Good day, and welcome to the eGain Fiscal 2020 Fourth Quarter and Full Year Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jim Byers of MKR Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone. Welcome to eGain’s fiscal 2020 fourth quarter and full year financial results conference call. On the call today are eGain’s Chief Executive Officer, Ashu Roy; and Chief Financial Officer, Eric Smit. Before we begin, I would like to remind everyone that during this conference call, management will make certain forward-looking statements which convey management’s expectations, beliefs, plans, and objectives regarding future financial and operational performance. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate, or similar expressions. Forward-looking statements are protected by Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a wide range of risks and uncertainties that could cause actual results to differ in material respects. Information on various factors that could affect eGain’s results are detailed in the company’s reports filed with the Securities and Exchange Commission. eGain is making these statements as of today, September 2, 2020, and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call. In addition to GAAP results, we will discuss certain non-GAAP financial measures such as non-GAAP operating income. Our earnings press release can be found on the News Release link on the Investor Relations page at eGain’s Web site at www.egain.com. The tables included with the earnings press release include reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. And lastly, a replay of this conference call will also be available at the Investor Relations section of eGain’s Web site. And now with that said, I’d like to turn the call over to eGain’s CEO, Ashu Roy.

Thank you and hello, everyone. We are pleased to report strong financial performance across the board for our fiscal 2020 fourth quarter and full year. In summary, our fiscal 2020 full year performance exceeded our guidance. Our top and bottom line results are ahead of Street consensus. We also saw a healthy increase in bookings year-over-year and we generated strong profit and record cash flow for the year. So it’s been a good year of business performance. In addition, we exited fourth quarter of fiscal 2020 with our SaaS business revenue, which is sum of SaaS revenue plus professional services. That SaaS business revenue is now little over 90% of our total revenue for the fourth quarter. As you all know, we have targeted to get to this 90% plus level of SaaS business revenue in the December 2020 quarter, which is two quarters from now and we have reached that milestone two quarters early, which is good momentum. Turning to the evolving business climate in the ongoing pandemic, some of our deals, especially in new logos that slipped in March, has since closed while some remain engaged. The spike in business that we saw from customers looking to deflect more phone interactions to digital during the early months of the pandemic has since pulled back a little to a new normal. As I mentioned during the last call, many of our clients successfully handled customer contact surge with our solutions, driving more digital self service and enabling their contact center workforce with our knowledge and AI solutions. Several customers have also activated our virtual assistant for conversational automation to reduce pressure on their contact centers. These customers have seen up to 80% deflection in specific contact types, even as customer [indiscernible] remains high. This is contrary to what we…

Great. Thanks, Ashu, and thanks everybody for joining us today. As Ashu noted, we are pleased to report strong financial performance across the board for our fiscal 2020 fourth quarter and full year. Let me start by sharing some financial highlights from the quarter and the full year. We grew our SaaS revenue by 34% for the quarter and 27% for the year compared to the same period a year ago. Our SaaS and professional services revenue or our SaaS business grew 30% for the quarter and 22% for the year. Our SaaS business comprised, as Ashu said, 91% of total revenue for the quarter and again two quarters ahead of the target that we had set at the beginning of the year to achieve the 90% of revenue by the end of calendar 2020. Our SaaS net retention rates for the year was 114%, up from 106% in fiscal 2019. Our GAAP net income was up significantly 300% for the quarter and up 50% from the year-ago quarter. Our operating cash flow margins were 29% for the quarter and 19% for the year. And with the strong cash flow, we ended the year with 37 million in cash and no debt. Looking at our quarterly results in more detail; first, the revenue components. SaaS revenue was 15.5 million or up 34% year-over-year. Legacy revenue was 1.8 million, down 50% from the year ago, driven by the combined migration of our legacy customers to the cloud and the sun-setting of our legacy non-cloud offering. Professional services revenue was 1.7 million for the quarter, up 3% from Q4 last year and accounted for 9% of our total revenue in Q4. Now looking at our non-GAAP gross profits and gross margins, gross profit for the fourth quarter was 14.1 million or a…

Thank you. [Operator Instructions]. We’ll take our first question from Ryan MacDonald with Needham & Company.

Yes. Good afternoon, Ashu and Eric. Thanks for taking my questions and congrats on a great quarter. Ashu, I guess the first for you. We’re obviously now getting into the final month of the first quarter here. Would just love to hear what you’re hearing from sort of your customer conversations, what you’re seeing from a pipeline perspective as we look out for fiscal '21? And I guess maybe some of the moving parts that make you cautious I guess still on providing that full year outlook?

Yes. Sure thing, Ryan. So what we are seeing is the engagement level in these conversations and deals is high. People are working, interacting closely, progressing the opportunities. The part that we want to make sure of and that’s the nervousness that all of us have is whether the decisions and the signatures can be done in time. Classically, even in the SaaS world in the enterprise, as we all know, deals are signed towards the end of quarter mostly, unless they slip from one to the next. And so that’s the part that we still are kind of watching closely. Other than that, the engagement level is high. And so that gives us comfort.

That’s helpful. And I guess as we’ve seen sort of this shift in sort of work from home and adoption of alternative channels for sort of customer interaction, could you talk about how that’s been framing the conversations you’re having with prospective customers around things like the Messaging Hub and the virtual assistant?

Yes. So I think the part which is – the two trends which have accelerated and again no surprise, but it does affect us positively in our business, one is just more digital and that we are seeing the Messaging Hub pull, in that regard, more migration into digital, more investment into digital. And the second thing we are seeing is more knowledge and guidance requirements either for self service automation as well as for agent support. On the agent side, we are seeing an interesting thing. Because of the dislocation of workforce, a lot of these agents are now working from home, some from different offices and so they are not quite in a position where they can just ask their coworkers when they have a question. So access to knowledge systems and guidance systems we are seeing more interest because of that as well.

Excellent. Then just one last follow up from me. You talked for this fiscal year sort of strategic focus on customer acquisition and building out that partner developer ecosystem. Can you talk about sort of the magnitude you’re expecting in terms of sort of sales headcount additions there and then perhaps what types of partners you’re looking for to add and to continue to build up that ecosystem? Thanks.

Sure. There are two areas where we are investing on the partner side. One is existing partners which a couple of those team members are part of Todd’s organization who runs our worldwide sales. And so we’re increasing investment in that area. And the second area is Mike’s, which is a new area where he’s building out a team. To begin with, probably I would say three to four people and the areas we’re going to be targeting which we’re already working on are some of the CRM and helpdesk ecosystem to see how we can get into complementary partnerships in those areas. We have certified integrations but the question is can we develop more mutually beneficial go-to-market strategies in those partnerships. And then the other area is system integrators and global service providers. So those are the areas that we’re looking to expand into from a partner standpoint.

Excellent. Thanks a lot.

Thank you.

Thank you. We’ll take our next question from Koji Ikeda with Oppenheimer.

Great. Thanks for taking my questions. Congrats on the nice quarter. I had a question on billings and deferred revenue. Granted both metrics has been a little bit all over the place over the past several quarters, especially with the run up in maintenance revenue. But I noticed this quarter was particularly strong. I guess what are some of the puts and takes that were driving the billings and deferred revenue strength? Was there any changes to contract durations or seasonality that we should be thinking about or any true-ups from previous customer relief programs? Is there any of that going on there or is it really just good execution in the fourth quarter?

Thanks, Koji. I think there’s probably a combination of those items. Certainly, there’s the good execution. I think the bookings were good. But as we’ve stated on previous calls, given the nature of our business and the timing of renewals and sort of – still the relative lumpiness of the – with the timing of the bigger deals occurring that this metric does tend to sort of move across as opposed to having some consistent movement. So obviously, we are pleased to see the positive movement this quarter, but again I think it’s probably a combination of those factors is what’s driving it.

Okay. Thanks, Eric. And maybe a follow up for you or Ashu, just thinking about the operating margin in the quarter, really good operating margin there. I think it’s the most you’ve had in a really long time, definitely as far as our model goes back. But the guidance for the fiscal first quarter implies it should be coming down a bit from where it ended up in the fiscal fourth quarter. So how should we be thinking about any incremental investments or upside that we saw in the fourth quarter being reinvested in the business in the first quarter? And is there anything seasonal in the first quarter in terms of the expense side that we should be thinking about?

Eric, you want to start this and I can add to that.

Yes, it sounds good. Thanks, Ashu. So the one point worth noting just from the seasonal timing standpoint is we do see – as we kick off the fiscal year, there’s an element of finalizing the budgets and sort of locking in the headcount. And so Ashu can talk a little bit to it, but we actually – as we’ve talked about, our plans are to ramp investment to gain more market share. And so I think the execution around continuing to bring those people on is something that certainly plays into it. I think from a seasonal standpoint we are still – not specifically seasonal but I think as a business we’re still adjusting to the new operations where we had scheduled to have physical events from a marketing side, so there was clearly money saved from those on-premise events that didn’t happen. I think now what we’re adjusting to though is increasing the digital spend and looking at other ways to increase that spend. So I think it’s a matter of as we transition into this new way of doing business and increasing the headcount is what we’re looking to drive that increased investment. But maybe Ashu can add a little more color to that.

Sure. So everything you said, Eric, that’s correct. So Koji, from our standpoint, the headcount increased investments in the areas we mentioned, that is underway. The marketing bit that Eric mentioned, he’s right. In the fourth quarter of fiscal 2020, because we did not hold this big event, we do one in U.S. and one in UK. So we did not do the one which normally gets done in the UK in the calendar Q2. So that kind of saved some money, but you’ll see that digital marketing spend is going to be up as an overall sort of marketing bucket in Q1 fiscal and beyond. So overall that sales and marketing investments will be up in Q1 and then in Q2 as well.

Got it. Thanks for the color. I appreciate it. And one last one from me and I’ll jump back into queue. So about 1.8 million-ish of legacy maintenance revenue sitting here, I guess it’s well ahead of the target for the end of calendar 2020. Where do you see legacy maintenance revenues stabilizing as we kind of think about the end of calendar 2020? And how should we be thinking about any runoff from there within that legacy maintenance revenue line item? Thanks for taking my questions, guys.

So I’ll go first, Eric, and just kind of give my sense and I think we haven’t nailed it down on a public basis to say where we wanted to be, but I would like to see that percentage be in the 5% area by the end of fiscal 2020. That would be my hope and that’s what we are kind of gunning toward. But, Eric, do you have any targets in mind at this point or --?

So I think just to clarify, fiscal '21 but I think Ashu said --

'21, I’m sorry. I apologize. It’s '21.

So basically a year from now. But I think just to add to that, I think now that we’ve sort of got past this milestone that we had set, I think we are continuing to be more aggressive in encouraging the remaining customers and really looking at opportunities that we can to drive them over. I think in the early days when we began the transition, we were very sensitive and working closely with customers more on their terms. But as we get down to the final stages, I think we can be more aggressive in our approach towards moving these final customers. So hopefully, to Ashu’s point, we can get that closer to that 5% range by the end of fiscal '21.

Got it. Thanks, everyone. Thanks for taking my questions.

Thank you. We’ll take our next question from Richard Baldry with ROTH Capital Partners.

Thanks. Kind of getting back into the bookings side again, can you talk about the linearity you saw through the quarter? Was it up – deferred rev up 10 million sequentially which looks like a pretty strong number, sort of curious how that played out throughout? Was it pretty tough in the early months and then kind of picked up pace or was it more linear than I would have expected maybe?

It was definitely more linear as quarters go. So we definitely saw some deals close earlier in the quarter as opposed to being completely back loaded, which is more often the case.

I think it’s also – just to add to that, Rich. Sorry, Rich, just one more thing. It’s not so much that that’s a pattern in every quarter, but just the fact that we have been cooking some of these large deals through the fiscal year and that resulted in the steady linearity that Eric is referring to.

Okay. Then maybe building off of that, how about aside from the first Avaya deal you talked about that closed early this quarter, maybe how has the trend continued early in first quarter versus last quarter?

I would say that we are in the usual quarter pattern which you do get some business in the first half, but you get more business in the second half of the quarter. That’s our pattern. Q4 was an aberration and Eric rightly pointed that out. So that’s how we see it right now.

Okay. Then in terms of absolute dollars, the recurring cost of goods actually fell sequentially while the revenues keep climbing. Is there anything unusual in there or one-time oriented in there some reversal or something, or you talked about efficiency but seeing the dollar fall is not necessarily something we usually count on. How do we think about that on a run rate maybe or go-forward?

Eric, do you want to take that?

Sure. So I think that what we’ve seen is I think the team is doing a good job in working with the platform providers, so continuing to find ways to sort of drive that average cost of SaaS revenue down where it comes down to the direct cost. And then I think – so that really was a big element. I think we saw some renegotiation of some contracts where we saw pickup. There may have been some catch up in the previous quarter that contributed to the decline, but there wasn’t as if there was anything out of line in this particular quarter that drove the lower number.

I agree. I think it’s the combination of those two factors here, Rich. One is the continuing automation and efficiency gain. And so as you know, since our architecture of the new cloud that we have had for the last several years uses AWS and Azure as the infrastructure as a service. So we keep optimizing that in terms of how we use those resources and that’s the first one, and that efficiency gain kind of helps us. And the second one, I do think there were some catch-up items there just end of year in terms of contract negotiations which helped as well.

And the last will be – we have sort of a general view that cloud-based communication is going to pick up in the demand side especially as people’s bandwidth sort of clears from their earliest headwinds from COVID. How do you feel about sort of your direct sale headcount and this transition to virtual selling sort of the capacity or efficiencies you’ve got so far, like can you keep up to it if the demand side accelerates like a lot of people think? Thanks.

Yes, that’s a good question. We are expanding our direct sales team, although it’s an overlay model. So it’s more of an enterprise sales team and hardly a field element there right now. It’s all virtual as you said, but the seniority and kind of domain expertise we certainly see as enterprise. So we are increasing our investment in that area. Whether we have the capacity to fulfill, I think we are hiring quite aggressively so we believe we will have the capacity, but we’ll see how things evolve as we get more and more demand generated both from direct and from our partners.

Thanks.

You’re welcome.

Thank you. We’ll take our next question from Jeff Van Rhee with Craig-Hallum.

Great. Thanks for taking my questions. A few from me. Just going back I think when we started FY '20, the original modeling outlook was 30 to 32 in S&M, 24 to 26 in R&D. As you look at FY '20, and I realize you don’t want to get into the annual because you’re more concerned on the revenue flow, but conceptually kind of that aggression to get you into those ranges, has that mindset changed at all? Again, I realize COVID has changed things a bit on the revenue side, but if that abates here, is that thinking still intact?

Yes, absolutely. I think if anything, just given the way that the market is accelerating to us, we’re looking at obviously prudently doing so but continuing to ramp that spend to really capitalize on the opportunity. So I think given the strong cash flow and the balance sheet position that puts us in it, I think that’s just gives us further confidence in working towards ramping those investments.

So those ranges wouldn’t be off the table, all else the same if the market bears out the way you think it is?

That’s right.

Okay. From a usage, I realize model is not primarily usage based model, certainly saw spikes and surges in a lot of different kinds of digital channels and consumptions. To be clear, any notable revenue impact from usage related streams?

There was. I think definitely not as much as the previous quarter, but it’s an area that we will obviously still seeing the uptick from many of our customers that saw a spike in their own interactions in the – more so in the early part of the quarter. So there was – I don’t have the exact amount, but there was definitely an element of some average seasonality, if you will, driven by the environment that I would say sort of tapered off some now.

Got it. And then along the lines of the pipeline, at this point if you kind of dissect that pipeline a little more precisely, what’s changed with respect to two aspects, new versus existing type prospects and then also the used cases you’re seeing really drive the pipe?

So this is actually – so, yes, two comments. One is we are seeing more in our pipeline over the last, say, three months to four months more of new logos in the pipeline. So that’s a welcome change and a lot of it is driven by the new partner channel, which is good. And the second piece around whether we are seeing particular areas of demand, like I said, one is the messaging area. Messaging and virtual assistants sort of go hand in hand. It’s more around digital connectivity and automation and self service. So we’re seeing that as one bucket of demand that continues to be strong. And the second area we see increased and sustained demand now is knowledge and AI in contact centers. So agent facing knowledge, we are seeing more sustained increase on incoming interest on that.

Sounds good. I appreciate it.

Welcome.

Thank you. We’ll take our next question from Mark Schappel with Benchmark.

Hi. Thank you for taking my question and congratulations on the quarter. Building on an earlier question with respect to your sales capacity, could you just discuss your plans for adding new quota carriers during the coming fiscal year, what we can expect as far as numbers?

So we haven’t quite talked about the numbers in terms of headcount. But what we are – and we are doing this so we can share with you, which is as a percentage of our revenue, we are kind of ramping our sales and marketing investment to the 35% level. Whether we get there in six months or we get there in 12 months, that’s something we’ll have to monitor quarterly because of the nature of where we are in the economy. But that’s kind of where we want to take it to, subject to obviously bringing in the cohorts and making sure that they are being able to deliver to early milestones.

Great. And then Ashu, with respect to the Avaya partner deal that was signed early in fiscal 1Q, I was wondering if you could just give a few details about how that deal kind of developed and came together?

Sure. So it happens to be a large BPO client of Avaya. They had been trying out some other solutions and once the Avaya branded solution, which is eGain solution, but Avaya branded was launched and as you know, the general availability was in March, we closed the deal in mid-July, so not a very long sales cycle. That happened to just be the situation where they needed to get into some client of theirs where they needed to deliver digital capability. So it wasn’t really a competitive environment. To us, it’s a start. What we are seeing is there’s a lot of pent-up demand in the Avaya installed base, particularly around the elite customers. And as you know there is – there is challenges around the Avaya customer base in terms of other new age competitors, but there is also a lot of reliability and confidence in the Avaya installed base to look at Avaya solutions, if they make sense. So we feel like it’s a good fit between our solution and it can be deployed extremely quickly because it’s a cloud-based solution, which is what we have done. So for this client, they’re just going live imminently now. And so you’re talking about a six-week deployment cycle. So all-in-all, looking encouraging. And based on that small early deals, because it's a large BPO, we do expect that there’ll be more expansion.

Great. Thank you.

Thank you. [Operator Instructions]. At this time, I show no questions in queue. I’d like to turn it back to eGain management for closing remarks.

Thanks. Well, thanks everybody. I appreciate you taking the time to listen and we look forward to updating you when we put out our Q1 results. And again, hopefully, we’ll get an opportunity to chat with some of you at the upcoming virtual investor events that we’re at later this month. Thank you.

This concludes today’s call. Thank you for your participation. You may now disconnect.