with ROTH Capital. Please go ahead.

Richard Baldry, Analyst

Thanks. So curious, given the strength you had in new logo ARR and a lot of the sort of new productivity from the hiring you've done, and you've got a very large cash reserve on the balance sheet, why not keep up the hiring in sales? And even if that resulted in modest near-term losses, you can clearly more than support that. So walk through the logic of pulling back on that when you're seeing some successes there. Thanks.

Ashu Roy, CEO

Sure. Rich, this is Ashu here. Yes. That’s a good point. This is a judgment call. We are guiding conservatively from an annual standpoint, but we are going to watch it very carefully, which is what we're doing right now. What we might miss is maybe the next cohort cycle. But if we feel that the sales investments are turning productive and the market environment is not as tough as some fear, then we will resume hiring in the middle of the year. We are keeping that option open.

Richard Baldry, Analyst

Could you discuss the two significant cohorts you brought in? Have they been performing similarly in terms of the ramp between cohort one and cohort two? Have there been any changes, particularly as macro conditions have become more challenging for both? Are those the kinds of lessons you are monitoring in real-time?

Ashu Roy, CEO

I feel like the sales reps we're hiring are more aligned to our direct selling plan in the more recent cohort. That's the change I see. The recent cohort hasn't performed yet, but the one before that is in performance mode now. That is good.

Richard Baldry, Analyst

Then talk about the legacy maintenance side. Do you feel like that's something that terminates by the end of fiscal '23? Or would you like to see it last out another year or two after that?

Ashu Roy, CEO

My sense is that we will probably drop another notch in the legacy revenue and maybe get to half of the current level by the end of this fiscal '23. The rest will likely be ignored and move on.

Richard Baldry, Analyst

If you look at changing conditions, does that change any thought process around the professional services you've been running with modest losses as you're ramping it? Do you think you manage that to breakeven for a period until you figure out when to get back to pushing growth on that?

Ashu Roy, CEO

Currently, we feel that investment is quite helpful in making customers successful and making them advocates. The way we'll drive more margin there is likely going to be more scale than just efficiency gains.

Richard Baldry, Analyst

Can you talk generally about the inflationary environment and what you're seeing as impacts on the P&L regarding revenue, pricing power, or cost side on wage inflation, etc.?

Ashu Roy, CEO

The impact on the cost of doing business is real, though I don't know if it is unusually high compared to prior years. It is somewhat mitigated by the economic environment as well. From a people cost side, we'll have our increase but not unusually high.

Eric Smit, CFO

To echo Ashu's point, the labor market has felt inflationary already in the last couple of years. We have been absorbing significant annual increases. Therefore, we don't see a big difference in current conditions compared to past years. We will continue focusing on efficiencies across the organization to mitigate expected costs that may come from vendors.

Richard Baldry, Analyst

Great. Thanks, and congrats on the acceleration you saw in fiscal '22.

Ashu Roy, CEO

Thank you.

Operator, Conference Operator

The next question comes from Jeff Van Rhee from Craig Hallum. Please go ahead.

Jeff Van Rhee, Analyst

Thanks. In terms of your cautious macro outlook, can you quantify any of that? Specifically, how much is based on things you've already seen versus things you're anticipating?

Eric Smit, CFO

For us, it’s really more about anticipation. We feel good about the opportunities and the way the teams are ramping. As we've done in previous years, we'd like to start the year with a more conservative view, but we hope to provide updates as the year progresses.

Jeff Van Rhee, Analyst

Can you talk about any differences you saw in behaviors regarding the OEM side channels and direct channels? Are they acting the same?

Eric Smit, CFO

Other than the metrics we've discussed, with the increased focus on direct selling, we've seen more business come through direct team members. Overall, we don’t see significant changes.

Ashu Roy, CEO

Quantitatively, no significant changes. However, qualitatively, we've expanded our partner ecosystem. This is working well for us, and we've added multiple integrations.

Jeff Van Rhee, Analyst

Thanks for that. Can you discuss the impacts of renewing contracts, particularly as volumes have lessened post-COVID?

Eric Smit, CFO

We don’t see a significant exposure to further renewals, as we’ve normalized business operations now. We may have experienced a spike in virtual assistant use, which is normalizing, but it’s something we can manage with new business coming in.

Jeff Van Rhee, Analyst

Got it. Thanks for taking my questions.

Operator, Conference Operator

Next question comes from Tim Horan from Oppenheimer. Please go ahead.

Tim Horan, Analyst

Thanks, guys. So the COVID impact, do you think you've largely seen it? Is it behind you, or is it still in front of you?

Ashu Roy, CEO

Business is pretty much back to normal now. To that extent, I don’t think it is impactful moving forward. We have already discussed the excess levels of business during COVID.

Tim Horan, Analyst

Are you back to steady state? Do you think there will be more impacts from COVID going forward?

Eric Smit, CFO

There might be some adjustments in the next quarter or two, but I don’t see them significantly material. We have factored these into our guidance as we go forward.

Tim Horan, Analyst

Got it. And you mentioned that the sales cycle was elongating. When did you start to see that?

Ashu Roy, CEO

Not yet, but that’s the anticipation right now.

Tim Horan, Analyst

Can you provide insight into market share gains? Who are you gaining shares from, or is the TAM expanding? Just some context around that.

Ashu Roy, CEO

Primarily, we are gaining from legacy tools implemented five to seven years ago that haven’t done well. Also, we see expansion in the market as enterprises look for better knowledge management solutions on top of their existing content management systems.

Tim Horan, Analyst

You've given impressive metrics on growth. Given the economic concerns, would growth be accelerating this year?

Eric Smit, CFO

Yes, and those metrics are indicative of positive trends for revenue growth.

Tim Horan, Analyst

You mentioned increased spending for lower margins this year to achieve a more scaled business model. Do you think you're there now, or is it a larger number?

Ashu Roy, CEO

As we see productivity from the current levels of sales investment, we'll reach a scale where better margins will be visible.

Tim Horan, Analyst

Is there a revenue number where margins will start to expand? Is it around $150 million?

Ashu Roy, CEO

Yes, $150 million would be a reasonable estimate for seeing the impact.

Operator, Conference Operator

Seeing no more questions in the queue, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Eric Smit, CFO

Thank you, operator. And thanks, everybody, for listening. We hope to see some of you at the Analyst Day in Las Vegas. Thank you.

Operator, Conference Operator

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