eGain Corporation (EGAN) Q3 2013 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the eGain Fiscal 2013 Third Quarter 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, today’s program is being recorded. I would now like to introduce your host for today’s program, Mr. Charles Messman, Vice President of Finance. Please go ahead, sir.

Good afternoon ladies and gentlemen and thank you for joining us today for eGain’s conference call to discuss the results for the fiscal 2013 third quarter ended March 31, 2013. Please note that the call is being recorded and will be available for the Investor Relations section of our website at www.egain.com for seven days following this call. Before I begin, I’d like to remind all listeners that all statements on this conference call that involved eGain’s forecast included 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 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 call are not guarantees of future results, rather they are subject to risks and uncertainties that could cause actual results to differ materially from those set forth on this conference 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 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 25th, 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.

Thank you, Charles and good afternoon everyone. Thank you for joining us today. From the third quarter of fiscal 2013, we performed well. Total revenue of the quarter was up 34% over the prior year, cloud subscription revenue for the quarter was up 89% over the prior year. With our continued strength and bookings, we ended the quarter with a backlog of $40.8 million up 100% from a year-ago quarter. So based on our year-to-date financial performance, we are pleased to raise our guidance for all of fiscal 2013. Eric will go into more detail on this later during the call. Now on to some color on what happened during the third quarter. In February, Gartner published its Magic Quadrant for CRM Web Customer Service applications where eGain was clearly the leader in both innovation and execution. As many of you know for the past four years, we have been consistently rated a leader in this quadrant. While we were always rated the best on innovation axis, this the first time we’ve been rated the best on both the innovation and the execution axes. In other words, we used to be one of the best. This year, we are the best. No doubt about it. This month is going to be the result of relentless innovation and execution by our eGain team and I’m proud of that tenacity and commitment to make eGain number one. We think this is a big deal. We think this is a big deal and our target market notices it too in net interest on the run rate basis has more than doubled in the April compared to the third quarter. So we think this is very significant for us and obviously we want to take advantage of this milestone and market, the success and…

Thank you, Ashu. We are pleased to report several solid financial results for the third quarter. Revenue end up 34% over the same quarter last year, our gross margins improved in particular for recurring revenue that increased to 84% from 77% in the same quarter last year. Our operating margins excluding depreciation and stock-based comp improved to 10% from 6% last year. Due to the increase in license revenue this quarter, our profitability was ahead of plan, but going forward we anticipate to become such a breakeven as we continue to increase our investment to drive growth. Looking at our bookings an backlog, total growth bookings or revenue has changed in total deferred for the quarter was $15.7 million and increase of 24% over the comparable year-ago quarter. Excluding the impact of foreign country fluctuations, the increase would have been approximately 29%. Backlog as of March 31st, 2013 for total deferred plus unbilled and collected revenue increase 100% to $40.8 million compared to $20.4 million reported last year. Now turning to our financial results, total revenue for the third quarter was $15.5 million up 34% from $11.5 million in the comparable year-ago quarter. For the first nine months, total revenue was $14.9 million, up 25% from the same period last year. For recurring revenue from subscription and support for the quarter was $8.3 million, an increase of 44% on a year-over-year basis. Looking at the recurring revenue in more detail, cloud subscription revenue was up 89% and support revenue was up 4% on a year-over-year basis. For the first nine months, recurring revenue was $23.3 million and the increase of 35% on a year-over-year basis. For cloud subscription revenue for the first nine months, it was up 69% to $13.4 million and support revenue is up 6% to $9.9 million…

Certainly. (Operator Instructions) Our first question comes from the line of Michael Huang from Needham & Company. Your question please. Sir you might have your phone on mute. Michael Huang – Needham & Company: Hey guys. Just a few questions for you, so first of all, so given the strength of imbalance interest that you’re seeing in April relative to what you saw in Q2, are you sales constrained at the moment? I mean, and then is this all attributed to the favorable Gartner rankings or is this attributed to other [inaudible] activities and what are your plans for sales hiring over the next 12 months.

Sure. Hi, Michael. This is Ashu here. So, I mean, you’re right in pointing out various other possibilities that maybe behind the growth and inbound request. But I would say that the document rating is probably a strong proximate cause. In addition, you’re right, we have been increasing our marketing investments for some time, so that contributing as well. So that’s on the inbound comment. And in terms of whether we are sales constrained or not, I do think we are sales constrained. We took us [inaudible] breathe or through March roughly in terms of expanding the sales force and we are kind of resume that process this quarter, which is the Q4 quarter. And so that’s an area where you will see up increase the sales headcount, direct sales headcount significantly, starting a April onward that processes on. Michael Huang – Needham & Company: Got you, great. And in terms of SuperChat, how was that impacting ASP. I know it’s early but is there any data points that you can throw out there that might help us understand how that’s drive in [inaudible]?

That’s a good question. Trying to think here. I think for now, what I can say reasonably confidently is that it’s helping on the win rate that I feel is anecdotally quite accurate. In terms of deal size, it’s hard for me to say though there is a bundling effect because we are putting more functionality into, shall we say, let’s say 1.5 times the cost of basic chat as oppose to if you would not bundling, if it could be 3X [ph], right? But we think that overall this will have a positive impact on the ASP, but I couldn’t comment on that yet. Michael Huang – Needham & Company: Okay. Last question for you. So in terms of a license performance in the quarter, I mean, pretty strong there. Was that all with existing customers, or was some of that was driven by new, and how much of the upside there was driven by Cisco? Thanks.

Okay. So broadly, there is a component of fiscal. Do we disclose that number? So I think from a Cisco study disclosing [ph] standpoint with this in a million, so it wasn’t the primary amount. Michael Huang – Needham & Company: Yes.

So that was not unusual. Then the second question around whether it was coming more from existing work with new, interestingly, came from you more than from existing. And part of the reason as you know, Michael, there’s some of the verticals we go at are just very, very cloud unfriendly, for instance, that I’m sure services ore some of the very large companies that have a strong bias of not going into the cloud. Our approach continues to be that are cloud first. We are driving more and more cloud business but we get very high value clients who are – help them to ongoing – going with an un-premise solution that we will [inaudible], et cetera. Michael Huang – Needham & Company: Great. Thanks so much.

Sure.

Thank you. Our next question comes from the line of Noel Atkinson from LOM. Your question, please. Noel Atkinson – LOM: Hi, folks. Congratulations on a good quarter.

Thank you. Noel Atkinson – LOM: I was wondering if you could talk a little bit about the cloud bookings in the quarter, your new cloud bookings. Could you talk a little bit about the split of activity between new customers and your existing license customers migrate into cloud?

So I think, first off, on the new mix we saw somewhat of a clip from where we’ve seen in the previous quarter. So this probably closer to 25 or there about new cloud business. So year to date, we’re now closer to the number that we’ve regarded to which – just under 70% of new cloud business year to date is where that trending up. To the second part of your question, we don’t have the details of the migration aspect but we did have sort of a one account that migrated in the quarter.

Yes, we talked about the GSA.

Yes.

Right, so. Noel Atkinson – LOM: And then your new data scenario, is there going to be a meaningful uplift in your OpEx from once in this new data center at all?

So I think, you know, the way that it’s structured partnering with AT&T at this point, we also investing in a significant amount of additional capital equipment from a building standpoint. I mean, there certainly will be additional computer equipment that goes into the facility, estimates probably – this last quarter, our CapEx was less than 600,000, I think we probably see that giving up to north of $1 million in this quarter, and probably three quarters of million of that may be driven from this expanded facility. Noel Atkinson – LOM: And when you’re talking about Q in 2014, is that fiscal 2014 that you expected to be open?

That’s correct. Noel Atkinson – LOM: Okay. And then my last question is talking about the Cisco Solutions Plus, is there an opportunity for that to be cloud as well as license? And then the second part of that is on the license side of Cisco, could you talk about sort of what the uplift potential could be for a seat sale to the Solutions Plus versus what you would get from an OEM with Cisco.

Okay. So in response to the first part of your question, yes, there is a possibility that we could get a cloud model joined with Cisco Solutions Plus. However, that is not in phase one, so that’s something that prevent discussion and we’re looking at sort of the demand side of things. And so that’s the first part. The second part in terms of the uplift OEM versus Solutions Plus, let me answer it’s somewhat indirectly because it’s not clear. There are too many variables. That’s the reason why I cannot give you a direct answer, but let me give you qualitative response. So in the OEM world, we are the provider for two applications like email management and web chat or Cisco. In the Solutions Plus world, the entire eGain solution set will be available for Solutions Plus channels settling by the end of the year, and roughly half of that is available today including all the knowledge products, right? So the opportunity of selling more [inaudible] and potentially selling more apps is higher. So that’s one qualitative response. The second is that in the Solutions Plus model, we are going to also be getting the annual maintenance and support payments directly from the capital market [ph]. Unlike your young model where we are simply the OEM technology provider. Hence, we got priority for sea but we do not get an annual fee for support [inaudible]. Noel Atkinson – LOM: Okay, great. Thanks very much.

Okay.

Thank you. Our next question comes from the line of [inaudible] from Dougherty [ph]. Your question, please.

Yes, hi, good afternoon. Thanks for taking my questions. I want to go back to the sales capacity. I think Ashu, you mentioned that in a capacity constrained, you are starting to hire. It looks like we haven’t seen lot of expenses heading in the March quarter. Can you give us some sense for what kind of headcount you are targeting and then how that might play out into the next three years or so.

Sure. So you’re right. It has not paid in the March quarter, but we will see some of that in the Q4, which is the current quarter. In terms of where we think we will get to, we are working it in an iterative model but my sense is that we will end up roughly doubling our sales force in the next 18 months. That’s not a wide range I’m giving you, but it accounts for flexibility because we might start quick and then kind of consolidate and then go review them again, but that’s my sense right now.

So the people that headcount are trying to [inaudible] is it going to be named account model or they’re going to assign new accounts. Are we going to – sort of maybe the existing sales goes on that [inaudible] in that account so that how long it would take for these guys to become productive. [Inaudible] getting some long leads of it, they call leads that it’s going to take some time to – just results.

I think that takes some time no matter what we think the average ramp up and we kind of model that internally, quite conservatively. We have a nine-month sales cycle plus ramp up, so mostly you expect to see salespeople become truly productive in the second year of their performance or in the company. So that, we think, is a reasonable way to model it and that gives us enough time to train them and kind of get them going.

And then couple of questions for Eric. Maybe you gave this down [ph] but, I mean, [inaudible] what was the new cloud billings up in the quarter? And then what was the mix between new bookings exists – existing bookings in your total bookings down there?

So I think these are some of the numbers that we pursue moving away from disclosing, so we’re providing a gross number but the split was certainly geared towards more license. I think the new cloud billings were approximately 25% in the quarter.

Okay. Thank you.

Thank you. Our next question comes from the line of Jon Hickman from Ladenburg. Your question, please. Jon Hickman – Ladenburg Thalmann: Hello. Congratulations. Good quarter, guys. So can you help me just think about license sales going forward is a pretty big jump in this quarter. You’re modeling your guidance at midpoint for the rest of the year assumes slightly down quarter for the last quarter of the year. Is that how you want us to think about the remainder of the year, Eric?

Sure, Jon. I think that’s appropriate. I think, for us, we are still very much focused on the cloud first initiative. So from the standpoint of the license business, there are obviously opportunities that could close, that would sort of impact it on the positive upside, but I think that’s sort of the – just given our current focus, that’s the way we’re looking at it. Jon Hickman – Ladenburg Thalmann: And then did I hear you correctly say that if the license sales come in as kind of you just talked about, you’re looking at more of a breakeven quarter versus actually having a positive gap numbers?

Exactly. Jon Hickman – Ladenburg Thalmann: Okay. Then one last question, you generated $9 million in the quarter from operations [ph]?

The $9 million is the nine-month period. So there was 900, yes. Jon Hickman – Ladenburg Thalmann: Oh, okay. Can you tell us what that was for the quarter?

That was a 900 use of cash? Jon Hickman – Ladenburg Thalmann: No, what you generated from operation during the quarter.

We did not generate. We used cash from operations. Jon Hickman – Ladenburg Thalmann: Oh, you use cash from operations. Okay. Thank you. That makes more sense. Sorry for the confusion. That’s it. Thanks for taking my questions.

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.

Okay, I want to thank everyone for joining us today. Again, we appreciate your interest in the company. We believe this is a very exciting time for eGain as we continue to build our world class organization. I’d also like to note that we’ll be attending the benchmark investor conference in [inaudible] on May 30th. So if you happen to be in the area, please stop by and say hello. And of course, if you have any further questions, please feel free to give us a call here at eGain. Thanks and have a great day. We’ll talk to you on the next quarter.

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