eGain Q3 2024 Earnings Call Transcript

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May 9, 2024

There are 6 speakers on the call.

Operator

And welcome to the eGain Fiscal 20 24 Third Quarter Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Jim Byers from MKR Investor Relations.

Operator

Sir, please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to Egain's fiscal 2024 Q3 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 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 and are protected by Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995.

Speaker 1

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, May 9, 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. 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.

Speaker 1

Egain's earnings press release can be found by clicking the press release's link on the Investor Relations page of eGain's website ategain.com. And along with the earnings release, we have also posted will post an updated investor presentation to the Investor Relations page of page of 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, Ashu Roy.

Speaker 2

Thank you, Jim, and good afternoon, everyone. We saw good momentum in new logo wins and business activity in the quarter, driven by our AI knowledge offering. In McKinsey report from last year, I talked about the potential of generative AI to revolutionize customer operations function across the economy and not about improving customer experience and agent productivity using generative AI through digital self-service and enhancing agent skills. And it said that there was a potential to deliver $400,000,000,000 in savings annually for businesses who today collectively spend $1,500,000,000,000 a year in customer service. I say this because with our latest AI knowledge offering, which is Egain Assist GPT, we are breaking down the technology barrier that prevented companies from delivering trusted answers for customer service at scale.

Speaker 2

That barrier was the manual effort in creating and curating knowledge within the hub that could serve as a single source of truth. As companies are looking to significantly reduce customer service cost, our comprehensive solution delivers on the promise of AI for them to reduce cost of customer service while boosting their customer experience. These are exciting times for us. So looking at our business, we signed some new good knowledge customers in Q3. I'll mention a few.

Speaker 2

First one is the U. S. Mega Bank, so one of the big four. We are starting with them in one of their fast growing multi $1,000,000,000 divisions. They're looking to contain their costs as they're grappling with customer and agent experience in a rapidly growing service group.

Speaker 2

Right following that, we have more opportunities with this client in our pipeline and we are looking forward to becoming the platform for AI knowledge across the bank. It's really exciting for us. MegaBank, something that we have been working with them for a couple of years now and I'll talk through that opportunity a little more later on. The next one I want to bring out is a Fortune 100 mortgage financing enterprise in the U. S.

Speaker 2

We're starting out with them by replacing an existing solution for conversational service for one of their business units. Over time, the intent is to enable an enterprise wide capability that is contextual and compliant available both to customers and employees. The next one I want to mention is a fast growing U. S.-basedpropertymanagement company. They see AI knowledge as a core capability to improve customer experience and empower their employees as they are driving growth in a $1,000,000,000 business.

Speaker 2

And the next one and the last one I want to mention is a leading manufacturer of high end bicycles and related products. They're replacing their current knowledge platform with eking to deliver trusted answers to customers and agents. Looking at the market, activity in this market continues to improve and has improved in the quarter as well. In fact, over the last 9 months of fiscal 2024, our new logo and RFP counts, both of them grew by 50% year over year. This reflects the growing trust sorry, the growing interest we are seeing in knowledge management as a foundation for effective AI use in customer service.

Speaker 2

Now the mega bank I talked about that we won in the quarter is a case informed. For the past year and a half, they've been running multiple AI initiatives within their business, no surprise. And having gone through their exploration and evaluation of AI in their context, they concluded that they needed a knowledge foundation to feed trusted content to their AI tools. In their case, as for most large enterprises, they like our composable architecture so they can plug in their LLMs whenever they are ready for prime time. Most of the new opportunities we are engaging with share this growing awareness of the complementarity of AI and knowledge to deliver trusted answers for customer service.

Speaker 2

As we all know, customer service is a business function where 80% answer accuracy is not good enough. With a wrong or a thoughtless answer delivered by uncontrolled AI tapping directly into uncurated content could easily result in a lawsuit or worse yet sustained brand compromise, a la Air Canada recently. Extending our product leadership in the AI model market for customer service, we rolled out our Assist GPT solution in Q3 to help our clients automate knowledge creation and curation. Fact, earlier today on our well attended marketing webinar, a European client of ours joined us to share their success story and lessons learned as we help them slash their knowledge build effort by a factor of 5 and reduced at the same time the answer errors by improving quality by 6x using our solution. Our current market position gives us a unique vantage point in the AI knowledge innovation risk.

Speaker 2

And so we are taking full advantage of it to enrich our products faster and better to orchestrate AI and experts to automate knowledge management, thereby driving down the cost of customer service with trusted answers. To conclude, we see continued momentum in new logo wins and supporting pipeline activity. And as such, we are investing in R and D and marketing to capitalize on this disruptive opportunity. At the same time, we're keeping a keen eye on costs and making sure that we're putting all our wood behind this arrow to dominate the AI knowledge market for customer service. With that, I'll ask Eric Smith, our Chief Financial Officer to add more color around the financial operations.

Speaker 2

Eric?

Speaker 3

Thanks, Ashu, and thanks everyone for joining us today. Let me provide more details about the financial results for Q3 before discussing our outlook and guidance for Q4 of fiscal 2024. Starting with revenue, total revenue for Q3 was $22,400,000 down 3% year over year. Contribution from our Cisco OEM business in the quarter was lower than anticipated due to a timing issue on revenue recognition as Cisco continues to implement its shift from an on premise model to the cloud. In this quarter, more revenue shifted to ratable recognition than originally anticipated, which caused our revenue to come in below our expectations.

Speaker 3

And looking at revenue by region, North America accounted for 78% of total revenue this quarter, the same as in the year ago quarter. Total revenue for North America was $17,400,000 down 2% from last year, whereas in contrast total revenue from Europe was $5,000,000 down 4% year over year. Looking at non GAAP gross profits and gross margins, gross profit for the was $15,800,000 for a gross margin of 71% compared to 69% for the prior year quarter. Now turning to operations, non GAAP operating costs for the 3rd quarter came in at $13,800,000 a 7% improvement from $14,900,000 in the year ago quarter, reflecting the expense controls we have implemented. Looking at the bottom line, non GAAP net income for Q3 was $2,600,000 or $0.08 per share, up 142% on a dollar basis from non GAAP net income of $1,100,000 or $0.03 per share in the year ago quarter.

Speaker 3

Adjusted EBITDA margin for the quarter was 10%, up 500 basis points from 5% in the year ago quarter. Turning to our balance sheet and cash flows, we generated $1,700,000 in cash flow from operations for the quarter or an 8% operating cash flow margin, up from $905,000 in the year ago quarter. For the 1st 9 months, cash flow from operations was $17,600,000 or an operating cash flow margin of 25%. During the quarter, under our share repurchase program, we repurchased approximately 881,000 shares or 5,500,000 dollars at an average price of $6.26 per share. Of the $20,000,000 authorized, dollars 5,700,000 remains available under program at the end of the quarter.

Speaker 3

Our balance sheet remains very strong. Total cash and cash equivalents at the end of the quarter were $83,800,000 up from $81,300,000 a year ago. Now turning to our customer metrics. With our continued focus on knowledge, I will share some additional custom metrics for our knowledge customers. LTM dollar based SaaS net expansion rate for knowledge customers was 109 percent, while our total net expansion rate was 105%.

Speaker 3

Our LTM dollar based SaaS net retention for knowledge customers was 97%, our net retention was 96%. Looking at total ARR, SaaS ARR for knowledge customers increased 4% year over year, while total SaaS ARR decreased 1% year over year. Looking at our remaining performance obligation, total RPO decreased 22% year over year to $67,900,000 The decrease was driven by the customer losses we discussed last quarter and a lower number of accounts up for renewal in the quarter. Our short term ARPU was $48,100,000 down 8% year over year. Now turning to our financial outlook and guidance.

Speaker 3

For the Q4, we expect total revenue between $21,100,000 to $21,400,000 Turning to the bottom line, for Q4, we expect GAAP net loss of $300,000 to $900,000 or $0.01 to $0.03 per share, which includes stock based compensation expense of approximately $1,100,000 and depreciation and amortization of $100,000 We expect non GAAP net income of $200,000 to $800,000 or $0.01 to $0.03 per share. For the full fiscal 2024, we now expect total revenue of between $91,500,000 to 91,800,000 dollars The slight reduction in full year guidance is to adjust for the accelerated shift in Cisco OEM revenue to a ratable model where we see expect to see less revenue upfront and more spread across the term of the contracts. We are increasing our guidance for GAAP net income to $5,400,000 to $6,000,000 or $0.17 to $0.19 per share for the year. We estimate share based compensation expense of approximately $4,600,000 and depreciation and amortization expense of approximately $400,000 for the year. We are also increasing our guidance for non GAAP net income for the year to $10,000,000 to $10,600,000 or $0.32 to $0.34 per share.

Speaker 3

Looking at weighted average shares outstanding, we expect approximately $30,500,000 for the 4th quarter and $31,600,000 for the full fiscal year. So in summary, we are pleased with the continued good momentum in new customer wins and business activity in the quarter, which continues into Q4 driven by our AI knowledge offering. We continue to generate significantly improved profitability We continue to generate significantly improved profitability and strong cash flow from operations, while buying back shares of our stock. We continue to invest in knowledge and generative AI capabilities and with our healthy balance sheet and cash flows remain well positioned to capitalize on the significant opportunity ahead. This concludes our prepared remarks.

Speaker 3

Operator, we'll now open the call for questions.

Operator

Ladies and gentlemen, at this time, we'll begin that question and answer session. Our first question today comes from Richard Baldry from Roth. Please go ahead with your question.

Speaker 4

Thanks. Could you maybe talk a little bit about any changes you're seeing in sales cycles faster or shorter? And then the second would be, I think it was last quarter you talked about the 6 largest companies you had in trials, a couple were Fortune 30s, a few others were north of $10,000,000,000 revenue, but all would be new logos. Can you talk about how the status of those trials is? Do you think it's nearing completion?

Speaker 4

Have any fallen out? Have any been added of similar large scale? Thanks.

Speaker 2

Yes, sure. So a couple of the ones that I mentioned, including the U. S. Mega Bank and the Fortune 100, that's actually a Fortune 20 company, the mortgage financing company. So yes, those 2 did convert.

Speaker 2

Then we have a couple of the pilots that we're going on that are still tracking to close this quarter. That's good. Interestingly, of those half a dozen that I mentioned, none have fallen off yet. So that's also promising. We say 75% conversion kind of is where we are at this point with our pilots.

Speaker 2

But what we're seeing is with advanced opportunities, the change we are seeing now is that people are making decisions, even though the sales cycles are much shorter, but they seem to be more predictable. And that is coming across with the RFPs and just the number of RFPs we are seeing with larger organizations. The other thing we are seeing, which is, I didn't mention in my prepared remarks, but we are seeing a lot of early conversations, which are around where we are prepping for budgeting for 25. So we are seeing a lot of that as well now. So I think that's also a good thing for us.

Speaker 4

And on those larger deals then when they move from being trialers to live, can you talk about the complexities, how long it would take to get into sort of a full deployment for revenue recognition purposes? Do they start with a big bang or will they sort of grow into scale over time, so we have an idea of how those should play in to the P and L over time? Thanks.

Speaker 2

Most of them start with an initial deployment. That could be still our average I think we have shared this in the past, right. Our average ARR for new logos is in that $200,000 range, right. So that's relatively small for some of these large logos we're talking about. So the initial deployments tend to be in that zip code, maybe a little north of that in some places, a little south of that in others, but then the opportunity scales from there.

Speaker 4

Great. Thanks.

Speaker 2

Sure.

Operator

Our next question comes from Daniel Huebschmann from Craig Hallum. Please go ahead with your question.

Speaker 5

Hey, thanks for taking my question. This is Daniel on for Jeff Van Rhee. Just on maybe using the U. S. Megabank as an example of some of these upsells that you have coming down the pipe.

Speaker 5

I understood that to be an upsell correct me if I'm wrong, an upsell of the SysGPT on to the mega bank having already, you said, been using you for several years. Now how would that upsell compare say as a percentage to what they're already doing with you? Just trying to get a sense for the scale of these wins or maybe just sizing the potential win in terms of 5, 6, 7 figures, etcetera.

Speaker 2

Got it. So I think I may have somehow conveyed the wrong impression. The mega bank we're talking about is a net new logo for us. So that's one point. But having said that, I can give you a feel for what we are seeing in terms of expansion in existing accounts, which is, I think, part of your question, right?

Speaker 2

So what we see is with Assist GPT, there's a lot more excitement to roll out the capability into self-service. So self-service has been an area where there has been historically a lot of challenge in getting consumers to use your self-service because it's still very kind of rigid and not very comfortable conversationally. And so we are seeing that with Assist GPT that is something people are driving as well. So that to us that is interesting because our mind that effectively doubles the proposition of whatever you think you can do on the agent side, you can roughly do the same on the customer self-service side in terms of business value and therefore revenue to us.

Speaker 5

Thanks for that. Then just on the timing headwind in relation to Cisco, just what was the size of that headwind? Or maybe it's not exactly sized, just where would that have gotten you near, say, the middle or upper bounds of the guide? Or just how does that compare?

Speaker 2

Again, no, good point. It would

Speaker 3

have got us to the upper end of the balance, probably ahead of the top end of our range.

Speaker 5

Okay. And then just one housecleaning item for me on the COGS and specifically the service gross margins. Should we sort of be thinking of the new levels as sort of a new normal or how should we be sort of thinking of that developing?

Speaker 3

I think this quarter there was some movement where the margins came in certainly lower than where we've seen it. So I think looking forward, we would expect that those margins to sort of service margins to get back into the sort of high single digit low teens range.

Speaker 5

Okay, thanks. That's it for me. Thanks,

Operator

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the floor back over for any closing remarks.

Speaker 3

Thanks, operator and thanks everyone for listening today. I think an exciting time for us. So, I look forward to updating you with our Q4 results. Thank you.

Operator

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

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eGain Q3 2024
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