eGain Corporation (EGAN) Q2 2013 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the eGain Second Quarter Fiscal 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this program is being recorded. I would now like to introduce your host for today’s conference, Mr. Charles Messman, of the MKR Group. Please go ahead.

Good afternoon everyone and thank you for joining us today for eGain conference call to discuss the results for the fiscal 2013 second quarter ended December 31, 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 seven days following this call. Before I begin, I would like to remind all listeners that all statements in this release that involved eGain forecast, including the above stated guidance, beliefs, projections, expectations, including but not limit 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 expenses of our products are forward-looking statements within the meaning of the Safe Harbor Provisions 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, 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 on this call. These risks include, but are not limited to, the uncertainty of demand for eGain products including our guidance regarding bookings and revenue; the our expectations related to our operations, our ability on best 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 the eGain’s Quarterly Reports on Form 10-Q. eGain assumes no obligations 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. 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. We are very pleased to report continued strong bookings this quarter. Our impressive revenue growth in the quarter is largely the result of our sustained bookings momentum over the last few quarter. These bookings momentum in turn as you know, as the result of our ramp sales and marketing investments through fiscal 2011 and 2012. So, now, these bookings are showing up in our top-line even as we are getting better revenue visibility, thanks to our growing backlog. As the story that we’ve been telling you all for some time is starting to show what we thought it would show as, and that’s happening. Specifically bookings for the quarter increased 57% over last year, new cloud bookings which comprised 75% of new contracts during the quarter was up an impressive 263% over the same quarter last year. With the strength in cloud bookings, we ended the quarter with twice the backlog from a year ago up to, a little over 40 million. Our cloud revenue for the quarter was up 76% year-over-year and we also generated approximately $10 million in operating cash in the year-to-date basis, ending this quarter with nearly $20 million on our balance sheet. We intend to continue investing in distribution growth and client success to capitalize on the market opportunity in front of us as well as the favorable competitive dynamics that have emerged over the last year or so with many of our direct competitors getting acquired by larger companies. So, let’s look at some of the customer activity in the quarter. This quarter we signed up a multi-million dollar cloud deal with an existing on-premise client in North America. As Bob has revealed, we will migrate all the eGain applications from…

Thank you Ashu. We are pleased to report solid financial results for this quarter with sustained cloud bookings over the last few quarters are starting to positively impact our top-line. This quarter, we generated growth in total revenue of 37% sequentially and 36% year-over-year. For the first six months ended December 31, 2012, total revenue was $35.5 million an increase of 20% on a year-over-year basis. More than half our revenue this quarter was recurring and backlog at quarter end was $40.5 million, up 127% from last year. This backlog is primarily related to cloud contracts and we’ll translate as you increase cloud revenues for the company in the coming quarters. To give you a better understanding of how significant the mix of our new business has been. Of the new business, if you look back to fiscal 2011, 24% of that was from new cloud contracts and 76% from new license contracts. Whereas of the new business this quarter, as Ashu mentioned, 75% was from new cloud contracts and 25% from new license contracts. This compares to 39% from new cloud contracts and 61% from new license contracts in the comparable year ago quarter. Of the total new business for the first half of fiscal 2013, 82% was from new cloud contracts and 18% from new license contracts, this compares to 38% from new cloud contracts and 52% from new license contracts in the same period last year. In addition to the shift of the new business to clouds we have also seen an overall increase in total revenue from the cloud customers. As Ashu mentioned, we achieved the milestone where now 60% of our total revenue in this quarter came from our cloud customers. With the shift to predominantly cloud business, going forward we plan to aggregate bookings…

(Operator Instructions). Our first question comes from the line of Noel Atkinson from LOM. Your question please. Noel Atkinson – LOM: Hi Ashu and Eric, congratulations on an outstanding quarter.

Thanks Noel. Noel Atkinson – LOM: I was wondering if you could talk a little bit about the professional services gross margin, do you guys see that as a sustainable levels going forward?

So, the way we see services, there are two parts to it, not surprising, one is the top-line, the other is the cost structure. And I think the top-line will continue to see more demand, so I think that will move in the right direction on the services side. The cost structure will continue to vary a little in the sense that when we ramp up our sort of team building to plan for anticipated growth and delivery requirements down the road, there will be some sort of temporary blips on the gross margins, right. But in a secular mode if you look at it multiple quarters, I would say that’s a reasonable statement. Noel Atkinson – LOM: Okay, good. And how about licenses, so you had the best quarter for license sales I think in quite some time, six plus quarters I guess. Can you talk a little bit about where that demand was, was that Germany or was it any specific vertical?

So, a significant portion of that was our OEM business partnership with Cisco, and Cisco has been a steady contributor if you will for – from the revenue standpoint. But first quarter of fiscal ’13, which we’re in – the September quarter, the Cisco numbers were not high partly because of some catch-up stuff that we were going through. But so, they have kind of moved up a notch in terms of what they are seeing in the market on the OEM side, and that’s helping. Other than that, I would say it’s been the usual business, and as you know our Q1 and Q3, fiscal Q1 and Q3, tend to be soft on deals, just because of the European summer vacation schedule in Q1 and then Q3 because of the usual budget building cycles in the calendar Q1 timeframe. So, Q2 and Q4 tend to be stronger and so that’s part of what you might be seeing. Noel Atkinson – LOM: Now, given your great results in the quarter and then your sort of consistent guidance, are you folks expecting to see positive net income for the second half of the year?

I think at this point, no, I think to the point that we made, we certainly – our plans are to continue to invest in the sales and marketing. We took a little bit of a breather in the first half of the year. So, from that standpoint, I think we should expect to see sort of increased investments going forward. So, again, it will be a function of the revenue mix, but at this point that is not our primary focus we’re looking to deliver a profit in the second half of the year again, given the opportunity in front of us. Noel Atkinson – LOM: And then the last question is, so you had a big jump sequentially in your cash. So, what – was that a catch-up, was it a collection, or because you’re even seeing this growth of cloud bookings by whatever reason this was the first quarter where you’ve really seen it hit the books in terms of cash?

Yeah, that’s a good point. So, I think I would say that – things are aligned for us well, this particular quarter where generally most of our new bookings have come in right at the end of the quarter. And therefore there is a lag in any cash associated with that could be ordinarily coming in the following quarter. This time around we were able to invoice and collect on some of the new contracts in this quarter. So, I would say that, going forward, certainly as we continue to invest in the business, we will certainly be monitoring the cash position, but I wouldn’t expect to see the type of increase sort of quarter-in and quarter-out going forward. Noel Atkinson – LOM: Okay, all right, thank you very much.

Thank you. Our next question comes from the line of Jon Hickman from Ladenburg Thalmann, your question please. Mr. Hickman, you might have your phone on mute. Jon Hickman – Ladenburg Thalmann: Hi, thanks, can you hear me now?

Yes.

Yeah. Jon Hickman – Ladenburg Thalmann: Thanks for taking my questions and very good quarter. I do have a couple of questions if you don’t mind. Would you give us – what you said in bookings were $21 million in the quarter, is that what you said Eric?

That’s correct. Jon Hickman – Ladenburg Thalmann: And that’s versus what were they last quarter total bookings?

So, the total bookings last quarter were, just bear with me a second. Jon Hickman – Ladenburg Thalmann: I mean, it’s like a 100% increase, isn’t it?

Not quite 100%, we’re at about $15 million. Jon Hickman – Ladenburg Thalmann: For the last quarter, okay. Okay, thank you. And then, you’re not going to breakout cloud bookings versus the rest of it anymore, you’re just going to give us a total number?

That’s I think, just as we feel like we’re turning the corner on this, I think going forward this is something that we would want to sort of not broil on this as much as we got in the past, now that we’ve seen several quarters of making this shift. So, that is our current line of disperse. Jon Hickman – Ladenburg Thalmann: You did say that card bookings were up 263% year-over-year?

That is correct, yeah. Jon Hickman – Ladenburg Thalmann: Okay. So, could you help me or help us understand the last caller’s question about profitability in the second half. So, could you, SG&A expenses have been, they were quite a bit lower on a percent of revenue basis this quarter. You would expect them to go back to I know what they’ve been in the last few quarters?

That is – again, it’s all subject to the timing as we move forward to sort of ramp up the spending, that would certainly be our expectation that we would be getting closer to that range versus from where we are. Jon Hickman – Ladenburg Thalmann: So, it just depends on how fast you do that?

Exactly. Jon Hickman – Ladenburg Thalmann: Okay, okay. And then, I think my other question was about professional services, but you covered that. So, I guess, that’s it from me. Thanks again.

Thank you. Our next question comes from the line of Ellis Steinberg from G2 Investment Partners, your question please. Noah Steinberg – G2 Investment Partners: Hi, it’s Noah Steinberg, how are you guys, very nice job.

Thanks a lot. Noah Steinberg – G2 Investment Partners: So, just a few questions. What is the – I know you’re very focused on sales and driving the sales here and the bookings. How many sales reps do you guys have currently?

35. Noah Steinberg – G2 Investment Partners: And where was that a year ago?

A year ago, that number was more like 18. Noah Steinberg – G2 Investment Partners: And have these been higher than the last six months or were they last year and you took a cause in the beginning of this fiscal year?

More like, it was up until the end of fiscal ’12 and then we sort of – though we’ve hired one or two here or there, but it’s been mostly in a consolidation mode right now for the last couple of quarters. Noah Steinberg – G2 Investment Partners: Okay, great. And then, on the – on the revenue and the bookings, were there any 10% or large deals and the revenue and also – and the bookings this quarter and that $21.8 million that you talked about?

So, I don’t have the answer on the 10% on the revenue, I think certainly we had a couple of large multi-million, at least one of them was a multi-million dollar deal that is more than 10%, yes. Noah Steinberg – G2 Investment Partners: In that bucket?

In that bucket. Noah Steinberg – G2 Investment Partners: Okay, okay. And the $21.8 million that you had in the gross bookings, that’s been very nice growth. What was the – was that mostly coming from new hosting and license bookings or was there – were there big maintenance and professional services and hosting renewals in there or which would you say is just coming from new business or is it coming from renewals?

Most of it was coming from new business. Noah Steinberg – G2 Investment Partners: Great. All right, that’s all I have for now, thank you so much. And great job.

Thank you. Our next question comes from the line of Wyatt Carl from Monarch Base Securities, your question please. Wyatt Carl – Monarch Base Securities: Hi, Eric and Ashu, congratulations on the quarter. Just quickly, could you kind of give a sense of the new business versus extension business from current customers, the large contract that you got which is a ratable contract. That I’m assuming is an existing customer?

That’s correct, yes. Wyatt Carl – Monarch Base Securities: But in the pipeline going forward, can you give me a feel for the mix between new and existing?

So, that’s – it’s a good question only because there are multiple schools of thought from what’s the better way to go. What we see in a good amount of new client opportunities in the pipeline. But we’re also proactively developing existing accounts which we think and become significant new deals over the next 12 to 18 months. So, we think that a healthy business for us going forward should a balanced one between bookings that are sort of – not exactly but even between new account wins and new deals in existing accounts. Wyatt Carl – Monarch Base Securities: Okay, great. In your forecast for or your guidance in the revenues and I know it’s June year, so, it looks like your news – as my assumption is that revenues slow down a little bit, the sequential gains?

I think the elements that we put in the guidance really becomes the function of the license revenue component so that the component, right. So, as we know, the cloud based revenues as it builds up is more consistent but it ramps slower than you do from the license component. So, I think that’s really the element that we really don’t have a good view to as of today as to what ultimately that mix would be. And so, I guess, it really depends as to how that mix shows up with the license revenue. Wyatt Carl – Monarch Base Securities: So, license revenue in this quarter was extremely good, license revenue in the first quarter was very small. Do you see it, somewhere in between in the future quarters?

So, I think we’re probably expecting to be closer to where it was this quarter than where it was in the first quarter. Wyatt Carl – Monarch Base Securities: Okay, great. And just one quick question on the accounts receivables, Eric, do you know what the DSLs were?

Sorry, I don’t have that right off the top of my head. Wyatt Carl – Monarch Base Securities: Okay. And just, G&A, it looked like for the three months, and December, your G&A was actually below what it was a year ago. And are you looking for that to expand them and it’s up slightly for the year, six months, do you expect that to be up a little or probably flat?

I mean, I think we had expected sort of as we scale the business to see if any increase in that, certainly not at the same place that we would do in the sales and marketing area. But think if you look to where, I think there were some increased legal related costs in the quarter a year ago that skewed the expense from a comparable standpoint. Wyatt Carl – Monarch Base Securities: Okay. And do you feel that the kind of margins you’re seeing on recurring revenue are sustainable?

We do. I think that there will be instances if we have to – there are going to be some timing issues where we have a step function where there is potentially an increased investment. But again, I think as we’ve said in the past with our global model, these are the ranges that we are targeting as this revenue is growing, we’re certainly are able to keep the costs in curtail and not ramp it at the same pace. Wyatt Carl – Monarch Base Securities: Okay. And is it customary that these large contracts are paid upfront or is that unusual?

Yeah, I think that – our standard is to be getting at least one year paid upfront. So, but that is – I think that’s what we would say. Wyatt Carl – Monarch Base Securities: Okay. Thank you very much. Congratulations again on the quarter.

Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Jamie (inaudible) Capital, your question please.

Hi, good afternoon. Could you guys speak to the opportunity of the existing installed base of licensed customers and what the transition could look like in terms of profitability from migrating those existing customers from license to SAS please?

Sure, yeah, so I think that’s a good question. So, roughly when you look at our total install base, close to two thirds of our existing customers on premise. And so, we see actually a significant opportunity as we look to migrate a number of these to the crowds. And when we look at the financial economics of it, typically we would expect to see two to three times incremental revenues that we would be ordinarily getting from these customers, let’s say we’re just trying to continue to be paying us the maintenance and support streams. So, that’s our – it gives you a sense of the opportunity.

And to add to that I would say that’s actually the correct answer. To add to that once the customers get on to the eGain cloud, then the rate of adoption of new capability also goes up significantly as you all know. Being able to turn on things in the eGain cloud is far easier. And that just improves and it’s a win even for the client because they do want to stay up on innovation curve, they want to try out the new thinkers quickly as it becomes available. So, we see that expansion also becomes more – becomes more near-term when customer moves to the cloud. It’s hard for me to put a number on that but definitely there is a qualitative improvement there.

So, you’ve migrated six customers – do you think, is the opportunity there in 30 to 50 range of large customers, how would you quantify that?

I think that’s a fair assessment, the timing of course – we are not sure right now because we are just, what we have done is we have created an internal program to make sure that we are – we are providing the right tools and incentives to our clients to show them how they can improve their customer engagement, which with their customers by migrating to the eGain Cloud. Some of these customers are not going to move to the cloud for reasons that are outside of speed and innovation and cost, it’s got more to do with security and their internal policies. But most of the verticals that we’re targeting seem to be amenable to the cloud model if you just repeat the top verticals that we go after, they’re all B to C, and there is four of them, there is to be Telco and Media verticals, that is the retail and branded manufacturing verticals, that is the insurance and retail finance vertical and finally there is the health insurance vertical. So, of those, some of the retail finance clients tend to be much more cautious. And even some of the large Telcos and retailers, some of them are also still quite cautious about the Cloud. Our approach is to be to offer the choice but also show the benefits of speed and agility in the eGain club.

Thank you. My next question, could you elaborate a little bit on the Cisco relationship, what’s changed there to really accelerate now that opportunity you have?

I would say two things, one our OEM relationship has stabilized and it’s a successful one from their point of view and ours. And that created good confidence in both the companies that we can – that we can create a proposition that – that’s valuable for their clients, their meeting Cisco clients. And that is a profitable one for them and for us so that’s the first point. The second is that, Cisco is seeing and we along with them seeing the fact that there is a technology refresh cycle underway in the contact central markets. And driven by the whole view I see technology change. Now all the large contact centers that have invested say 8 to 10 years ago in a contact center infrastructure and are looking to replace it with a voice check. And when they do that, almost all of them are looking to create multi-channel capability rather than go single channel voice. So that presents a nice opportunity for Cisco to present a proposition which is much broader than voice only, eGain having helped that confidence with them as they are reliable and way to provider than present that kind of expanded relationship choice for Cisco to say, all right, we will resell all your products as opposed to just e-mail and chat products which are OEM today through Cisco. And that’s been kind of the second part of the client demand right now.

And can you speak at all to – are you seeing system integrators reach out to you more or are there additional partnership opportunities that you think you’ll be coming back to share with us over the next couple of quarters?

We’re certainly working on developing new ones but we don’t have enough to talk about them today. And you’re right, system integrators are a significant part of that target partner set that we are going after.

Congratulations again, thank you.

Thank you.

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to management for any further remarks.

Great, thanks operator. And thanks everybody for joining us today. We believe this is a very exciting for eGain. And we continue to build a world-class organization. If you should have any further questions or comments, please feel free to give us a call or on Investor Relations. I look forward to talking to you on our fiscal third quarter call. Thank you.

Thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.