eGain Q4 2024 Earnings Call Transcript

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September 5, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the Egain Fiscal 20 24 4th Quarter and Full Year 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, MKR Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to Egain's fiscal 2024 Q4 and full year financial results conference call. On the call today are Egain's Chief Executive Officer, Ashu Roy and Chief Financial Officer, Eric Schmidt. 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, September 5, 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

The tables included with the earnings press release include a reconciliation of historical non GAAP financial measures to the most directly comparable GAAP financial measures. 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 will post an updated investor presentation to the Investor Relations page of Egain's website. And lastly, a phone replay of this conference will be available for 1 week. Now with that said, I'd like to turn the call over to Egain's CEO, Ashu Roy.

Speaker 2

Thank you, Jim, and hello, everyone. We finished our fiscal year with revenue and profitability ahead of our projections. Total revenue for the year was $92,800,000 and our non GAAP net income was $12,300,000 or $0.39 per diluted share. Looking at the 4th quarter specifically, we saw increased new logo momentum in our AI knowledge offering. This included some big graphs, for example, a travel management subsidiary of a financial mega brand in the U.

Speaker 2

S. Our AI Knowledge Hub will replace their homegrown knowledge base. Next is a mobility division of a multinational conglomerate in Germany. Here our AI knowledge hub will consolidate their knowledge across multiple silos which includes sales force and other internal knowledge bases. The 3rd logo I want to point out is a global consumer brand based out of London.

Speaker 2

To support their new product introductions across 84 countries, they have selected Egain's AI Knowledge Hub. And the last one I want to highlight is an industry leader for higher education savings in the U. S. Our AI Knowledge hub will replace this client's legacy knowledge systems. Looking at our overall business and the market, we are seeing growing inbound interest in our knowledge AI offerings.

Speaker 2

In fiscal 2024, our new logo win and RFPs for AI knowledge were up 50% year over year. And our pipeline activity remains strong in July August. In fact, this summer has been the strongest in 4 years, pretty much since COVID. To give you a good sense of the foundational role of knowledge in delivering value with AI in customer service specifically, let me share verbatim an excerpt from a Gartner report that was recently published in June this year. I quote, by 2025, 100% of generative AI virtual customer assistant and virtual agent assistant projects that lack integration to modern knowledge management systems will fail to meet their customer experience and operational cost reduction goals.

Speaker 2

That's a very strong statement coming from Gartner. I'm sure many of you read Gartner reports over the years, you have read many. I cannot recall and I've been doing this for many years, a prediction like this that has a 100% number on the predictor and a timeframe which is basically 12 months from now or a few months from now and running on an average 12 months. What that means and we are seeing this that every CEO of a large business is urgently demanding that their teams apply generative AI technology and the key is application, apply generative AI technology to reduce operating cost and do it at scale. So they move the needle.

Speaker 2

As we know, customer service is one of the significant operating line item costs in business. Given that Gen AI needs a solid knowledge foundation to deliver that value, as Gartner points out, not surprising that we are seeing more and more businesses looking to centralize and modernize their knowledge platform. So as we've been saying for a few quarters, we are doubling down on this AI knowledge market opportunity. Currently, half of our revenue comes from AI knowledge offerings. Over the past year, we have increasingly rotated our R and D investments toward AI knowledge products.

Speaker 2

As you may know, we launched Assist GPT, an eGain product in February this year, a novel solution to automate and accelerate what are routine but time taking tasks for customer service agents and knowledge authors. This has been enthusiastically received in the market. Historically, knowledge centralization and creation of scale has been what you would call a proverbial Guardian North and we are helping clients flash through it with the eGain AI knowledge offerings. Before I ask Edik, our Chief Financial Officer to add more color to our financial operations, I want to mention that our annual customer event, Solve24, will be held in Chicago on October 29, 30. At that event, we'll have many clients sharing success stories using our AI knowledge hub and we'll also announce and demo new product capabilities.

Speaker 2

So we're very excited about that. And now, over to Erik.

Speaker 3

Thanks, Ashu, and thanks everyone for joining us today. Let me provide more details about the financial results for the Q4 and full year of fiscal 2024 before discussing our outlook and guidance for fiscal 2025. Looking at our revenue, total revenue for the Q4 was 22 $500,000 ahead of our guidance, but down 9% year over year. The decline was primarily due to the impact of the large 2 large client losses we have discussed on our Q2 call, and one of them from our conversation hub and the other from our analytics hub. For the 4th year, total revenue was $92,800,000 down 5% year over year.

Speaker 3

And looking at our revenue by region for the full year, North America accounted for 78 percent of total revenue, the same as in the prior year. Looking at our non GAAP gross profits and gross margins, gross profit for the 4th quarter was $15,900,000 for a gross margin of 71% compared to a gross margin of 74% a year ago and 71% last quarter. For fiscal 2024, gross profit was $66,400,000 for a gross margin of 72% compared to 74% for the prior year. Now turning to our operations, non GAAP operating costs for the Q4 came in at $13,700,000 down 8% from $14,900,000 in the year ago quarter, reflecting the expense controls we implemented earlier in the year. Non GAAP operating costs for the full fiscal year were $56,000,000 down 13% year over year.

Speaker 3

As we see increased momentum from our AI knowledge offering, we plan to increase investments, particularly in R and D and brand marketing to capitalize on this very exciting opportunity. Looking at our bottom line, for Q4, non GAAP net income was 2,500,000 dollars or $0.08 per share compared to $3,600,000 or $0.11 per share in the year ago quarter. Adjusted EBITDA margin for the quarter was 11% compared to 16% in the year ago quarter. For the full fiscal year, non GAAP net income was $4,300,000 or $0.40 per share on a basic and $0.39 per share on a diluted basis, up 47 percent on a dollar basis from non GAAP net income of $8,400,000 or $0.26 per share on a basic and $0.25 per share on a diluted basis in the prior fiscal year. Adjusted EBITDA margin for the fiscal year was 12% compared to 9% in the prior fiscal year.

Speaker 3

Turning to our balance sheet and cash flows. For the full fiscal year, cash flow from operations was 12,400,000 dollars or a 13% operating cash flow margin. During fiscal 2024, we repurchased approximately 2,800,000 shares at an average price of $6.28 per share, totaling $17,300,000 Since inception, we have purchased 3,500,000 shares or 12% of the shares outstanding when we began the buyback program. Of the $40,000,000 authorized, dollars 17,000,000 remained available under the program at the end of the year. Our balance sheet remains very strong.

Speaker 3

Total cash and cash equivalents at the end of the year were $70,000,000 compared to $73,000,000 a year ago. Now turning to our customer metrics, with our focus on AI knowledge, I've broken out the knowledge metrics from the total metrics. As a reminder, total metrics were impacted by the 2 conversation and analytics customers losses we had previously discussed. Outside of these losses, I'm pleased to report that all material customer renewals came in as planned during the quarter. Looking at LTM dollar based SaaS net retention for knowledge customers, that came in at 97%, while total net retention was 85%.

Speaker 3

LTM dollar based SaaS net expansion rate for knowledge customers was 106, while our total net expansion rate was 103. Looking at total ARR, total SaaS ARR for knowledge customers increased 8% year over year, while total SaaS ARR decreased 10% year over year. Looking at our remaining performance obligations, total RPO decreased 19% year over year, but was up 16% sequentially from last quarter as renewals came in as I mentioned and we also had strong new bookings in the quarter. Our short term RPO was $60,400,000 down 9% year over year, but up 26% sequentially. Now on to our financial outlook and guidance.

Speaker 3

One item I'd like to call out before providing our guidance is the expected change in revenue forecasted from our Cisco OEM business. As I mentioned last quarter, we are seeing the shift to more ratable recognition and we estimate this change will result in deferral of approximately $1,300,000 of revenue that would have otherwise been recognized in fiscal 2025. Just to be clear, we are not lose we don't expect to lose this revenue, but rather instead recognize it more ratably than upfront that we've done previously. And we see most of that impact taking place in Q1 of 2025. For the first now on to the guidance.

Speaker 3

For the Q1 of fiscal 2025, we expect total revenue between $21,400,000 to $21,800,000 Turning to the bottom line for Q1, we expect net loss of $400,000 to $1,300,000 or a net loss of $0.01 to $0.05 per share, which includes stock based compensation expense of approximately $900,000 and depreciation and amortization of approximately $120,000 We expect non GAAP net loss of $400,000 to net income of $500,000 or a loss of $0.01 to a gain of $0.02 per share for the quarter. Looking at fiscal 2025 full year ending June 30, 2025, we expect total revenue of between $92,000,000 to $93,000,000 non GAAP net income of $5,000,000 to $6,000,000 or $0.17 to $0.20 per share and GAAP net income of breakeven to $1,000,000 or 0 $0.03 per share. We estimate share based compensation expense of approximately $5,000,000 and depreciation and amortization expense of approximately 400,000 dollars Looking at weighted average shares outstanding, we expect approximately 29,300,000 shares for the Q1 and 29,700,000 for the full year. So in summary, we are seeing continued strong momentum with new customers for our AI knowledge offering. And while we doubled down on the AI knowledge market opportunity, we are remaining focused on ensuring high customer satisfaction and delivering full business value to our conversation and analytics customers.

Speaker 3

Lastly, we will be hosting an Investor and Analyst Day event in conjunction with our upcoming customer event in Chicago on October 29. This event is a great opportunity for prospective investors and analysts to meet with customers and learn more about our business. You can register for the event on our website. We hope you can join us. This concludes our prepared remarks.

Speaker 3

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

Operator

Our first question comes from Jeff Van Rhee with Craig Hallum. Please go ahead.

Speaker 4

Hey, guys. Great. Thanks for taking the questions. It's really nice quarter. A handful of questions, if I could.

Speaker 4

I'm curious on the AI knowledge wins. You talked about 2 or 3 specific customers and would love to hear a bit about the competitive landscape. I think you said in 1, you took out a homegrown solution and in others, I don't recall, I think you might have had a sales force competitor in the second if I recall. But just talk about the competitive landscape. What are you displacing and what are you competing with?

Speaker 2

Yes. This is Ashu here, Jeff. Yes. So, let me maybe take a few seconds to give you a sense of what both in terms of the customer profile we are going after as well as what we are seeing in terms of incumbency, replacement and competition, right. So who we are going after, as you know, are customers who have at this point, we target companies with 5,000 employees or more.

Speaker 2

That's what we that's our sweet spot is companies that are 5,000 employees or more. So typically $1,000,000,000 plus in revenue. Now we do get customers who are below that, but when these large companies have complex content and compliance needs and where agent turnover is an issue, that's where we do have. So that's the need that we are targeting and the size of the companies. In terms of who we end up being winning more and more is where there has been a failed knowledge project.

Speaker 2

And typically that's getting more and more highlighted because people are recognizing that when they're doing these Gen AI investments in trying to automate customer service, they realize that trusted content and trusted knowledge needs to be fed into the Gen AI tools for them to do their job on the other end. So we are replacing, I would say, number one replacement for us is SharePoint, homegrown essentially, that's what it means, right? Number 2 is Confluence replacement, again homegrown. Number 3 replacement is Salesforce. So people deploy Salesforce knowledge and it's not delivering the value as much as they want, right?

Speaker 2

And the pressure is on to do more. And the 4th one that we have been replacing is Genesys' knowledge. So but Salesforce and Confluence are the dominant ones in terms of incumbency because they've been around for a while and people have their homegrown solutions. And the last part of these responses in terms of competitors, I would say broadly, those are the competitors that we are also working up against, right? The people who are trying to retain those knowledge set ups, and we are in the replacement business.

Speaker 4

Okay. That's helpful. And in the presentation, you talk about the conversion of pilots to customers. I think you quoted a 75% number in there. Obviously, very, very good number.

Speaker 4

Give me a sense of sample size here. I mean, what's the quality of that indication and the ability to repeat that?

Speaker 2

I would say more than 10 in the last few in the last couple of quarters.

Speaker 4

And is there anything about those that gives you doubt that you can retain that pace of conversion?

Speaker 2

That's hard to say. I feel like we know how to qualify much better now and that's probably what I would say. So we are I think part of the reason for the conversion rate being that high is that we are qualifying things well before we put them through the innovation pilot. As long as we do that, I think we should be good. But if we expand that and we are doing that with some partners we are developing, then I expect that some of those partner led pilots might actually have perhaps a smaller conversion rate, right, lower conversion rate.

Speaker 4

On the sales front, I think you said you're going to spend a bit on sales, if I recall, around branding and then a bit on development. What about quarter reps? Are you at the right headcount? Where are you quarter rep wise? Where do you think you'll be in 12 months?

Speaker 2

So, we feel that the biggest opportunity right now is to drive more pipeline and generate more pipeline. And that's why we are focusing on the brand and front end sort of market demand investments. We feel that we are in a good place with our reps, especially because our deal sizes are reasonable. We are still talking about north of 200,000 ARRs for new logos. So, we feel like we can manage that reasonably well with all the growth expectation we have on the AI knowledge booking side.

Speaker 4

Okay. And one last, if I could squeak it in. Obviously, you've got a couple of things going on here, knowledge on one side, catching a tailwind and in conversation and in analytics. And obviously, your focus there is customer satin and keeping butts in seats so to speak. You had the 2 big customer churn off a couple of quarters ago.

Speaker 4

I'm sure you've got your ears really tuned. I mean how are you getting comfortable in the conversation and analytics hub base that you're not at risk with any of your other customers in avoiding future large churn?

Speaker 2

Yes, that's a good point. We are as you can only expect, we are hyper focused on that satisfaction, value delivery and continuing to work with these clients to find opportunities and it happens with the sort of cycle time that every one of these customers have as they are investing on the knowledge and AI side, finding ways to get into that slipstream of knowledge and AI opportunity as well because then that creates collective stickiness in these accounts.

Speaker 4

Got it. Okay, great. Thanks for taking my questions. Appreciate it.

Operator

Our next question comes from Richard Baldry with Roth Capital. Please go ahead.

Speaker 5

Thanks. You guys have tended to be pretty conservative on the spending side. So I'm sort of curious that only a couple of quarters ago we're talking about cost controls and now we're talking about investments. So could you maybe talk about what you're seeing that's changing there, whether that's top of the funnel, sales cycles, ARPUs? Sort of give us some backdrop for why that positive shift in sort of your stance looking forward?

Speaker 2

Okay. So, I'd say 2 things. One is that 3 things really. One is that with existing clients, we are seeing a consistent increase in interest in faster rollout of knowledge across other businesses or other functions like self-service or enterprise facing. So for those where we are already with, we are in there with agent facing knowledge solutions.

Speaker 2

So that's one, right. So that's our kind of the most reliable year to the ground. And the next thing we are seeing is more inbound interest. And that has been consistently edging up even in the summer months as I mentioned. It's very unusual for us to be this busy in the summer months on that sort of sales side.

Speaker 2

This has been unusual. As Eric and I were talking, we felt like the last time we were this active and busy was summer of 2019. It's just been a while. So that's the second item. And then the third thing that has changed is I'm noticing this and our sales leadership is also pointing it out, that we are seeing more and more of these opportunities prosecute all the way to a decision much more predictably than before.

Speaker 2

So people when they come in, the amount of tire ticking is going down. People are executing RFPs and they say they will execute. It's kind of happening around that time and eventually they're deciding whether we win or not. So those are the three things we are seeing that's making us change our investment posture. And like Eric said, this is important, Richard.

Speaker 2

Right now, we are saying product investment and then brand marketing investment, right? Those are the 2 primary areas we're investing right now. And then as the pipeline gets to a point where it starts to become really not something we can handle with our current sales capacity, we're going to lag with that sales investment at that point.

Speaker 5

Got it. And in the past quarter or 2, you've gone through some pretty specifics about some of your larger trialers or how they fit into the 14:30, etcetera. Is there any update to that? Any changes? Any new sort of larger scale pilots going on that are continuing sort of to fill that top of the funnel while others are working their way through?

Speaker 5

And I know it's hard because it's sort of lumpy, but I'm just curious if there's anything there?

Speaker 2

A couple of things I'll say. I think the quality of companies we're engaging with in terms of size and brand continues to be very good. So, for example, the mega brand, when I said the financial mega brand, I meant a mega brand in the U. S. On the financial side.

Speaker 2

When I said multinational conglomerate where we have just got our foot in the door with a reasonably chunky ARR deal in Germany, specifically this was in Europe, we're talking about a Global 100 company. Right? So these are very large companies even on the logos that we are acquiring. Then on the pilot side, I feel like if I look at it, there are many large companies. Now one of the things we do see and this is a secular thing, we don't see as many multimillion dollar ARR initial purchases anymore.

Speaker 2

We just don't see that. What we see is the average is pretty good. Like I said, it's north of 200 ks, right, Eric? Yes, north of 200 ks initial error. But the quality of these companies is large.

Speaker 2

The potential is large. So I feel like that is a good trend for us.

Speaker 5

And then last for me, you're still sitting on a pretty good amount of cash on the balance sheet even after doing some pretty meaningful buybacks. Is there anything interesting sort of on the technology side, whether it's to keep wrapping more product around the AI side of the table or you think your capital allocation still remains sort of focused on the buybacks over the near term? Thanks.

Speaker 2

So we are increasing our investment R and D. I know it's not it's a good thing that it's not burning a big hole in the balance sheet, but we are increasing our investment. And in terms of the rotation that we've done in new innovation, so we have a very chunky amount of money that we are putting in and with people and capability around their knowledge. That is an area that we'll continue to invest in for some time because we think there's a lot of runway to differentiate as well as make an attempt to dominate the emerging market of AI knowledge systems. So I would say that's our primary focus right now.

Speaker 5

Got it. Thanks.

Operator

This concludes our question and answer session. I would like to turn the conference back over to eGain management for any closing remarks.

Speaker 3

Thanks everybody for taking the time today and look forward to seeing some of you at our Solar event in Chicago at the

Speaker 2

end of October. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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eGain Q4 2024
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