eGain Corporation (EGAN) Q4 2012 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to eGain’s Fourth Quarter and Full Year Fiscal 2012 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Charles Messman of the MKR Group. Sir, you may begin.

Good afternoon, ladies and gentlemen, and thank you for joining us today for eGain’s conference call to discuss results for fiscal 2012 fourth quarter and full year ended June 30, 2012. Please note this call is being recorded and will be available for replay from the investor relations section of our website at www.egain.com for 7 days following the call. Before I begin, I’d like to remind listeners that all statements in this conference call and release that involve eGain's forecasts, including above-stated guidance, beliefs, projections, expectations, including but not limited to our financial performance and guidance, the anticipated growth of our business, market trends, plans to invest in our business, and expectations regarding the market acceptance of our products, are forward looking statements within the meaning of the Safe Harbor provision of the private Securities litigation Reform Act of 1995. These forward looking statements, which are based on information available to eGain at the time of this conference call and release, are not guarantees of future results. Rather, they are subject to risks and uncertainties that may cause actual results to differ materially from those set forth in this release. These risks include, but are not limited to, the uncertainty of demand for eGain’s products, including our guidance regarding revenue and mix of new license and hosting contracts, our expectations related to our operations, our ability to invest resources to improve our products and continue to innovate, our partnerships, our future markets, and other risks detailed from time to time in eGain’s filings with the Securities and Exchange Commission, including eGain’s annual report on Form 10-K filed on September 27, 2011, and eGain’s quarterly reports on Form 10-Q. eGain assumes no obligation to update these forward looking statements. With me today are Ashu Roy, Chairman and Chief Executive Officer; and Eric Smit, Chief Financial Officer of eGain Communications. To begin management’s discussion, I’ll now turn the call over to Ashu Roy. Ashu?

Thank you, Charles, and good afternoon, everyone. Thank you for joining us today. Our sales investments are starting to show some good results. In the fourth quarter of fiscal 2012, we booked more business, including renewals, than in any other quarter in our company history. That includes the first quarter of fiscal 2011, when we booked our single largest deal ever. If you recall, that was with Vodafone. So now let me share some notable wins in the fourth quarter of fiscal 2012. We’ll start with a new client with a rather unusual name, Everything Everywhere. You may not have heard of them, but they are the number one mobile service provider in the U.K. We will provide cloud based knowledge solutions to them for customer cell service and contact centers. In this opportunity, we beat Salesforce and RightNow with our platform breadth, innovative features, and telco industry experience. Next, we won a knowledge self-service opportunity at Your Phone [ph], a rapidly growing mobile service provider in Germany. We also signed up AXA Insurance as a client in France. They are the number one insurance company in the world, as you may know. They will use our multilingual email management solution to start with. Coming to stateside, we signed up Anderson Windows, the largest manufacturer of windows in the world. They will use our cloud-based knowledge solution for customer self-service. Again, a start, and then they well add more as they look at other interactions. In partnership with SAP, we won Carestream, a leading medical imaging equipment company. They will use our knowledge solution, integrated with SAP’s CRM, for customer service. We also signed up Catamaran, a leading U.S.-based healthcare software and services provider. Many of you may know it as the old company called SXC Health Solutions. They combined with another company that they bought and renamed themselves Catamaran. They will start with our cloud-based knowledge solution as well. Finally, we won Alberta Blue Cross as a new client. Now we have 5 Blue Cross entities as clients in North America. With the continuing quality cost of regulatory pressure on healthcare, delivering better customer experience at lower cost is becoming crucial for health insurance companies and service providers alike. We also, in addition to these new clients, expanded our business with several existing clients. Notable among them were State Farm and Avon. Both opted to expand their usage of eGain in the cloud solution. So you can see the trend toward more cloud business in these wins. In fact, our second half new cloud bookings in fiscal 2012 were up nearly 400% compared to our first half new cloud bookings in fiscal 2012. Large enterprises are increasingly getting comfortable with cloud-based solutions to run their 24/7 customer-facing processes. With cloud solutions, our clients get end-to-end accountability and shorter time to market, while we get greater long term economic value with revenue visibility. So we are happy with this trend. Looking back at fiscal 2012 as a year, as we had planned and mentioned in our calls, we invested aggressively in sales and marketing while running some necessary experiments to accelerate growth. And the results were mostly positive. Where we were not satisfied we adjusted course. Part of our planned growth was contingent on aggressive sales hiring and ramp up in the early part of fiscal 2012. While we attracted good sales talent in the hiring process, I believe that we were slow to ramp them up. We could have done better. To improve sales execution, therefore, we reorganized our sales team globally earlier this quarter. I have promoted, Chuck Jepson, who was running business development for us, to a newly created worldwide role for sales and business development. Chuck now oversees and directs all our direct sales and channel sales worldwide. His mandate is to ensure effective sales performance based on consistent training and best practices. He will also ensure that we are balancing investment with performance moving forward so we can fully capitalize on the market opportunity. We have also integrated our service and support teams globally to better serve clients by matching best resources on a worldwide basis to client needs. However, not all was gloom and doom in fiscal 2012. We executed quite well on a number of fronts. We grew our new bookings in fiscal 2012 over a tough compare with fiscal 2011. We attracted strong talent across the company. For instance at the end of fiscal ’12 we have 36 sales reps worldwide compared to 20 sales reps worldwide at the end of fiscal 2011. To match it, we grew our professional services capacity by over 40% year over year. This investment will help us rapidly expand our solutions among premium clients this year. We also hired some great product talent, an investment that will show results in the medium term. Our investment in new geographies is also showing early returns. We established presence in Germany in October 2011. As I noted, Your Phone [ph] was a nice recent win for us in the telco vertical in Germany. We also established our direct presence in France last quarter, and in France we won 2 new marquee clients, AXA Insurance and Euro Disney last quarter. On the partner front, we struck a strategic partnership with SAP, as you know, in January 2012. Since then we have signed up 4 joint clients, including HP and Carestream. As planned, the first phase of the eGain product integrated with SAP’s CRM will be generally available this quarter. This product milestone will build even more momentum in our joint pipeline. Our OEM partnership with Cisco continues to be solid and successful. Now we are looking to expand on it to enable Cisco Contact Center clients to buy more applications in the eGain suite, directly from Cisco. In particular, our rich knowledge suite will be attractive for Cisco’s Contact Center clients. On the mid-market front, sales ramp has been a little slower than expected. However, based on continued pipeline strength, channel pull, and customer feedback, we believe that our strategy to recruit Cisco UCCX partners to sell an integrated eGain-Cisco solution to the mid-market is sound. In fiscal ’12, we sold the integrated solution to 8 customer, compared to 3 customers in fiscal ’11. 4 of these customers now have gone live. Others are still in deployment. All the deployed customers are happy with the solution, so we know the value proposition works. We should see meaningful sales volume from this channel in fiscal ’13. Turning to our products, we were rated a leader in the Gartner Web Customer Service MQ, or Magic Quadrant, for the fourth year in a row. In that report, Gartner noted that eGain “continues to be the most complete solution in the market.” This, coming from an analyst group that is not easily given to superlatives. Further, eGain Offers and eGain Social, 2 brand new products that we launched in version 10 last year, have been well-received by the market. In fact, Land’s End and Virgin Media, 2 sought-after brand names and early adopters in the market, spoke about their successful experience with Offers and Social respectively at our 2012 customer summit. Thanks to enthusiastic customer engagement and our agile innovation, I’m confident that we will soon have the best solution for social and proactive customer engagement as well. Today, no competitor offers the breadth of multichannel customer engagement capabilities that we do. Most are throwing in the towel to merge with larger companies or looking to cobble solutions through combinations and acquisitions. This market confusion presents a great short term opportunity for us to gain share among global enterprises who seek stable, proven, and innovative providers of multichannel customer engagement solutions. Finally, our platform based product adoption strategy is gaining more traction, especially with version 10, that we launched last year. In fiscal 2012, for instance, we sold an average of 2.3 applications to each new client, compared to 1.6 applications that we sold to each new client in fiscal 2011. This trend validates our long-pursued platform strategy to help clients reduce the cost of ownership and increase their business agility. Looking ahead, we see growing opportunity for a true multichannel customer engagement solution in a dynamic market. Furthermore, the cloud trend continues to grow, and we are happy to offer what the client wants. Finally, our premium clients are looking for even more commitment and engagement from us as they make our platform a critical component of their customer-facing processes. This is a great opportunity for us. We have a strong team to capitalize on it, and we are entirely focused on making our expanded team productive based on a scalable execution model. Now I’d like to turn the call over to Eric Smit, our chief financial officer, to discuss our financial performance for the quarter and fiscal year. And then we will be happy to take your questions. On that note, Eric?

Thank you, Ashu. Before I walk you through our financial results, I want to let you know of a change to our bookings disclosure. We have made the decision to discontinue the use of our new and gross bookings metrics and are moving to the more standard bookings definition of revenue plus change in deferred revenue. The primary reason we have not adopted this bookings definition in the past is due to our hybrid delivery model, a large percentage of our deferred revenue is off balance sheet. To address this issue, in our release today, and going forward, we will disclose our unbilled deferred revenue that includes contractual commitments not yet invoiced or collected, and therefore off balance sheet. Deferred revenue on our balance sheet as of June 30, 2012 was $8.2 million, up from $6.4 million as of March 31, 2012 and $5.8 million as of June 30, 2011. Unbilled deferred revenue, representing business that is contracted but not yet invoiced or collected and off balance sheet, was approximately $20.7 million, up from approximately $13.4 million as of March 31, 2012 and $11.9 million as of June 30, 2011. If you add the revenue for the quarter of $10.6 million to the change in our deferred revenue, you come up with the quarterly bookings number of $19.6 million. Not only is this up 36% over the comparable year ago quarter, it is the largest quarterly booking in the company’s history. Bookings for fiscal 2012, using the same formula, were $54.7 million, up 13% over fiscal 2011. Of the new business in the quarter, 80% were from new hosting contracts, and 20% from new license and support contracts. This compares to 10% from new hosting contracts and 90% from new license and support contracts in the comparable year ago quarter. Of the new business in fiscal 2012, 55% were from new hosting contracts, and 45% were from new license and support contracts, compared to 22% from new hosting contracts and 78% from new license contracts -- license and support contracts in fiscal 2011. This significant mix shift to hosting contracts negatively impacted our revenue and profitability for the year, but it increases revenue visibility for us for fiscal 2013 and beyond. Now turning to our financial results, total revenue for the fourth quarter was $10.6 million compared to $12.6 million for the comparable year ago quarter. Total revenue for fiscal 2012 was $43.4 million compared to $44.1 million for fiscal 2011. On a pro forma basis, if you take new license and hosting contract mix as being consistent with that of fiscal 2011, revenue would have been approximately $53 million for fiscal 2012. License revenue for the quarter was $2.3 million compared to $5.6 million for the fourth quarter last year. License revenue for fiscal 2012 was $11.1 million compared to $17.4 million for fiscal 2011. Recurring revenue for the quarter was $6.3 million, an increase of 21% from the comparable year ago quarter. Looking at the recurring revenue in more detail, hosting revenue was up 35% and support revenue was up 9% from the comparable year ago quarter. Recurring revenue for fiscal 2012 was $23.6 million, an increase of 18% from fiscal 2011. Hosting revenue was up 21% and support revenue was up 15% from fiscal 2011. Professional services revenue for the quarter was $2 million, an increase of 15% from the comparable year ago quarter. Professional services revenue for fiscal 2012 was $8.7 million, an increase of 31% from fiscal 2011. Looking at our gross profits and gross margins, gross profit for the fourth quarter was $6.7 million, for a gross margin of 63%, compared to gross profit of $9.7 million, or a gross margin of 77% in the comparable year ago quarter. If you look at the breakout of gross margin by revenue type, recurring revenue gross margin for the quarter improved to 77% from 73% in the comparable year ago quarter and the professional services margin was negative 22% compared to 16% in the comparable year ago quarter. Contributing to the negative PS margin for the quarter was the increase in PS costs associated with the delivery of services for new hosting arrangements, where the revenue from these arrangements is deferred and will be recognized over the life of the hosting contract. Deferred professional services at the end of the quarter was approximately $1.8 million, up from approximately $1.4 million as of March 31, 2012 and $1.3 million as of June 30, 2011. Gross profit for fiscal 2012 was $29.9 million, or a gross margin of 69%, compared to gross profit of $33.1 million, or a gross margin of 75% for fiscal 2011. This decrease, again, is primarily due to the shift to hosted based business resulting in a decrease of our license revenue as a percentage of total revenue. The recurring revenue gross margin for fiscal 2012 improved to 77% from 74% for fiscal 2011 and the professional services gross margin for fiscal 2012 was 7% compared to 16% for fiscal 2011. Turning to our operating costs, total operating expenses for the quarter were $9.4 million, an increase of $2.1 million, or 28%, from the comparable year ago quarter. Most of this increase comes from the planned increased investments we have made in sales and marketing. Total operating expenses for fiscal 2012 were $33.1 million, an increase of $9.6 million, or 41%, from fiscal 2011. And, again, approximately $6.5 million of this increase was related to new personnel and related personnel costs for the sales group. Included in total costs and expense was stock based compensation expense for the quarter of $336,000 compared to $60,000 in the comparable year ago quarter. The stock based compensation for fiscal 2012 was $854,000, up from $218,000 in fiscal 2011. GAAP loss from operations for the quarter was $2.7 million, or an operating loss of 25%, compared to income from operations of $2.4 million, or an operating margin of 19% in the comparable year ago quarter. GAAP loss from operations for fiscal 2012 was $3.1 million, or an operating loss of 7%, compared to an income from operations of $9.7 million, or 22%, for fiscal 2011. On a pro forma basis, if the new license and hosting contract mix was consistent with fiscal 2011 in fiscal 2012, we would have shown an operating profit of approximately $6.2 million, or an operating margin of 12%, for fiscal 2012. Net loss for the fiscal fourth quarter was $3.4 million, or a loss of $0.14 per share compared to net income of $2.1 million, or $0.09 per share on a basic and $0.08 per share on a diluted basis for the comparable year ago quarter. Net loss for fiscal 2012 was $4.9 million, or a loss of $0.20 per share, compared to a net income of $8.5 million, or $0.37 per share on a basic, and $0.35 per share on a diluted basis for fiscal 2011. Now turning to our balance sheet and cash flows, total cash, cash equivalents, and restricted cash were $10.9 million at the end of fiscal 2012 compared to $12.5 million at the end of fiscal 2011. Cash flow from operations for fiscal 2012 was $900,000, compared to $6.8 million for fiscal 2011. Total net accounts receivable was $6.5 million at the end of fiscal 2012 compared to $8.2 million at the end of fiscal 2011. Turning to our deferred revenue, as I mentioned earlier, deferred revenue on our balance sheet as of June 30, 2012 was $8.2 million, up from $6.4 million as of March 31, 2012 and $5.8 million as of June 30, 2011. Unbilled deferred revenue, representing business that is contracted but not yet invoiced or collected and off balance sheet, was approximately $20.7 million, up from approximately $13.4 million as of March 31, 2012 and $11.9 million as of June 30, 2011. Looking at our debt obligations, our bank debt was $3.3 million at the end of fiscal 2012 compared to $5 million at the end of fiscal 2011. Our related party debt was $5.6 million at the end of fiscal 2012 compared to $5 million at the end of fiscal 2011. During the quarter, we extended the maturity of the related party debt through the end of July 2013, and we did this at the reduced interest rate of 8%, down from the original rate of 12%. Now turning to our guidance for fiscal 2013, based on an estimated split of 40% new license and support contracts and 60% new hosting contracts for fiscal 2013, eGain is estimating total revenue growth for fiscal 2013 to be between 20% and 25% and total hosting revenue growth of approximately 40%. This mix in license and hosting may change during the year, and if it does, this may impact our revenue guidance. And so we plan to update you on any significant mix shifts throughout the year. This ends management’s presentation. We will now open up the call for questions. Operator, we will now turn it back to you to open up the call for questions.

[Operator Instructions] Our first question comes from Noel Atkinson from LOM.

I was wondering if you could talk a little bit about your outlook for fiscal 2013 in terms of your split between the hosted and the license. Are you starting to see demand again from folks for the licensing? Or is this just something that you’re expecting to just sort of come back over the next little while?

The rate at which we have seen the change over the last 6 months, compared to, say, the last 6 months before that, has been somewhat steep, and so what we see happening in a lot of these large enterprise opportunities is that the customer keeps their options fairly open until the advanced stages of the opportunity. And so we are not sure how to model that in a very reliable way. But we are seeing a secular trend toward more cloud. It’s just not clear if that may oscillate a little quarter by quarter before it steadies into an annual trend which is more predictable.

And then you spent quite heavily in the fourth quarter, and it looks like the bookings grew as a result as well. Do you want to talk a little bit about where you think you folks are going to be investing in sales in fiscal 2013? Are you going to be able to slow down or stabilize the sales as a percentage of revenue?

The way we are approaching fiscal ’13 from a sales and marketing standpoint is to say, look, we have hired up very aggressively through the end of fiscal ’12, and this quarter we have kind of gone into a higher grade talent mode, but not necessarily hired up to increase territorial coverage. And now what we are doing is focusing on ramping up these sales reps and I believe that this quarter, once we are through that process, then we start to engage again in increasing territorial coverage. And so I do think that there will be some slowdown in the first quarter and maybe a little in the second quarter, but we’ll probably pick up again on the expansion of the direct sales coverage in the second half of the year.

Our next question comes from Jon Hickman from Ladenburg.

I was wondering if you could tell me what the -- you said the trend in the quarter was 80% hosting and 20% licensing. If you look back 6 months, what are the percentages?

If you look at the first 6 months of the fiscal 2012, our hosting bookings in the second half were, to be precise, 384% of the hosting bookings for the first half of fiscal 2012.

I was just trying to dig a little deeper on that first question. It seems like the way the trend is going it’s much more than 60% hosting and I guess I’m wondering what gives you the feeling that licensing is going to come back.

Some of the pipeline visibility as well as the fact that we -- if you look at the entire year, the percentage has been not as steep, right? So I guess if the trend continues and this is the trend, then you’re absolutely right. But we’ve seen these oscillations in the past. So even though the secular trend is in that direction, we’re not sure if we want to, necessarily, call an extreme cloud percentage mix for fiscal ’13.

It was 75% cloud to 25% in the second half of the year. And the first half, it was more like...

So that’s primarily the reason, but you have a valid point. And we’ll keep everyone informed as we see the quarterly changes.

So are you going to tell us every time you do a call?

Yes, we’ll share that.

Would you update us in between quarters?

Probably not between quarters, but certainly on the call. And I think another point to add to this is, again, with the partner relationships. These are at the early stages of it, but certainly the tie in with the license part of the business, that most of the partner customers may have an installed base opportunity. Not to say that they wouldn’t go with our SAS model in that case, but that’s also part of our modeling here.

Then could you explain to me a little more the professional services? You do all the work, but you don’t get to recognize the revenues for those services?

That’s correct. For the accounting treatment for the professional services revenue for the pure hosting opportunities, we bill the customer and collect the payment for it, but the recognition of that revenue is then spread out ratably over the life of the hosting contract. So as we’ve seen the movement toward more of the hosting business, that’s had an impact on the recognition of the PS revenue.

So when would you expect that to catch back up, and you start having positive margins there?

Certainly from a positive margin standpoint we expect that to be starting next quarter, because I think the other combination of the negative margin was also the additional ramp up in the PS group that did the additional hiring. So there’s some element of that tied toward getting that PS group productive as well.

And then, Eric, just one last question. I remember you said that in the quarter on the recurring revenue side, hosting was up some percent. I missed that. And support was up 9%? Was it like 35%?

Sorry?

In the fourth quarter, you were talking about your recurring revenues, and you said that hosting was up 35% and support was up 9%?

Right. So the recurring revenue -- the hosting revenue was up 35%. And support revenue was up 9%.

And that’s sequentially?

No, that’s compared to the year ago quarter.

Our next question comes from Noah Steinberg from G2 Investment

I wanted to know if you would provide the unbilled deferred revenue on the off balance sheet for the first 2 quarters of the year.

We don’t have that information available at the moment.

And then also, for SAP, are there any 10% source of revenue?

Not yet. And as we pointed out, we announced the partnership in January, so it’s been 8 months, and now with the first product launch off that integrated product, this quarter, we expect that that pipeline is going to build up better.

And our next question comes from Noel Atkinson from LOM.

Can you guys talk a little bit about the competitive environment? You mentioned in your prepared remarks that you won out in the U.K. over Salesforce and RightNow. Who are you seeing as prime competitors in the space right now? And if you could talk a little bit about what’s happening for what I would call your self-service or inbound tools versus your outbound sales support tools.

On the service side, as in customer service side, I think most of our competition now is with the bigger companies that have signed up or integrated through acquisition. So whether it’s Oracle or whether it is Salesforce -- because Oracle has RightNow and InQuira inside them -- so I think most of our competition comes from that. And a little bit comes from the smaller point solution vendors, but that’s not really significant. On the sales side, the competition is mostly with the ATG group of Oracle, as well as with LivePerson. So that’s how I would characterize the primary competition sources.

[Operator Instructions] I’m showing no one else in queue at this time.

Well, thank you again for joining us today on the call. We believe that this is a very exciting time for eGain, and we continue to build a world-class organization. So should you have any questions or comments, please feel free to give us or our investor relations firm a call. I’m looking forward to talking with you on our fiscal first quarter call. Thank you.