Earnings Call Transcript - EGAN Q3 2025

Operator, Operator

Good afternoon and welcome to the eGain Fiscal 2025 Third Quarter Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jim Byers, Pondel Investor Relations. Please go ahead.

Jim Byers, Investor Relations

Thank you, operator, and good afternoon, everyone. Welcome to eGain’s fiscal 2025 third 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, May 14, 2025, 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. eGain’s earnings press release can be found by clicking the Press Releases link on the Investor Relations page of eGain’s website at egain.com. And along with the earnings release, we will post 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 one week. And now with that said, I’d like to turn the call over to eGain’s CEO, Ashu Roy.

Ashutosh Roy, CEO

Thank you, Jim, and good afternoon, everyone. In our third quarter, we exceeded our profitability projections and delivered solid operating cash flow. Bookings for the quarter, however, were impacted by the extended sales cycles we had mentioned last quarter. Despite this, we continue to grow our pipeline as demand for our AI knowledge offering continues to gather momentum. Having said that, we're very excited to report that we secured one of our largest deals ever soon after the quarter closed. This deal is with the US Consumer Group of a US mega bank, one of the Big Four. Like most innovative businesses, they have concluded that they need an enterprise knowledge foundation to deliver trusted content to customers, employees, and AI. We started out in this account by establishing a beachhead with the client over a year ago in one of their fast-growing international divisions. Shortly thereafter, we replaced their homegrown knowledge solution in one of their US subsidiaries. And now with this third win, which is in the US Consumer Banking Group, which by the way is the largest business unit, we are going to have our AI knowledge platform used across more than half the bank, over 100,000 users. And that's very exciting to us because it exemplifies the vision that we have been pursuing, and that is establishing a single source of truth which delivers trusted content across the business in the AI era. Turning to our products. In March, we launched the eGain AI Agent for Contact Center. This is the second of the offerings of our AI Agent product capability. The first one was the eGain AI Agent for Customer Self Service. Now this Contact Center solution is a breakthrough conversational assistant that guides Contact Center agents to resolve customer issues across all touch points. So, the phone, chat, email. Unlike other solutions, the eGain AI Agent delivers proactive real-time guidance beyond simple FAQs or narrow preprogrammed domain interactions. And it does so by using the trusted answers from our eGain Knowledge Hub. The solution connects out of the box with Amazon Connect, Genesis Cloud, and Salesforce. Plus, it has APIs to integrate with other CRM and CCaaS platforms. Now we are seeing very good interest in the solution, particularly from businesses that in the past have struggled to get value out of the first wave of AI solutions in the market. One of our banking clients, existing ones, is already rolling out the solution for their contact centers. They are keen to reduce the variability of agent performance and improve compliance in the flow of service rather than policing for compliance and performance after the fact. Interestingly, they had tried out a couple of AI assistant solutions from their CCaaS provider and another vendor, but they could never scale it beyond the prototype. So, we are very excited about these AI Agent offerings. We have two of them now, one, as I mentioned, for customer self-service and now for the Contact Center agents. The easy try-and-use models that we have created, we believe will accelerate new logo acquisition and innovation consumption among our clients. I'm also excited to note that during the quarter Gartner published their first emerging market quadrant for generative AI knowledge management apps. It's a mouthful, but this is a category that they have created. In this category, they rated eGain a leader, so in the upper right quadrant. This emerging category, as they call it, is defined by Gartner as technologies that enable companies to better retrieve and contextualize information and insights from their knowledge bases, including search and insight engines, conversational AI, and productivity tools, all toward communication and content development. In the AI era, as Gartner states, knowledge management is no longer a nice-to-have capability. It is a must-have infrastructure, an enterprise-wide system of record for trusted answers that power AI and empower all employees and customers. In this emerging market opportunity, we are focused. We're investing in it and we are capitalizing on it. To conclude, while macro uncertainty impacted the timing of closing new deals during the third quarter, we are seeing good deal closure in the current quarter, starting with the mega bank deal that I mentioned. We launched our breakthrough AI Agent for Contact Center offering during the quarter, and we are seeing very good customer interest. And finally, our strategic efforts and increased R&D investments over the past year are starting to show results, and we are starting to establish eGain as the trusted knowledge foundation for the AI enterprise. With that, I'll ask Eric Smit, our Chief Financial Officer, to add more color around our financial operations. Eric?

Eric Smit, CFO

Great. Thank you. Thanks everyone for joining us today. As Ashu noted, our third quarter results included profitability that exceeded our projections and solid operating cash flow. Let me share more details about our financial results for Q3 before discussing our outlook and guidance for Q4 and fiscal 2025. Looking at our revenue. Total revenue for the third quarter was $21 million, which was within our guidance, but down 6% year-over-year. As previously discussed, the year-over-year decline reflects the impact of the two large client losses last year, one a conversation hub customer and the other an analytics customer. This will be the final quarter with year-over-year comparisons affected by these former customers. Looking at the revenue in more detail. Our SaaS revenue in the quarter accounted for 93% of total revenue. The remainder was professional services revenue. As I've noted before, with the recent product improvements, our PS attach rate on new implementations decreases by design. The improvements we are making to our products have resulted in faster deployments and quicker time to value for clients, which means less need for low-margin professional services, which is good for our business. Looking at non-GAAP gross profit and gross margins, SaaS gross margin for the quarter was 77% compared to 78% a year ago. And total gross margin for the quarter was 69% compared to 71% a year ago. Now turning to our operations. Non-GAAP operating costs for the third quarter were $13.8 million, down 6% sequentially and flat compared to the year-ago quarter. R&D was up 15% year-over-year as we continued to invest in product innovation to capitalize on the significant emerging market opportunity that Ashu just talked about. Looking at our bottom line, non-GAAP net income was $765,000 or $0.03 per share and ahead of the high end of our guidance range for the quarter. This compared to non-GAAP net income of $2.6 million or $0.08 per share in the year-ago quarter. Adjusted EBITDA margin for the quarter was 6% compared to 10% in the year-ago quarter. Turning to our balance sheet and cash flows. For the third quarter, we generated $2.2 million in cash flow from operations for an 11% operating cash flow margin, up from $1.7 million generated in the year-ago quarter. During the quarter, under our share repurchase program, we repurchased 895,000 shares at an average price of $5.61 per share, totaling $5 million. At the end of the quarter, $5 million of the $40 million of authorized remaining available remained available under the program. Our balance sheet remains very strong. Total cash and cash equivalents at the end of the quarter was $68.7 million. Now turning to our customer metrics. I've broken out our ARR knowledge metrics from the total metrics to highlight the momentum in our knowledge business. Looking at ARR, SaaS ARR for our knowledge customers increased 11% year-over-year, while the total SaaS ARR for all customers decreased 6% year-over-year. With the strong booking start to Q4, Ashu mentioned, we expect SaaS ARR for our knowledge customers for fiscal 2025 to increase in the high teens year-over-year. We also expect year-over-year growth in the total SaaS ARR in fiscal 2025. Turning to our net retention rates. LTM dollar-based SaaS net retention for knowledge customers was 97%, while net retention for all customers was 88%. Our LTM dollar-based SaaS net expansion rate was 103 for our knowledge customers and 104 for all customers. Looking at our remaining performance obligations, total RPO decreased 2% year-over-year and our short-term RPO of $44.3 million was down 7% year-over-year. The year-over-year declines were primarily due to the two large customer losses last year, as previously mentioned. Now turning to guidance. For the fourth quarter of fiscal 2025, we expect total revenue of between $22.8 million to $23.3 million. Turning to the bottom line. For Q4, we expect GAAP net income of $1.1 million to $1.6 million or $0.04 to $0.06 per share, which includes stock-based compensation expense of approximately $700,000, and depreciation and amortization of approximately $100,000. We expect non-GAAP net income of $1.7 million to $2.2 million or $0.06 to $0.08 per share. For the fiscal 2025 full year, due to the deals taking longer to close than previously projected, we are revising our guidance range for total revenue to between $88 million to $88.5 million, down slightly from the original range of $88.5 million to $90 million. With our ongoing cost optimization efforts, we are increasing our bottom line guidance range to GAAP net income of $2.5 million to $3 million or $0.09 to $0.10 per share, up from the original guidance range of $1.1 million to $1.7 million or $0.04 to $0.06 per share. This includes stock-based compensation expense of approximately $2.6 million and depreciation and amortization of approximately $360,000. We expect non-GAAP net income of $5.1 million to $5.6 million or $0.18 to $0.20 per share. In summary, with eGain now increasingly recognized as the knowledge foundation for enterprise AI initiatives and backed by our profitable core business, we continue to invest in product innovation to capitalize on the emerging market opportunity. Notably, we closed one of the largest deals in the company history shortly after the quarter-end, securing a significant expansion of our knowledge offering across the US mega banks enterprise. We are also seeing strong customer interest and early traction with our newly launched AI Agent for Contact Center, which is already demonstrating its potential to enhance service performance and broaden our addressable market. With that, I would like to open the call for questions.

Operator, Operator

We will now start the question-and-answer session. Our first question today is from Richard Baldry with ROTH Capital. Please go ahead.

Richard Baldry, Analyst

Thanks. Can you talk about a little bit more about the mega bank win? I'm sort of curious about the pace to roll out the deployment. How big the expansion is by scale sort of compared to what they were. Is it 50% bigger, 2x? And then maybe sort of how unique or repeatable that win was across the rest of your customer base.

Ashutosh Roy, CEO

Sure. Rich is here, so let’s start with the first question. The deployment is currently on track, and I anticipate that the customer will complete the expansion by late fall. This schedule is quite aggressive, as we have about six months for deployment in several phases. In terms of the size of the rollout and expansion, I’d estimate it’s significantly larger—perhaps around ten times our previous scale. This is a much larger deal compared to our prior engagements in the second expansion and the third deal. Regarding repeatability, we’re noticing a consistent pattern across all businesses. As I mentioned a couple of quarters ago, we used to see much more involvement with customer service and contact centers primarily for knowledge management, which remains our main entry point. However, we are increasingly observing a breakdown of functional silos due to AI influences. Consequently, businesses are looking to implement knowledge solutions that provide a single source of truth across all departments. This reflects the repeatability we are currently witnessing in our sales efforts.

Richard Baldry, Analyst

Thanks. To wrap up my questions, you've mentioned that sales cycles have been somewhat prolonged. Do you believe they have perhaps stabilized at this point? Are they worsening or improving? I'm interested in your thoughts on this.

Ashutosh Roy, CEO

I would say they're stabilized. They're stabilized. I think the increase has been mostly because of the size of the opportunities as well as the number of groups that need to be involved to go through that process of evaluation and ultimately decision. So, yeah, I would say that it's stabilized. So, it's probably more like nine to 12 months now on average as opposed to nine months. This is an extra quarter if you will add it to all of this.

Operator, Operator

The next question is from Jeff Van Rhee with Craig-Hallum. Please go ahead.

Unidentified Analyst, Analyst

Good evening, Ashu and Eric. This is Daniel standing in for Jeff. I have one more question regarding the mega bank before we shift topics. Could you elaborate on what the ramp-up looks like through the fall in terms of the process? Is it all confirmed and finalized? Will the rollout be straightforward and linear? What challenges do you anticipate in terms of implementation, training, and approvals? Additionally, regarding the revenue growth, can we expect it to be linear? How will that progression appear?

Ashutosh Roy, CEO

Sure, I can address the first part, and perhaps you can handle the second. Regarding implementation, I would say it’s not particularly unique. It’s similar to our experience with other large enterprises. The main difference here is that this bank is highly proactive in terms of AI. Their internal AI teams are more developed and they plan to utilize a substantial amount of content from our knowledge hub to enhance their AI-driven workflows for users. This aspect is quite new and promising. Aside from that, I would consider it standard for a large enterprise agreement.

Eric Smit, CFO

And on the RevRec side, the way the deal is structured, it'll be ramped up pretty much from the beginning as opposed to a phased purchase over time.

Unidentified Analyst, Analyst

Okay. That's helpful. And I think that gets sort of to my next question, which was in terms of the sequential growth we're looking for from Q3 to Q4, looks like around 10%. What's the visibility? What are the drivers of that? Is there any sort of rebound in PS? Is this all visibility from this major mega bank deal sort of starting off hot? What's the visibility there?

Eric Smit, CFO

Yeah. Exactly. I think it's a combination. I mean, given the size of this deal and the timing of it, that'll certainly have a meaningful impact on that sequential growth.

Unidentified Analyst, Analyst

Okay. And then just as we look a little further out to '26 and beyond, if a bottom was going to be reached on the growth and sort of a rebound back to positive growth, I mean, how do you think about at a high level what that growth formula would look like? Is that analytics and conversation hub hitting a bottom? Is that an acceleration in knowledge? Is that a change in top 10 customers? Where's sort of the change in that growth formula?

Ashutosh Roy, CEO

I would say that '26 should be our year of showing real top line impact of the AI Knowledge investments that we have been making for the last two years and particularly in the last year, meaning fiscal '25. So, I think we'll see the benefit of that in fiscal '26.

Eric Smit, CFO

And as I'd mentioned on the call, I think, obviously, with this deal, the ARR, which obviously is the leading indicator, we see that getting up for the knowledge business into the high teens. And so, certainly that's what we'll be targeting in that range as we look to fiscal '26.

Unidentified Analyst, Analyst

Okay. That's helpful, Eric. Thank you. And then just last for me. Just in terms of revisiting the results for this quarter. And obviously, the decline was already called out last quarter and we got to discuss it in terms of expecting some headwinds in TS and some pushouts in terms of deals slipping. But sort of beyond deals slipping and beyond PS with subscription down sequentially, just revisit. Was that churn? Is there something seasonal? Is that push out of renewals where a deal temporarily goes suspended and then it comes back just a sequential there for this quarter?

Eric Smit, CFO

I mentioned earlier that due to the shorter number of days historically, there tends to be a sequential decline in this quarter, which contributes to the results. Also, the timing of the deals being pushed out didn't lead to any significant impact on the revenue from the deals that closed this quarter. Additionally, there was some catch-up from the previous quarter that we discussed. As you pointed out, we covered these points in our last call.

Unidentified Analyst, Analyst

Okay. Thanks Ashu, Eric. That's it for me.

Operator, Operator

Showing no further questions. 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

Thanks operator and thanks everybody for listening today and look forward to providing the update at the end of fiscal '25. Thank you.

Operator, Operator

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