Earnings Call Transcript - EGAN Q2 2022

Operator, Operator

Good day and welcome to the eGain Fiscal 2022 Second Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jim Byers and MKR Investors Relations. Please go ahead, sir.

Jim Byers, Investor Relations

Thank you, Operator, and good afternoon, everyone. Welcome to eGain's Second Quarter of Fiscal 2022 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, February 3rd 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 to 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 www.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. 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 have had a good quarter. We are actually rating our top-line growth and flatness. Our total revenue in the second quarter was $23.1 million, up 20% year-over-year and up 8% sequentially. Quarterly SaaS revenue grew 26% year-over-year, and 7% sequentially. So it’s an execution cycle which we are deep into, and we are increasing our focus on it. Let me share some notable new logos in the quarter. A top U.S. insurance company selected our knowledge hub for customer service and number engagement. They plan to deploy it across tens of thousands of contact center reps and field agents. Interestingly, this company had chosen to go with another provider a few years ago. At that time, we were the unfortunate recipients of the rejection letter as the moving finalist. So this win is sweet for us. The second example I want to mention is a major U.S. airline. They have selected our platform as part of their contact center modernization program. And interestingly, we won this client in partnership with Avaya. We also saw some interesting expansions in the quarter. A large U.S. financial services client is expanding the use of our conversation hub to deliver billions of proactive, personalized member notifications across all touch points. Our unique composable architecture of the conversation hub is very attractive to clients like this. They are looking to compose new experiences for customers by bringing together best-in-class capabilities within an API ecosystem. This is something we are seeing more and more of, which is quite interesting. The second expansion I want to mention is a large U.S. based utility company, significantly expanding the use of eGain as part of a large contact center modernization program. Noteworthy here is that we are expanding this customer footprint in partnership with Cisco. So from the ecosystem front, which is something we've been working on for a while, we're making good progress. Our goal is to integrate with most of the leading contact center and CRM platforms using our open APIs. I want to mention three new ones that are noteworthy here. First is 59, where we have certified our knowledge capability, which is now connected and published on the 59 CX marketplace. Next, with Genesys, our knowledge hub connector is now certified and available on their Genesys AppFoundry. The third is ServiceNow. Just earlier today, we announced our certified connector with ServiceNow, BuiltOn now, which is their new platform. We see knowledge management as a horizontal need across customer engagement. Our goal is to make it super easy for partners and customers to use our knowledge and our platform alongside all their current CRM and contact center investments. Most companies in the enterprise market have more than one CRM and more than one contact center platform operational. Our approach is simple: we are building these 35 connectors with leading contact center and CRM platforms. This makes it really attractive for our customers to deploy our solution across all those CRM and contact center platforms, even as they execute their migration and transformation plans for the underlying investments. On the customer success front, we're very pleased that our clients, BT Consumer, won the 2021 KM Reality Awards in November last year. This is a big deal for them and a huge deal for us. Interestingly, they were the sole winners of this award in 2021. If you have a moment, check out the article that announced that award on the CareMore website. It's hyperlinked inside our press release that we put out for the quarter. I think you will be impressed with the detail and the business value that they share about the value they generate with the eGain knowledge hub at scale. They have over 10,000 contact center agents handling 0.5 million inquiries every week, which amounts to just over 25 million inquiries every year. It’s quite amazing the value they're getting. The business value they achieved has been shared, and the operational streamlining they have now accomplished is exactly what our prospects are looking for. What everyone is seeking now is a modern knowledge hub that is conversational, automated, intelligent, and composable. So to us that's a great story. On the product front, we have some exciting news for us. We've received our FedRAMP authorization. This is the best holiday gift we could have imagined, coming through in late December. Congratulations to our product team. It's been a long road, taking 18 months since the start of this process to achieve this authorization for our private suite. I want to thank the IRS leadership team for sponsoring us in this process. We're continuing to partner with them to help modernize the tax experience with our solution. Currently, we're one of the few knowledge-powered platforms in the FedRAMP authorized approved marketplace. As far as we know, none of our knowledge competitors that we track closely are in that FedRAMP mix. Over the last month, we're seeing growing inbound interest from partners who are focused on the federal and state markets, particularly federal, inviting us into opportunities where they need FedRAMP authorized capability for knowledge management and digital engagement. While sales cycles are understandably long in the government sector, these opportunities are quite attractive. Our solution is a good fit. This is exciting. In conclusion, with our continued product leadership, expanding ecosystem capability, our FedRAMP authorization, and enhanced sales and marketing capability, we are looking forward to continuing this momentum in the second half of the year. With that, I'll ask Eric Smit, our Chief Financial Officer, to add more details around our financial operations.

Eric Smit, CFO

Thanks, Ashu, and thanks everybody for joining us today. As Ashu noted, we delivered record total revenue in the quarter of $23.1 million, up 20% year-over-year, well ahead of our guidance and consensus estimates. SaaS revenue was $20.5 million, up 26% year-over-year, 7% sequentially, and accounted for 89% of total revenue. Looking at non-GAAP gross profits and gross margins, gross profit for the quarter was $18 million or a gross margin of 78%, up 200 basis points from 76% a year ago. Turning to operations, non-GAAP operating costs for the quarter came in at $14.8 million compared to $12.3 million in the year-ago quarter. The increase was primarily driven by investments in sales and marketing, which increased 22% year-over-year. Looking at our bottom line, non-GAAP operating income in the quarter was $3.2 million or an operating margin of 14%, up from an operating margin of 12% in the year-ago quarter. Non-GAAP net income for the quarter was $3 million or $0.10 per share. This compares to non-GAAP net income of $2 million or $0.06 per share on a diluted basis in the year-ago quarter. Turning to our balance sheet and cash flows, our balance sheet remains strong with cash flow from operations of $4.7 million for the first six months of the fiscal year, or 11% operating cash flow margin. We ended the Second Quarter with total cash and cash equivalents of $68.5 million, up 26% from a year ago. Turning to our customer metrics, as Ashu mentioned, a strong booking in the quarter reflected new customer wins, as well as expansions and renewals with existing customers. This is highlighted by the improvements in several of our customer metrics for the quarter. Our LTM dollar-based SaaS net retention rates increased to 112%, up from 103% a year ago. Our LTM SaaS expansion rates increased to 119% from 115% a year ago. Our SaaS ARR excluding OEM customers increased 25% year-over-year. Our short-term RPO increased 10% year-over-year to $58.7 million. Our long-term RPO increased 32% year-over-year to $89.8 million. Now, onto our financial outlook and guidance. As I noted on our last call, our primary focus is on top-line growth. We've seen positive early results from our increased investments. Based on this success, we plan to continue investing in sales and marketing to further increase our brand awareness and capture greater share of the massive market opportunity we see in front of us. Before sharing our updated guidance, I would like to highlight a few changes. Based on our strong results in Q2 and positive outlook for the fiscal year, we are raising our annual revenue guidance. We're also updating our bottom-line guidance to reflect our year-to-date performance while remaining committed to making the necessary investments to drive sustainable top-line growth. Now on to the guidance. For the third quarter of fiscal 2022, we expect total revenue of between $22.9 million to $23.5 million, representing growth of 16% to 19% year-over-year. Note that this guidance takes into account that this current quarter has fewer days than in Q2, translating into approximately $400,000 less revenue. Also note that with the start of the new calendar year, bookings tend to be more back-end loaded this quarter, and that's not expected to materially contribute to revenue in the quarter. We expect third quarter non-GAAP net loss of breakeven to a million or a loss of $0.03 per share. GAAP net loss of $3 million to $4 million, or a loss of $0.10 to $0.13 per share. We estimate share-based compensation expense will be approximately $3 million and depreciation and amortization expense will be approximately $120,000 for the quarter. For fiscal 2022, full year ending June 30th, 2022, we expect total revenue of between $90.5 million to $92 million, representing growth of 16% to 18% year-over-year, an increase from our previous annual revenue guidance, non-GAAP net income of $1.5 million to $3 million or $0.05 to $0.10 per share. GAAP net loss of $9 million to $10.5 million, or a loss of $0.29 to $0.33 per share, where we estimate share-based compensation expense of approximately $12 million and depreciation and amortization expense of approximately $500,000 for the year. In summary, we saw continued positive momentum in Q2 with a second consecutive quarter of record total revenue reflecting double-digit growth. We're on track with our sales and marketing investments to expand our market coverage and partner ecosystem. Our product leadership in knowledge management and digital customer engagement continues to build momentum, generating increased interest and activity in our business pipeline. With our recent FedRAMP authorization, we’re already seeing increased demand for our solutions from potential federal and large state government agency clients. Based on this recent performance and the significant market opportunity, we are also updating our target model included in our Q2 investor presentation that can be accessed from the IR section of our website. For our interim targets, which we define as in one to two years, we are raising our annual revenue growth rate to 20% from 15%. For our long-term targets, which we define as in three to five years, we are raising our annual revenue growth rate to 30% from 25%. Lastly, on the Investor Relations calendar, eGain will be presenting and meeting with investors at the Annual Roth Conference taking place March 14th and 15th in Dana Point, California. We'll provide more details as we get closer to that date and hope to see some of you there in person. This concludes our prepared remarks. Operator, we will now open the call for questions.

Operator, Operator

We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will now take our first question from Mr. Richard Baldry from Roth Capital. Your line is open. Please go ahead.

Richard Baldry, Analyst

Thanks. Can we talk about the sales productivity levels that you're seeing? What's your longer-term outlook as well as the newer cohorts? And then the progress that's being made on building new sales cohort teams to ramp up in the second half or for fiscal '23? Thanks.

Ashu Roy, CEO

Sure. This is Ashu here, Rich. Yes. So our sales productivity on the core team, which has been around for over a year, is holding steady, which is good. The new group, the first cohort that we brought in earlier this fiscal year is getting the pipeline going now. The second cohort for this fiscal year, which is from our current hiring, is also underway. We have this cadence now which will essentially do two cohorts every fiscal year, six months apart, and training and the onboarding part is working quite well.

Richard Baldry, Analyst

The professional services costs line went up fairly meaningfully in the quarter, more so than the revenue side. Do you feel like the revenues there are probably going to see an acceleration? Are you hiring to support that shift, or are there any one-time factors we should consider that may skew that number?

Ashu Roy, CEO

Eric, do you want to take that?

Eric Smit, CFO

Sure. That’s a good point, Rich. We are increasing our investments to grow the business, so that's certainly the expectation that we would see the professional services line increase too. I think towards the end of the year, there were some fluctuations driven by the holiday periods and the like that might have contributed to that number being a little higher. But overall, the focus is on increased investments to drive revenue growth.

Richard Baldry, Analyst

Under legacy maintenance side, it came down a little bit sequentially but at a slow pace versus some of what we've seen in prior quarters. Can you talk about how long it takes to phase that out? It's a small revenue stream for you now, but do you think this is a year we could see it gone, or do you feel like because those customers are still important to the business that we could see this as a multi-year transition to the Cloud?

Ashu Roy, CEO

Different license, please continue, Eric.

Eric Smit, CFO

I think we're certainly pushing to get it done within the year. As we've mentioned in the past, what we expect to see is somewhat of a step function because the remaining balance is fairly concentrated. So when one or two of these larger accounts move, as we've seen before, they might be flattening, then we will see a fairly meaningful decline. So I'd say that's sort of the pattern we expect to continue. But Ashu, if you have any further insights on that.

Ashu Roy, CEO

That is exactly right. I would venture to guess that in the next 12 months we will probably reduce it by 80% gross, and at that point, we will ignore it.

Richard Baldry, Analyst

Lastly, can you talk a bit about seasonality, because implying the guidance as a flat third quarter, which is at odds with the win rates that are accelerating inside the data we're getting, the number of heads that are ramping. Do you feel there's any one-time event we need to be thinking about as we look at the sequential growth patterns or is this just appropriate conservatism? Thanks.

Eric Smit, CFO

The one item just to reiterate that I’ve mentioned in the remarks, Rich, is that in Q2 numbers, we benefited from closing business early in the quarter. We recognized revenue from deals closed early which was ahead of our expectations. In our Q3 guidance, many of the enterprise customers that we're selling to have annual budget cycles that are just closing now. The expectation is that the bookings occurring in Q3 are not expected to materialize as revenue in the quarter. Meanwhile, we saw much of the upside recognized already in Q2.

Richard Baldry, Analyst

Great. Congrats on the accelerating momentum.

Eric Smit, CFO

Thank you.

Operator, Operator

We will now take the next question from Tim Horan from Oppenheimer. Your line is open. Please go ahead.

Tim Horan, Analyst

Thanks, guys. Can you give a little bit more color on the dollar-based net retention? That's a pretty significant year-over-year improvement. Is that due to less customer churn, or is it mostly because of customers spending more? And where do you see the potential for this to go over time?

Ashu Roy, CEO

Thanks, Tim. I think both points are correct. We've talked about our focus on increased investments in our customer success team, which helps with retention and expansion within existing customers. The good news is that we still believe we are under-penetrated, so the ability to continue to grow that number over time is likely. We previously had some significant churn reductions just over a year ago, contributing to that improvement. Since then, we have not seen such a significant level of churn in the business.

Tim Horan, Analyst

Can it continue to improve like we've seen? I mean, could we get up to 120% this year or next? Or would that growth help drive the 30% growth you're discussing?

Ashu Roy, CEO

Yes, we certainly see that as a possibility. The continued investments we’re making in expansion will also contribute to improving this metric.

Tim Horan, Analyst

What do you think is the bottleneck to getting better digital interactivity for customers and better overall customer experiences? When will those bottlenecks start to ease, allowing for better quality of services and revenue growth overall?

Ashu Roy, CEO

You're asking a very big question here. Our view is limited, but I think a reasonable one, which aligns with Gartner's view on customer service. In 2022, they have said that the only technology they recommend for improving customer service is knowledge management. Companies have spent a considerable amount on digital connectivity for customer service and on cloud moves. However, they are realizing that while they now have a digital connection, the conversation and content flowing through these connections are still broken. Therefore, knowledge management becomes essential to creating modern knowledge experiences, which are automated, intelligent, and conversational to drive better customer experience.

Tim Horan, Analyst

What do you think is the bottleneck to adopting this or really seeing significant improvements in customer experience? What does the industry need to do at this point?

Ashu Roy, CEO

Essentially, the industry needs to invest in knowledge management. Gartner suggests that leaders in digital transformation are disproportionately investing more in knowledge management right now. This indicates that as companies invest in this area, it will impact their transformation positively.

Operator, Operator

Ladies and gentlemen, we will now take the next question from Jeff Winfrey from Craig-Hallum Capital Group. Your line is open. Please go ahead.

Aaron Spychalla, Analyst

Hey guys. This is Aaron on for Jeff. I appreciate you taking my questions. First question. I know in the past you've provided some bounds around new logo capture. Just curious if you have those metrics for what that looks like in the quarter and how that broke down between direct versus partners? Maybe some color there?

Ashu Roy, CEO

Thanks for the question. We're not sharing systematic numbers right now because our focus has shifted to the quality of logos we are closing. The enterprise focus is yielding the biggest returns for us. We're not trying to close hundreds of logos every quarter; instead, the goal is quality logos resulting in higher ARR averages. That's where our attention is, and it’s working well for us.

Aaron Spychalla, Analyst

Got you. That's helpful. And as far as new logos, how is the breakdown between direct versus partner sales?

Ashu Roy, CEO

Right now it’s probably about 50/50 between partner and direct sales for new logos, and I think both areas are performing well.

Aaron Spychalla, Analyst

As for the knowledge management space, could you discuss how use cases have changed among your customers and what you think your revenue mix might look like going forward? How much will that skew towards knowledge management versus traditional customer care?

Ashu Roy, CEO

The trend is definitely favoring knowledge management, but digital is also performing well. It’s just that the bigger opportunities are leaning toward knowledge first, which is the current trend.

Aaron Spychalla, Analyst

Last one for me on the hiring front. You talked about having two cohorts per year. Previously, you mentioned an anticipated capacity increase of 50%. Is that still accurate, and is that the trend moving forward?

Ashu Roy, CEO

Definitely, yes. We’re aiming for more than that, but 50% is a conservative number that we plan to surpass.

Operator, Operator

Ladies and gentlemen, it appears there are no further questions at this time. I would now like to turn the conference back to eGain management for any additional or closing remarks.

Ashu Roy, CEO

Thanks, Operator, and thanks everybody for taking your time to listen to the update today. We look forward to updating you on the Q3 results and are excited to start meeting in person in the coming quarter. Thank you.

Operator, Operator

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