eGain Corporation (EGAN) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the eGain First Quarter Fiscal 2013 Financial Results. [Operator Instructions] I'd like to pass the conference to your host, Charles Messman. Please go ahead.

Good afternoon, ladies and gentlemen, and thank you for joining us today for eGain's conference call to discuss results for its fiscal 2013 first quarter ended September 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 all listeners that all statements in this release and call that involve eGain's forecasts, including the 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 release and call, 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 and call. These risks include, but are not limited to, the uncertainty of demand for eGain's products, including our guidance regarding bookings and revenue, our expectations related to operations, our ability to invest in 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 25, 2012 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, Chief Executive Officer; and Eric Smit, Chief Financial Officer of eGain Communications. To begin the discussion, I'd now like to turn the call over to Ashu Roy. Ashu?

Thank you, Charles. And good afternoon, everyone. Thank you for joining us today, and we apologize for the delay. Sorry about the 15-minute delay here. Overall, we are pleased with the strong financial results and business momentum we achieved in the first quarter which, seasonally, is a slow one for us. And the investments we made in sales throughout fiscal 2012 are beginning to deliver now. Our gross bookings for the quarter increased 76% over last year. Our new cloud bookings, which comprised 94% of all new contracts during the quarter, were up an impressive 344% over the same quarter last year. And our cloud revenue for the quarter was up 42% year-over-year. The numbers aside, impressive as they are, we also see a secular trend in our market, where enterprise lines are increasingly getting comfortable with cloud solutions. Several of our existing on-premise clients are starting to migrate to our cloud solution to enjoy greater speed to value and innovation. Also, this migration unlocks scarce IT talent that they can redeploy elsewhere. This quarter, for instance, one of our large U.S.-based insurance clients began to migrate their on-premise eGain deployment to the eGain cloud. With eGain cloud, clients get end-to-end accountability, improved customer satisfaction and rapid time to market, while we get greater long-term economic value with better revenue visibility. So it's a win-win. To further capitalize on this trend, we are investing in technology, process and automation to compress time to value for our new cloud clients. Besides improving customer satisfaction and the rate of solutions adoption, these improvements also will drive quicker revenue flow from cloud contracts. We see up to a 50% improvement in the time to value for our cloud clients compared to our on-premise clients, largely due to client-side IT backlog and procurement dependencies…

Great. Thank you, Ashu. As Ashu mentioned, we are pleased with our financial performance this quarter. We saw revenues grow year-over-year, even though our license revenue declined by 75% on a year-over-year basis. More than 2/3 of our revenue this quarter was recurring, up from 56% last year. With the higher-than-predicted new cloud bookings, we have reached a record backlog of contraction commitments of $33 million, which is up 109% from the end of the first quarter last year. This backlog will translate into increased cloud revenue for the company in the coming quarters. Looking at our change in deferred revenue. Deferred revenue on our balance sheet as of September 30, 2012, was $11.2 million, up from $8.1 million as of June 30, 2012, and $7 million as of September 30, 2011. Unbilled deferred revenue, representing business that is contracted but not yet invoiced or collected and off balance sheet, was approximately $21.8 million, up from approximately $20.7 million as of June 30, 2012, and $8.8 million as of September 30, 2011. Gross bookings for revenue plus the change in deferred for the quarter were $14.9 million, an increase of 76% over the comparable year ago quarter. Excluding the impact of exchange rate fluctuations, bookings were approximately $14.3 million for the quarter. Of the new business in the quarter, 94% were from new cloud contracts and 6% from new license contracts. This compares to 36% from new cloud contracts and 64% from new license contracts in the comparable year ago quarter. Now turning to our financial results. Total revenue for the first quarter was $10.7 million compared to $10.4 million for the comparable year ago quarter. License revenue for the quarter was $713,000, compared to $2.9 million for the first quarter last year. While we continue to see the shift…

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

Could you talk a little bit about the shift of moving the on-premise customers to cloud contracts in terms of what you see as your pipeline of active opportunities or available opportunities over the next little while? And then maybe could you talk a little bit about the -- what does this do to your revenue structure if you're able to migrate an on-premise customer that has -- already is paying a support or maintenance fee to a cloud contract?

So I think we are -- this is Ashu here. We are engaged with many of our clients. We offer both cloud and on-premise, as we have done for a while. It's just that there's a growing trend in the market toward more speed to innovation and time to value. And that's driving this kind of trend toward more cloud consumption of our solution. Look, it's hard for us to say what percentage of customers at this point would be migrating. But we see, in general, that the customer satisfaction of our cloud clients tends to be higher than the corresponding on-premise deployments, not because of any difference in the solution but because of fewer parties involved. Our control over the entire sort of deployment and solution consumption experience and also our ability to rapidly update new capabilities in the cloud without being constrained by sort of external dependencies, like IT backlog and so on. So we think that this is a trend that will continue for some time. But at the same time, it's not as if every single on-premise customer is moving to a cloud model because we do have enterprise clients who, for various reasons, would like to continue to stay in the on-premise environment. On the second point around sort of additional opportunity from these on-premise customers as they migrate to cloud, we do see -- an annuity stream coming from the cloud service that we offer even after these customers have secured a perpetual license and are paying the annual maintenance. So yes, you're right, that does create more annuity revenue streams for us as the customer moves from on-premise to the cloud environment.

And in some cases, we've had instances where the existing customer has the perpetual license and they choose to maintain the right to that license. They would continue to be paying the maintenance, and now, in addition to that, will be providing a cloud component as well.

Okay. And if they didn't do that, they just went straight to the cloud, would it be a double? Is that what you're trying to achieve? Or is it just customer by customer changes?

I think the number, it's hard to say it's double or not. But we see the cloud business -- if someone gives up their right on the perpetual license, then effectively, they then migrate to a SaaS model in the cloud with us. And then they would be paying a little more for the right to consume the software in the cloud.

Can you talk, as well, the accelerated on-boarding that you mentioned in your prepared remarks? Can you talk a little bit more about that? And what you're -- how much more quickly you're hoping to get these folks from an initial booking to start generating revenue?

Sure. So I think that, historically, we've been modeling that we required a like, on average, 90-day lag from when we booked the deal to when we start revenue recognition. And we're seeing that move up to closer to 45 days now.

That's great. And then also, the R&D that grew sequentially, are you -- is this related to sort of preparing your next iteration of the release for eGain, going from eGain 10 to the next generation?

That's a fair assumption. That and other sort of projects that we are working on altogether. There are 2 parts to the investment. One is, like you said, the next version of our major software release, as well as responding to increased customer demand and field demand. As we have ramped up our sales and marketing, we are engaged with many more customers in parallel. And so for us to ensure that they have a positive experience, we want to make sure that our product and services teams are adequately staffed.

Our next question comes from Josh Goldberg from G2 Investment.

Just a couple of quick questions. First is, by reiterating the guidance while making the cloud revenue a bigger percentage of the total, it would imply that you actually think that your bookings will come in ahead of what you originally thought 90 days ago. And I just want you to talk a little bit more about that, and then I have a follow-up.

So I think there's a -- I think the combination of the bookings elements but also the accelerated speed that we're seeing on getting the cloud deployed. So that, I would say, is certainly as much a component of this is the -- the time from when we booked the deal to when we start recognizing the revenue has had a big impact as well.

Okay. And in terms of the relationships with SAP and other partners, can you talk a little bit how those are going?

Sure. So the partner stuff continues to get a lot of focus and investment from us, and it is showing good progress in the -- our plan in this fiscal and beyond is to not just enhance our market reach through partners but also to co-develop solutions that are compelling in partnership with these clients. And so we are doing that with partners like SAP, like Cisco. And also, we are developing additional partnerships beyond the ones that we have talked about with some significant players. So what we're seeing in the market now is, given the clearing out of competitive options because of consolidation, we have become the go-to provider in the multichannel space for large companies that have a great distribution and are looking for a strong solution with proven capability and cloud offering. So the partner momentum continues nicely. And we expect to share more details with you as we are ready to share it more publicly.

Okay, great. Just to other ones. You -- on your press release, you talked about unbilled deferred revenue of $21.8 million at the end of the quarter. What was that number 3 months ago?

So we -- the unbilled deferred at the end of the year...

If you don't have it, we can come back.

That was $20.7 million as of June 30.

Okay, great. And then, I guess, my last question is by reiterating the revenue guidance for the year of $52 million to $54 million, at the midpoint of that, that would imply about $43 million of revenue, $42.5 million for the last 3 quarters. Basically, it would seem like you would be exiting this year at close to a $15 million revenue run rate. At that level, is it possible that you would be earning positive at that level?

I think that if we decided to take our foot off the growth investments, we could turn profitable in short order. But given the opportunity ahead and our competitive position in the market, we think that the best course for us right now is to drive for growth and make sure that our margins continue to stay in the right zone on the gross margin side. And that's why we share all the details of the breakdown of gross margins across different lines of revenue. But then not be slowing down on our sales and marketing investment and our product investment. So while we could turn positive, I would say that we would probably not want to because of the opportunities and continue to up the growth trajectory through this year and beyond.

Okay, great. It does sound like pipeline continues to grow and you seem to be pretty upbeat about the opportunities out there.

Yes, like I said, the secular trend in our space is our market space, which is the sole multichannel space, is becoming more mission critical. More and more companies see it as a must-have, not a nice-to-have. And again, our competitive differentiation, given the consolidation in the market, has become even stronger. So we think this is a good time to press the gas.

[Operator Instructions] And we have a question from Josh Goldberg from G2 Investment.

In terms of your new hosted bookings, what was that number in the quarter? I don't know if I heard that.

96% -- sorry, 94%.

The dollar number?

We don't disclose that.

And this ends our Q&A session. I will turn it back to management for closing remarks.

Great. Well, thanks, everybody, for listening in today. Apologies, again, for starting a little late. I think, as Ashu mentioned, we find ourselves at an interesting time here with the market dynamics. So we are focused on executing at the business level and look forward to updating you next quarter. Thank you.

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.