eGain Q2 2024 Earnings Call Transcript

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Provided by Quartr
February 8, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the eGain Fiscal 2024 Second Quarter Financial Results Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jim Byers with MKR Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to Egain's fiscal 2024 Second Quarter Financial Results Conference Call. On the call today are Egain's Chief Executive Officer, Ashu Roy and Chief Financial Officer, Eric Smith. 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.

Speaker 1

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, February 8, 2024, 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 also discuss certain non GAAP financial measures such as non GAAP operating income.

Speaker 1

Tables included with the earnings press release include reconciliation of the historical non GAAP financial measures to the most directly comparable GAAP financial And our earnings press release can be found by clicking the press release link on the Investor Relations page of Egain's website ategain.com. And along with the earnings release, we will also post an updated investor presentation to the Investor Relations page on Egain's website. And lastly, a phone replay of this conference call will be available for 1 week. And now with that said, I'd like to turn the call over to Egain's CEO, Ash Roy.

Speaker 2

Thank you, Jim, and good afternoon, everyone. Our top and bottom line results for the quarter have exceeded our guidance and our assist GPT AI offering is being well received by the market and helping us win new logos. Turning to business, We signed several new logos in the quarter. Some notable wins here, our global investment management company chose began to modernize their knowledge management capability. Their services staff was struggling to find answers in What are long complex documents in their business spread across many silos, they selected eGain based on Our ability to unify that knowledge and deliver consumable answers using generative AI in a safe auditable way.

Speaker 2

Another new logo is a membership based primary care practice, which is in hypergrowth mode. They selected eGain to enable their associates with a unified knowledge platform. Again, they will integrate all their content and knowledge sources on the EDN platform and use our Assist GPT capability to deliver easy answers and ramp up their new hires. Lastly, I'll mention a pioneering U. S.-basedmutual auto insurance company.

Speaker 2

They selected us to streamline their agent experience and therefore improve their customer experience. They've gone live with eGain already for their service group and are now looking to roll out the knowledge capability across the enterprise. We also saw good expansion from existing customers during the quarter. A couple of notable ones, a large P&C Insurance Company and a global electronic component distributor. Turning to renewals, in the current macro environment, we are working hard to serve and retain customers as they look to reduce their operating costs.

Speaker 2

We've had good renewals in the quarter, including large healthcare insurance an industry leading HCM SaaS solution provider and a large multinational bank. At the same time, we have received notice from 2 large clients about their intent to not renew with us. The first is a conversation hub client. They're choosing to consolidate vendors for all their digital customer communications. The second is an analytics hub client.

Speaker 2

They are choosing to build out their homegrown capability to measure and manage their contact centers. The combined ARR of these two accounts is approximately $8,000,000 These churn events are challenging as they are not factored in our fiscal 2024 plan. At the same time, we are very encouraged by the growing interest in our Assist GPT proposition. Our new logo pipeline is growing nicely with knowledge and AI opportunities. We're also feeling good about our new logo sales performance in the quarter.

Speaker 2

And as macro conditions improve, we believe we can grow our new logo acquisitions without adding sales capacity. Our new Assist GPT and Instant Answers capabilities are generating lots of good market interest. With this GPT, customers can speed up knowledge creation by 4x. For an early client In the energy vertical we piloted with, what historically would have taken 8 weeks of human effort was done in less than 2 weeks. With Instant Answers, another AI product, agents get much better and faster answers from our knowledge base.

Speaker 2

At one of our insurance clients, insurance, this is P and C Insurance, agents have seen more than a double improvement in speed to answer, even as answer quality has improved. Our product investments and leadership continues to be recognized by the market and clients. We were honored to be the sole recipient of the 2023 Kilometers Promise Award from KM World Magazine. This award recognizes the provider who best delivers on the promise to customers with innovative solutions integrated into their business process. Also in November, Egain was named a visionary in the Gartner Magic Quadrant for CRM customer engagement.

Speaker 2

We had mentioned this in our prior call. But that was followed by our receiving the top rating for knowledge management in the 2023 Gartner Critical Capabilities Report and that was something new that we had not mentioned before. We continue to invest at this intersection of AI knowledge and digital technologies to extend our product leadership. To conclude, we see good momentum in new logo wins and pipeline activity. We continue to invest in innovative AI capabilities like Assist GPT and Instant Answers to enhance our knowledge hub.

Speaker 2

And as market conditions improve, we are well positioned to capitalize on this big opportunity to help automate knowledge for customer service. With that, I'll ask Eric Smith, our Chief Financial Officer to add more color around our financial operations. Eric?

Speaker 3

Thanks, Ashu, and thanks everyone for joining us today. We delivered another quarter of significantly improved profitability and strong cash flow from operations. Both our top and bottom line results exceeded our guidance and Street expectations. Let me share more detail about our financial results for Q2 before getting into our outlook and guidance for Q3 fiscal 2024. Starting with revenue, total revenue for Q2 was $23,800,000 above our expectations, but down 7% year over year, Reflecting the current cautious ending environments and the tough comparison where last year we benefited from a seasonal volume increase of approximately $1,000,000 did not repeat this year.

Speaker 3

When looking at the revenue by region, North America accounted for 79% of total revenue this quarter, up from 77% in the year ago quarter. Total revenue from North America was $18,800,000 down 5% from last year whereas in contrast total revenue from Europe was 5,000,000 down 14% year over year. Looking at non GAAP gross profits and gross margins, Gross profit for the Q2 was $17,100,000 for a gross margin of 72% compared to 75% for the prior year quarter and 73% last quarter. Now turning to operations, non GAAP operating costs for the Q2 came in at $13,500,000 a 22% improvement from $17,300,000 in the year ago quarter reflecting the expense controls we have implemented. Looking at the bottom line, non GAAP net income for Q2 was $3,400,000 or $0.11 per share, up 100% on a dollar basis from non GAAP net income of $1,700,000 or $0.05 per diluted share in the year ago quarter.

Speaker 3

Adjusted EBITDA margin for the quarter was 16%, up 700 basis points from 9% in the year ago quarter. Turning to our balance sheet and cash flows, we generated very strong cash flow from operations for the quarter of 7,700,000 or a 32% operating cash flow margin. During the Q2, under our share repurchase program, We repurchased approximately 391,000 shares or $2,500,000 at an average price of 6 $0.39 per share. Of the $20,000,000 authorized, dollars 11,200,000 remain available under the program at the end of the quarter. Our balance sheet remains very strong.

Speaker 3

Total cash and cash equivalents at the end of the quarter were 86,800,000 up from $80,900,000 a year ago. Now turning to our customer metrics. With our continued focus on knowledge as outlined by Ashu this quarter and going forward, I will share some additional Customer metrics for our knowledge customers. First looking at our LTM dollar based SaaS net retention from knowledge customers was 103%, while our total net retention dropped down to 94%. The LTM dollar based SaaS net expansion rates for knowledge customers was 1 113%, while our total net expansion rate was 106%.

Speaker 3

Looking at our total ARR, the total SaaS ARR for knowledge customers increased 6% year over year while the total SaaS AOR decreased 13% year over year. Looking at our remaining performance obligation, total RPO decreased 15% year over year to $77,900,000 and our short term RPO was 55,800,000 down 4% year over year. Now turning to our guidance. For the Q3 For fiscal 2024, we expect total revenue of between $22,600,000 to 23,000,000 Turning to the bottom line, for Q3, we expect GAAP net income of $400,000 to $1,000,000 or $0.01 to $0.03 per share, which includes stock based compensation expense of approximately $1,200,000 and depreciation and amortization of 100,000 We expect non GAAP net income of $1,600,000 to $2,200,000 or $0.05 to $0.07 per share. For the full year fiscal 2024, given the increased churn as outlined by Yashu, we are revising our previously provided Guidance as follows.

Speaker 3

For fiscal 2024 full year ending June 30, 2023, we now total revenue of between $92,000,000 to $93,000,000 non GAAP net income of $9,300,000 to $9,800,000 or $0.29 to $0.31 per share and GAAP net income of $4,500,000 to $5,000,000 or $0.14 to $0.16 per share. We estimate share based compensation expense of approximately $4,800,000 and depreciation and amortization expense of approximately $500,000 for the year. Looking at weighted average shares outstanding, we expect approximately $31,900,000 for the 3rd quarter And for fiscal 2024, dollars 32,000,000 for the full year. So, in summary, while the macro environment remains challenging, we are very pleased with the increased number of new knowledge customer wins in Q2 And we expect to see continued positive momentum in new business activity going forward given the level of interest for our new Assist GPT product offering. The opportunity for Egain is significant and with our leadership and focus on knowledge and AI, We remain well positioned to capitalize on the expanding market opportunity with our strong balance sheet and cash flow generation.

Speaker 3

Lastly, on the Investor Relations calendar, Yigand will be presenting and meeting with investors at the Annual ROTH Conference taking place March 17 to March 19 in Dana Point, California. We'll be providing more details as we get closer to that date and hope to see some of you there in This concludes our prepared remarks. Operator, we will now open the call for questions.

Operator

And our first question comes from Richard Baldry with Roth

Speaker 4

Thanks. In terms of the unexpected attrition, can you talk about is there any commonality there in terms of Geographies or vertical end markets? And then, in terms of the timing, it looks if I backed it out right that most of it hits in the Q4. Is that right? Or is there some residual pressures into the September quarter as well?

Speaker 4

Thanks.

Speaker 2

Okay. So let me address the first part, maybe Richard and then. So No, there is nothing particularly common. 1 was a direct client. The conversation hub client was a direct client.

Speaker 2

The analytics hub client was Partner, by exclusion, I guess neither of them are knowledge clients, but that's not to say that We may not have customers in that area. There's a usual sort of pattern to that. But I think both of them are under tremendous cost pressure in their businesses that we see. There's a lot of public news about them looking to reduce cost, headcount reduction. So that I guess is a commonality right now.

Speaker 2

That's both of them have been using our products well. They seem to still be the operational teams are still very happy with us, seem to be engaged with the product, but they are being given marching orders and so that's where the outcome is. Eric, you want to Yes. And I

Speaker 3

think, Rich, you're correct that both of these accounts impact will be felt in the Q4.

Speaker 4

And flipping over to the AI side of the table, could you talk about some of the Early deal wins, sort of how it's impacting deal sizes, deal cycles. Are you seeing a noticeable increase in the pipeline of people evaluating the AI type solutions? And sort of when do you think that if that comes a tailwind, when could that start to emerge? Thanks.

Speaker 2

Yes. So firstly, I would say that A couple of things. 1, in terms of the IITD pilots that we do the innovation in 30 days, We are doing more pilots now than we have done in the last several years, right? So and Almost all of those, let's say, are those AI pilots, right, around Assist GPT or more at this point more instant answers, which is part of the Assist GPT. So we're seeing a lot of instant answers pilots right now, both in prospects as well as existing accounts.

Speaker 2

So that's one thing. 2nd thing we are seeing and this is early, but my sense is that the early Engagement with prospects, early in the funnel, people seem to be coming in with an AI oriented budget and AI oriented interest into knowledge saying what can I do with AI? And so that's something different from what we had seen say 6 months ago. There were not a lot of Ground level conversations that started with AI, there was a lot of talk about it, but people were not the conversations we're just chatting with our SDR team and that's one of the trends that we are seeing much more now. Those are the 2 things I would point out.

Speaker 4

And maybe last for me is The AI traction seems to be picking up and you see sort of an inflection point ahead for growth, but it's not reflected in current results or arguably your valuation. Do you think you'd find a period where you might be willing to get more aggressive on the buyback front given the strength of the balance sheet? How do you view sort of the trade offs there? Thanks.

Speaker 3

Yes. I think, Rich, that's a valid point. I think certainly as we Look at the cash generation that we generated again, certainly something that We'll continue to look at closely for sure.

Speaker 4

Thanks.

Operator

And our next question comes from Jeff Van Rhee with Craig Hallum.

Speaker 5

Great. Thanks for taking the questions. Just maybe high level in terms of the splits of the business. So from a revenue percent of revenue perspective, how much is sitting in? I think you gave some splits in SaaS IRR, but can you give it holistically where the revenue With respect to knowledge management versus conversation hub versus analytics, we have a sense of proportion?

Speaker 3

I think, just roughly speaking, the knowledge business is just under 50%. And then I would say the analytics business is probably in the 15% range and The conversation help is in that 35% range.

Speaker 5

Okay. And then with respect to the 2 losses, I think it sounded like the You had some visibility into where they're going in terms of whatever platforms are moving over to. They're under cost pressure. Is the move that they're making, is it your impression there's that substantial of a cost benefit by just consolidating onto the platforms of the existing providers or are there other motivations. I mean, certainly, if they've got a platform provider, maybe there's some cost benefit.

Speaker 5

Just a little bit more about why the shift and if you know what the cost benefit was if there was some for their departures? Yes.

Speaker 2

So I can tell you what we know so far. Yes, we were aware that was an ongoing battle inside, let's say, the conversation hub client, let's talk about that first. We were aware that that was a hustle going on between The people who were using the solution from our side were very happy with it and sort of a company wide agenda to try to reduce number of vendors. And ultimately, I think what we've been told is that they're moving this direction. They'll see how the quality of that service goes in that migration.

Speaker 2

And they are open to the idea and we're still working with them, but no guarantees to see if we can continue to operate as a trusted second source. So that's what we know on the first one, the conversation hub one. On the second one, The analytics one, I think the what we don't know enough about that to be honest, because it's behind a partner and we don't have enough visibility to know what is the economic sort of trade offs between their homegrown and ours.

Speaker 5

Okay. All right. That's helpful. And then Eric, you mentioned on the year over year compares, I think you mentioned something about a volume, dollars 1,000,000 in volume that didn't Repeat, can you just refresh me on what that was a year ago?

Speaker 3

Yes. So, I think what we had seen was The account that was driving increase in messaging business that those running a special program at the end of This quarter last year that drove that spike. Increase in volume usage.

Speaker 5

Okay. All right. And then just on the Assist GPT, Obviously, you tried to get it in the hands of a lot of folks that let them use it and get feedback. I realize it's early, but any areas of pushback in places where you've decided to pivot, accentuate, deemphasize already?

Speaker 2

Yes, a couple of learnings we have got. One is that people are Very in the enterprise, not in the mid market, but in the enterprise, people are very focused on Control safety and auditability, so we are enhancing that significantly around generative capabilities. So that is a learning for us. And the second is that the results that people are seeing in the pilots And these pilots are obviously trials, right? They're not production level at scale.

Speaker 2

They're limited production trials. People seem to be very happy with the solution results. So we're consistently seeing strong positive feedback saying, yes, we like this, right. So that's the second thing that we are seeing.

Speaker 5

Okay. And then maybe just one last, Eric, and we can take this offline if it's easier. Just trying to There's obviously going to be some volatility in results next couple of quarters as you kind of reset to the new revenue level. Do you have a sense of gross margins Q3, Q4?

Speaker 3

So, we'll definitely see some pressure obviously given that reduction. But I think one of these accounts actually had some of the profile wasn't at the High level. So, but yes, I think we'll maybe I'll have to get back to you on the exact percentage where we see it, but certainly there'll be some pressure.

Speaker 5

Yes. Okay, fair enough. I'll leave it there. Thank you. Thanks.

Speaker 5

Thank you.

Operator

And seeing no further questions, we will conclude the question and answer session. I would like to turn the conference back over to management for any closing remarks.

Speaker 3

Okay. Well, thanks everybody. Appreciate you taking the time. We look forward to updating you as we continue to Proceed with this exciting knowledge driven by the SysGPT product here. Thank you.

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Earnings Conference Call
eGain Q2 2024
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