eGain Corporation (EGAN) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the eGain Fiscal 2013 Fourth Quarter and Full Year 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 conference call is being recorded. I would now like to turn the conference over to Mr. Charles Messman, Vice President of Finance. Sir, you may begin.

Good afternoon, ladies and gentlemen, and thank you for joining us today for eGain's conference call to discuss the results for our fiscal 2013 fourth quarter and year ended June 30, 2013. 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’d like to remind all listeners that all statements in this conference call that involves eGain's forecasts, including [our stated] (ph) 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 this time of the conference 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 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 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’ll now turn the call over to Ashu. Ashu?

Thank you, Charles, and good afternoon, everyone. Thank you for joining us today. First, some financial highlights for the fiscal year. Our revenue for the fourth quarter was up 69% over prior year and up 36% for the fiscal year. Out cloud subscription revenue for the quarter was up 73% over prior year and up 70% for the fiscal year. So I think we ended the year strong. That was good performance sustained well through the year. Eric will go into more details on the financials. Let me turn on the business side and provide some color. If you recall, we identified four broad themes of focus at the start of fiscal 2013. They were, cloud leadership, cloud expansion, client expansion, distribution buildout, and product innovation. So let me start with the cloud. At the start of the year, we saw growing interest in eGain cloud. In the fourth quarter for instance, we signed up blue-chip clients like Electrolux and [LLB] (ph) into the eGain cloud. At the same time, certain big verticals of our focus area, like financial services, are continuing to prefer the on-premise action. At eGain, we want to attract large financial services clients with our top-rated customer engagement solution, regardless of the delivery model. In the long run, we believe in building dominant market share and ensuring client success, not just focus on cloud versus on-premise delivery arguments which we believe are short term. Second, we continue to see a fair share of our large on-premise customers migrating to the eGain cloud as they want to benefit from faster innovation adoption rate and higher levels of customer satisfaction. Moreover, we are the only credible provider in the market who can reliably serve both cloud and on-premise enterprise clients with exactly the same platform and solution capabilities…

Thank you, Ashu. So again to reiterate Ashu's points, we are pleased with our results both for the quarter as well as fiscal 2013. For the quarter, total revenue was up 69% over the same quarter last year, and for the fiscal year, total revenue increased 73% over fiscal 2012. Our gross margin improved, in particular for our subscription and support revenues, which increased to 83% for the quarter from 77% in the same quarter last year ended fiscal 2012. Our operating margins, excluding depreciation and stock-based comp, for the quarter improved to 13% from a negative 14% last year. For fiscal 2013, our operating margins improved to 6% from negative 1% in fiscal 2012. In fiscal 2014, we anticipate our operating margins to be closer to breakeven as we continue investing in the business to drive growth. Now looking at the numbers in more detail, starting with our bookings and backlog, total gross bookings or revenue plus the change in deferred for the quarter was $21.7 million, an increase of 13% over the comparable year ago quarter. Total [indiscernible] bookings in fiscal 2013 were $74.5 million, an increase of 37% over fiscal 2012. Backlog as of June 30, 2013, or total deferred plus unbilled and uncollected revenues, increased 54% to $44.5 million compared to $28.8 million reported last year. Now turning to our financial results, total revenue for the fourth quarter was $18 million, up 69% from $10.6 million in the comparable year ago quarter. For fiscal 2013, total revenue was $58.9 million, up 36% from fiscal 2012. Looking at the subscription and support revenues, or our recurring revenue for the quarter, this was $9 million, an increase of 42% on a year-over-year basis. And looking at subscription and support revenues in more detail, the clouds subscription revenue for…

(Operator Instructions) Our first question comes from Michael Latimore from Northland Securities.

A great finish to the year there everybody. On the [corner itself] (ph), you talked about I think you said bookings were $21.7 million, what percent of those were cloud related?

So I think on a recurring basis, the number was approximately 60% [indiscernible] recurring basis.

Okay. And in the quarter itself, were there any verticals that were particularly strong or weak during the quarter?

I think it will be a mix. What we are seeing is that in the U.S. the financial services vertical is picking up more interest. So that's the trend. We'll watch that. The other area we are seeing more interest in and even some early buying is in the health care vertical in the U.S. So those two seem to be deltas compared to where we were say six months ago.

And how many customers, they migrated from maintenance to cloud during the quarter?

Off hand, I don't think we have that number with us, and I'm not sure if we are disclosing that.

Okay. Any particular reason for the strength in professional services in the quarter?

Just more new clients, more implementation, and some of these clients have big digital transformation projects going on, and they are using eGain to be aggressive about implementing those strategies. So that's where we are seeing the delta. As you know well, professional services for us is not a moneymaking operation. So if that number goes up and down for the right reasons, we are fine with that as long as the eventual goal of building sort of success around our high-margin business in the cloud is where we are focused.

Just to add to that point with on-premise customers that the rescue recognition for the PS happens in the quarter it is delivered, whereas for the cloud customers, it's recognized really beyond the contract terms. So there is an element of timing as well that goes with that.

Just last question, how is demand for your SuperChat offering and maybe do you have an idea of some of the deals in the quarter with that product?

Definitely, so I think the whole SuperChat proposition is working better for us now. What we're finding is that it's sort of the health care vertical in the U.S., the whole customer acquisition opportunity around the Affordable Care Act is an area where we have seen good interest for SuperChat where these businesses are figuring out innovative remote models to acquire new customers.

Our next question comes from Jeff Van Rhee from Craig-Hallum.

Very nice quarter, I'd like to echo Mike's comments, real nice quarter. Couple of follow-ups, just on the professional services side, what kind of utilization rates did you have during the quarter, how busy, what kind of the excess capacity did you have beyond what you did this quarter?

So again I don't have the number offhand but I'll address the question behind the question which was the second part of your comment, and that is, as you know we have a model which has professional services team members in key geographies and we have a global bundle, so we have [indiscernible] based teams, we have [indiscernible] based teams, and we have the other teams. So we are actively sort of adjusting our hiding and buildout to make sure that we are not going to constrain the implementation rollouts for some of our clients, as well as the fact that we are also now working with some of these early partners that we are building out who can provide services bandwidth as and when required.

Okay. In terms of the discussion starter in terms of customers coming in, how would you sort of prioritize the top one, two, or three initial capabilities? I know they are coming sort of platform, I get the vision, but what's the most acute pain point right now?

I would say the clinical sphere, there are three stories that resonate well, and then let's just say the platform alongside that makes it more differentiated and interesting, but the tip of the sphere arguments will be, right now in terms of number of opportunities that we go after multichannel service still is number one. So the whole idea that I want to have consistent service capability of all the customers. The second is knowledge, so I want consistent knowledge across all the channels. And the third is that interactive selling or customer acquisition. It doesn't mean that one is less important than the other for us, but it just means that in terms of relative volume today, that would be the order, and over time we will see the interactive sales stuff picking up more and more.

And then, two others if I could, just Cisco relationship you touched on it a little bit, can you expand a little further what's been accomplished thus far, little more color on where you are and just how that pipe is filling, and along those same lines, you touched on your goals for 2014 and enhanced distribution was one of them, obviously you have laid out your intentions last quarter about aggressively growing direct sales team, but can you expand on what else you have in mind there in terms of expanding distribution?

So the first topic as to some color, we jointly have conducted one, two, three, four roadshows with Cisco where we, the eGain team and the Cisco team, are going out and educating and training the Cisco and the partner sales communities that are selling in this contact center multichannel marketplace. So we have done that twice in the U.S. and twice internationally. We are jointly addressing the Annual Cisco Sales Summit in U.S. and in Europe next month. We are planning to, and this is not, the details have not been worked out but we are committed to jointly marketing our proposition with Cisco and eGain. So there's a lot of meat behind the enablement and education and training of the sales team. That's the first part. The second part is the pipeline, is the number of opportunities is large, it's early days, we just announced the market improve, so it's still early. We believe that the next fiscal year, which is the current one we are in, fiscal 2014, is going to be the, the buildout of the pipeline is going to be along those 12 month cycle of the fiscal year which is essentially, not exactly but essentially, end of July through end of July, last end of June to end June, so it's one cycle from fiscal quarter end fiscal year, so that we see as a pipeline buildout and monetization and conversion of the back half of fiscal year, so that's on fiscal. We have closed a couple of small deals. We are seeing [indiscernible] opportunities coming through quickly. So, it's sort of pointing the right way at this point. We just have to see some quarters of execution to see how big and how quickly that development for our business. On the second topic which is how much and how well we plan to expand our distribution, so the first answer would be just the straightforward direct sales team and build out that, and we expect to continue to build that out. Our expectation is that we will be at least 50% up from where we were end of fiscal 2013, we will be at the end of fiscal 2014 in terms of net sales. And then on the partner side, we are repeating our investment to build out beyond the fiscal partnership, some other large partnership that we are working on which we haven't discussed too much, and hopefully those become material in the first half of fiscal 14.

Great, thank you.

Our next question comes from Michael Huang from Needham and Company.

Just a few questions for you guys. Just first of all, as you look at fiscal 2014 and the guidance that you provided, I wanted to get a sense from you guys like what represents the biggest wildcard, I mean is it Cisco, is it some of the work you have been doing with the premier accounts team, large deal activities, sales ramp, I mean could you just help us understand kind of what are the things that could be kind of meaningful driver that maybe you haven't baked in necessarily into fiscal 2014?

I would say all the four things that you mentioned are very, very important. So I agree with all four. In terms of what we haven't baked in, probably I would say that we don't know enough about it right now, that would be my assessment.

[indiscernible] These are factors that, as we have said in previous calls, we are targeting the large enterprises with this installed base focus, the timing and the size of these deals is something that is hard for us to say in the beginning of the year.

Got you, okay. In terms of new customers, I know that you don't share with us the metric on how many new logos you are adding, but maybe just help us understand kind of directionally kind of how that is trending, especially as you have been able to take your sales team up and your experienced sales team up as well, I mean should we be expecting to see that drive an increasing number of logos and maybe like as you kind of think about bookings, like what does it look like from a bookings standpoint as well?

So yes, you are right, that is a big area of focus for us in terms of new logos of the right kind and acquiring them moving forward, increasing that bucket size, and so the new sales rep ramp is focusing on that. So that is an important part because to us, the account expansion that we see which is where we get the big deals typically will be highly dependent on the number of deals, right type of logos that we acquire in the front end of the tunnel. So absolutely, that lining and expanding is a key part, so we need to line more of new logos, and so the direct sales reps, especially as we have been sending them off into focusing on new accounts and focusing on strategic accounts, the new account guys, new target account guys, are incented on right kind of logos and new logos.

Got you, okay. And then a question for you Eric, so in calculated bookings growth, I guess was a little bit slower kind of versus last quarter in terms of year-over-year growth, I mean obviously you had tough comp, but given kind of the demand dynamic and credit positioning and sales productivity, et cetera, I want to understand is there anything else kind of out there because of tough comp or maybe it's timing on some large deals with existing customers, just help us understand kind of what's driving that and then is that likely to reaccelerate through next year, and maybe you can just kind of give us some sense around that?

Sure. I think you actually hit the points. When you look at that from a comp standpoint, definitely in comparison to this relatively three and four last year were quite significantly different. So I wouldn't lead more into it other than that. I mean I think the other aspect that we have talked about and we are looking to evaluate going forward is that this is the gross booking number that certainly this year I think looking forward maybe focusing on some of the [indiscernible] model, sort of just gets more representative sense of what the true number is. So I think that's the point that we'll be looking to do maybe in future quarters, but that gives a fair sense as to what makeup is just the gross number where you have one quarter has the number of multiple year deals versus single year deals, optically if may look that that may not be [better] (ph) or even. Does that make sense?

Yes, it does. Thanks guys, appreciate it.

Our next question comes from Raghaven Sarathy from Dougherty & Company. Raghaven Sarathy - Dougherty & Company: Just first question for Ashu, so the last call you talked about larger BPOs interested in customer engagement, so wondering if you have any update on this in terms of the type of opportunities that they are bringing in or the type of opportunities that you are seeing and the progress you're making?

Okay. Is there another part to the question or is that the first question? Raghaven Sarathy - Dougherty & Company: No, that's the question.

Alright. Yes, you are right, we did talk about that, and we do feel those BPOs bringing in opportunities. We are working closely with a few that I mentioned the last time where – what these companies or these BPOs are doing is creating customer management practices where they want to differentiate their offering from the typical [indiscernible] kind of model which they have had in the past. So they are bidding for new business around multichannel. So the big thing they are pushing was their clients as multichannel and the whole customer experience on multichannel. So we are working with a small group right now, trying to make sure that we can train their sales team and help them qualify these opportunities well. Raghaven Sarathy - Dougherty & Company: So from a revenue perspective, for you that will be more of a license sale or how would that translate into revenue for you?

It could be license if it were a non-trade environment or it could be again cloud if it were a eGain cloud implementation that is just being tapped into by the BPO. Raghaven Sarathy - Dougherty & Company: Okay. And then kind of a couple of follow-ups for Eric, so I understand the bookings number could be skewed depending on some multi-year or single-year contracts, but if you look at the bookings, can you give us some color around the mix between new and existing customers in the total bookings in terms of percentages, and then how much of the new bookings is cloud?

Sure. I think, again the total number of 21.7, approximately 60% of it was coming from recurring. Of that number, roughly $10 million was coming from new license in clouds, bookings [indiscernible], and again close to 55% or 60% of that was coming from new cloud business. Raghaven Sarathy - Dougherty & Company: Okay. And then in terms of 2014, obviously license revenue could be a wildcard, but I was wondering how we should think about license revenue in the context of overall revenue growth?

So I think that the bonus – we're looking at – we are not ready to provide too much more on this at this stage, I mean I think we will maybe update as the year goes along, but I think just given the timing of that, this is not something we can maybe provide any more detail at this point. Raghaven Sarathy - Dougherty & Company: Okay, thank you.

Our next question comes from Noel Atkinson. Your line is open.

Very nice quarter. Just had a couple of questions. So the first is that you spoke on the last call about building out a new data center that was supposed to come online in Q1 of 2014. I saw that the cap at your PP&E grew about $900,000 sequentially. Have you guys finished that data center and now do you expect that revenue to come online?

That's correct, yes. So that's sort of the increased investment we talked about in the cloud side with more disaster recovery and better security and all that. So yes, that is done.

Okay. And you folks talked last time about being about $500,000 of quarterly revenue that would come online once the center was finished. So is that still sort of the ballpark number or were you able to add further customers?

I think that that's going to be a phased approach, so not all of those customers would be coming online immediately. So I think that will probably happen over the next two quarters.

Okay, good. And my phone was breaking up a little bit, Eric you gave some guidance on I believe the expected split of license and cloud bookings in 2014, could you just repeat that please?

Yes, we are looking at 60% cloud, I think 60%-40% is what our initial estimate are.

Okay. And then just my last question here is, maybe not in the last quarter but maybe like the three quarters before that, you folks had been talking quite heavily about your partnership with the large integrators, so SAP, IBM, those folks, and so what are you seeing for activity to those partner channels?

We are continuing to work on them, Noel, but at this point the one that we see as most attractive in terms of activity as well as pipeline is Cisco. So three quarters ago we probably didn't even talk about the Cisco S Plus which is the whole resell expansion that we have got going with Cisco. Now that we are where we are with Cisco, we are back sort of taking two thirds of our partner investment and the other one third still continues to be on the building out some of the other promising partnerships..

Okay, great, thanks very much.

Our next question comes from Jon Hickman from Ladenburg.

Could you – the relationship with Cisco, is that cloud business or on-premise or both or is that up to the customer?

It can be both, both are available through that channel, Jon, so depending on the customer's preference.

And you are providing the professional services there?

Initially yes but we are also training up the Cisco partners and so they will be doing the bulk of that professional services over time.

Okay, a few more questions. A year from now, could you opine about how many sales guys you might have on book?

So what we are doing is really going as fast as we can in terms of hiring, ramping, consolidating. My sense is that we'll probably be up by 50% or so by the time we end fiscal 2014, 50% of ramped sales reps is what we are shooting for.

So you will add about 20, okay. And then people have talked about your professional services in this quarter and obviously there is a big jump there in revenues, but the margins, the gross margins were considerably better than in past quarters. What happened there?

So I think two items, I think there were some components of revenues that was project based where there was maybe some billings that have been in the previous quarters the recognition ended up coming in this quarter, and then I think there is also the ramping up of the team. If you look in the previous quarter, I think we talked about hiring additional reps. There was obviously a number of un-ramped PS people on focus. So I think as we've seen them come on board, that's obviously driving the improvements in the margin.

So I don't know how much guidance you are willing to give here, but on a gross margin basis going forward, I mean it was 73% this quarter, that's kind of an outlier to look backwards, can you help us out there at all if you were going to look out for the year?

Yes, I would agree that it is somewhat of an outlier. Again clearly given the high margin on the on-premise professional licenses that is certainly skewed in this particular quarter, so probably closer to the 69% to 70% range is I think what we would expect given the mix that we are modeling.

Okay, thank you. That's it for me. Great quarter, guys.

Our next question comes from Nathan Schneiderman from Roth Capital.

Nice job on the quarter and the year, congratulations. Ashu, in your prepared comments, you referenced new product that you were excited about for 2014, I was hoping you could speak to that and if there is something that's a brand-new revenue product as opposed to just an enhancement, maybe if you could elaborate on that as well?

So broadly it's in the area of sales and service, it's not opening up a completely new target market or a very, very separate sort of skew, if you will, but the capabilities we believe are going to be very differentiated and exciting. So that's what I can tell you for now.

Is there a targeted GA date for the new product release?

Not yet. We are certainly in the year for sure.

Okay. And then, I was just curious if you could share with us the number of 10% customers you had in the quarter and if you had some, specifically what was the percent and if you can identify the customer or customers?

No, unfortunately we don't have that information available at this point.

Eric, I was just curious with the billed and unbilled backlog, the $45 million, if you could share with us the portion that's current that you expect to recognize over the next 12 months, and then how did that compare against the year ago period?

So unfortunately we don't have that currently available at this point, I think we will be able to provide that in the future but we don't have that currently available.

Ashu, in your prepared comments, you mentioned competition against vendors that were only offering checkbox platforms, and I was just curious who specifically you were speaking to there and if you can speak broader to the changes in the competitive environment that you're seeing?

So, yes, that was an attempt to speak to the vendors who claim to do everything that you can possibly imagine, so you have some contact center vendors like outside of Cisco, the large ones, that seem to claim they can do all the multichannel stuff, they can do all the engagement stuff. Also on the CRM side there are vendors who claim to do everything. So those are the big kind of vendors that I was referring to. I'm not sure if I want to get specific but we do find enough examples where these customers, the clients have deployed these backlog systems and they have a choice to make whether to go with those same backbone vendors who are claiming to offer them all the richness of application capabilities or go with a platform like ours that can integrate into their backbone. So that was the discussion that I was referring to.

Is there a set of vendors that you are competing more against than you used to or more successfully against than you were maybe six months to a year ago that you could talk about?

I think Oracle continues to be a vendor we compete with primarily around the RightNow piece. We are seeing more of Salesforce, though not a lot, because of the B2B versus B2C focus difference. So those two I guess are the big ones. Other than that in the sales area, Live Person continues to be a significant player in the market, so we see them very often.

Okay. And final question for you and I'll drop off, I was just curious about the decision to take 2014 operating margin beyond the breakeven levels and what do you see driving that and why are you making that decision as opposed to maintaining, trying to maintain op margin or improve it?

Sure. So it's really market share and an opportunity that we think we have because of the competitive environment and our relative sort of solution advantages. We think the market is hot, we think that we have the right solution at the right time, so it's really constrained by our ability to scale our distribution. So we think that running the business as an operating sort of even margin or zero margin is a reasonably good balance between being highly aggressive and maintaining some discipline on the business as well.

I'm showing no further questions at this time.

Again I want to thank everyone for joining us today. Should you have any further questions or comments, please feel free to give us a call. I also want to point out we will be attending the upcoming Craig-Hallum Conference in New York on September 26. So if you're in town, please stop by. We look forward to talking with you on our first quarter conference call. Thanks now.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.