eGain Q2 2025 Earnings Call Transcript

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February 13, 2025

There are 5 speakers on the call.

Operator

As a reminder, this conference is being recorded. I would now like to hand the call to Jim Byers, Pundell Wilkinson, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to eGain's fiscal twenty twenty five second quarter financial results conference call. On the call today are eGain's Chief Executive Officer, Ashi 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, planned, intend, expect, anticipate or similar expressions.

Speaker 1

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, 02/13/2025, and assumes no

Speaker 2

obligation

Speaker 1

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. EGain's earnings press release can be found by clicking the press release's link on the Investor Relations page of eGain's website at eGain.com. And lastly, a phone replay of this conference call will be available for one week.

Speaker 1

And now with that said, I'd like to turn the call over to eGain's CEO, Ashu Roy.

Speaker 3

Thank you, Jim, and good afternoon, everyone. In the second quarter, we closed some exciting new enterprise logos for our AI Knowledge Hub offering. Let me share three examples. First, we signed up a major U. S.

Speaker 3

Airline, one of the largest in the world. They wanted to modernize their knowledge platform to improve customer experience and reduce service cost using AI automation. And we are the selected provider for that. Second, we signed up a leading interactive entertainment company, one that has 800,000,000 player accounts worldwide. This company has a vision of putting knowledge in the game for their players, but they were struggling with the existing knowledge platform they have because it could not provide the necessary APIs and functionality to implement the vision.

Speaker 3

After a successful Innovation in thirty Days pilot with us, they selected our solution. The last one, a global money transfer company with 50,000,000 customers across 200 countries. They incidentally had successfully or unsuccessfully, sorry, tried to implement a customer knowledge platform two times before they ended up selecting us. Looking at trends and our overall business, the first trend which continues is knowledge centralization and enterprises. This trend is attracting even greater focus due to its foundational relevance to AI projects.

Speaker 3

As enterprises push to operationalize meaningful AI use cases, particularly in customer service, they are struggling with content silos and fragmented knowledge, which makes it hard to ensure that AI systems relying on these silos for input can generate correct, consistent and compliant answers. As a result, having a single source of truth in a knowledge central hub across the business is becoming critical. The other trend we see emerging is that knowledge management projects starting out with a mandate of automating customer service are incrementally adding enterprise facing use cases for employee service or partner service during the sales process. As a result, we see larger knowledge opportunities in our pipeline. In the last six months, for example, we have seen the number of seven figure deals in our pipeline more than double.

Speaker 3

This is exciting. At the same time though, the side effect of this trend is more scrutiny on these projects and the vetting process now includes groups like the AI office. So these bigger deals are taking some more time to close. On balance, we see this as a very good thing for us. We have the ability and patience to nurture these deals to close.

Speaker 3

Turning to our customers and products. At the October, we had a very successful eGain Solve24 event in Chicago. This is our main U. S. Customer event.

Speaker 3

Many of our clients shared success stories about getting real value from AI capabilities in our platform. One client presentation in particular comes to mind. The Head of Knowledge Management at Specialized Bikes, which is a name brand, a Bikes manufacturer for higher end specialists. She was on stage talking about their experience with eGain AI Knowledge Hub. And she said, I quote, eGain AI is like having an army of interns on Red Bull.

Speaker 3

Our content team is really fricking happy. At the event, we also announced eGain AI Agent, a new omni channel conversational product that guides and resolves customer and agent questions using documents, websites and our knowledge base. Customer interest in eGain AI agent is very strong. We see the pressure in enterprises all the way up or coming down from Board and the CEO to show real business value with AI this year. Most of our clients are actively looking for full stack AI solutions to quickly move the needle in customer service, both in cost and experience.

Speaker 3

And we are on track to launch our eGain AI agent in the current quarter as planned. To conclude, our AI knowledge hub solution is driving growth in our pipeline. We are actively investing and leading and shaping the AI knowledge hub market to automate business operations starting with customer service. An eGain AI agent, our omni channel conversational solution that we announced at our Solve event will be available this quarter. With that, I'll ask Eric Smith, our Chief Financial Officer, to

Speaker 2

add more color around our financial operations. Eric? Thanks, Ashu, and thanks everyone for joining us today. As Ashu mentioned, we won several new enterprise logos in the quarter that resulted in a 17% increase in AI knowledge of ARR year over year. Let me share more details about our financial results for Q2 before discussing our outlook and guidance for Q3 and fiscal twenty twenty five.

Speaker 2

Looking at our revenue, total revenue for the second quarter was $22,400,000 which was within our guidance, but down 6% year over year. As discussed on previous calls, the year over year decline was primarily due to the impact of two large client losses last year. One, a Conversation Hub customer and the other, an Analytics customer. Looking at the revenue in more detail, our SaaS revenue in the quarter was ahead of our internal expectations and accounted for 93% of total revenue. This was offset by our peers revenue coming in lower than expectations.

Speaker 2

With the recent product improvements, we are seeing the PS attach rates for revenue on new implementations go down as designed. This improvement results in faster deployment and quicker time to value for our clients. But based on this, we are lowering our PS revenue targets for fiscal twenty twenty five by approximately $2,800,000 This will be reflected in our updated guidance, which I will cover later on in the call. Looking at the non GAAP gross profits and gross margins, SaaS gross margin for the quarter was 78%, unchanged from a year ago. Total gross margin for the quarter was 71% compared to 72% a year ago.

Speaker 2

Now turning to our operations. Non GAAP operating costs for the second quarter came in at $14,700,000 up from 9% from $13,500,000 in the year ago quarter. R and D was up 21% year over year as we invest in product innovation to capitalize on the significant AI knowledge market opportunity. Looking at our bottom line, non GAAP net income was $1,300,000 or $0.05 per share on a basic basis and $0.04 per share on a diluted basis compared to non GAAP net income of $3,400,000 or $0.11 per share on a basic and diluted basis in the year ago quarter. Adjusted EBITDA margin for the quarter was 7% compared to 16% in the year ago quarter.

Speaker 2

Turning to our balance sheet and cash flows. For the second quarter, we generated $6,400,000 in cash flow from operations or a 29% operating cash flow margin. This compares to $7,700,000 generated in the year ago quarter. During the quarter, under our share repurchase program, we repurchased approximately 421,000 shares at an average price of $5.73 per share, totaling $2,400,000 Of the $40,000,000 authorized, dollars 10,000,000 remain available under the program at the end of the quarter. Our balance sheet remains very strong.

Speaker 2

Total cash and cash equivalents at the end of the quarter was $70,500,000 Now turning to our customer metrics. To highlight the momentum we are seeing in our knowledge business, I've broken out the AI knowledge metrics from the total metrics. First, looking at ARR. The SaaS ARR for our AI knowledge customers increased 17% year over year, while total SaaS ARR for all customers decreased 3% year over year was up 2% sequentially. Looking at ARR for our AI knowledge customers, this accounted for 55% of our total SaaS ARR at the end of the quarter and up 46% from a year ago.

Speaker 2

Turning to our net retention rates. LTM dollar based SaaS net retention for our AI knowledge customers was 99%, while net retention for our old customers was 89%. Now turning to our expansion rates. Our LTM dollar based SaaS net expansion rate was 104% for our AI knowledge customers and 105% for all our customers. Looking at our remaining performance obligations, total RPO decreased 5% year over year, which was up 5% sequentially.

Speaker 2

And our short term RPO of $51,000,000 was down 9% year over year. The year over year decline declines were primarily due to the two large customer losses previously mentioned. Looking at our outlook for the remainder of fiscal 'twenty five, '2 factors are driving the updates to our guidance. First, the change to our PS implementations, as I discussed earlier, are reducing our PS revenue target by $2,000,000 for fiscal year twenty twenty five. Second, as Ashu mentioned, our AI knowledge hub is becoming a more strategic offering for Global 1,000 enterprises focusing on customer service automation.

Speaker 2

As a result, we are seeing a growing number of 7 figure AR deals in our sales pipeline. However, with this strategic importance comes increased review cycles and extended timelines for final decisions and implementation. As such, we want to give ourselves more cushion in the revenue guidance for fiscal 'twenty five to factor in the additional time that may be needed to close these large strategic deals. Now turning to our guidance for fiscal twenty twenty five full year ending 06/30/2025. Based on the points I just outlined, we are updating our guidance as follows.

Speaker 2

We are lowering our total revenue guidance range to $88,500,000 to $90,000,000 down from our original guidance of $92,000,000 to $93,000,000 Our revised expectations is for SaaS revenue to equal approximately 93% of total revenue for the year. Turning to the bottom line, we are lowering our non GAAP net income guidance range to $4,100,000 to $4,700,000 or $0.14 to $0.16 per share, but down from our original guidance range of $5,000,000 to $6,000,000 or $0.17 to $0.2 per share. And we are raising our GAAP net income guidance range to $1,100,000 to $1,700,000 or $0.04 to $0.06 per share, up from our original guidance range of breakeven to $1,000,000 or $0 to $0.03 per share. We now estimate share based compensation expense of approximately $3,000,000 for

Speaker 3

the year

Speaker 2

and depreciation and amortization expense of approximately $350,000 Looking at weighted average shares outstanding, we expect approximately $28,500,000 for the third quarter and twenty eight point six million dollars for the full fiscal year. Turning to our guidance for the third quarter of fiscal twenty twenty five, we expect total revenue of between $21,000,000 to $21,500,000 As a reminder, the fewer number of days in Q3 has an approximate 330,000 negative impacts on the revenue for the quarter. In addition, in our Q2 revenue included approximately $600,000 of usage based revenue, which we do not expect to recur in Q3. Turning to the bottom line for Q3, we expect GAAP net loss of $300,000 to $800,000 or $0.01 to $0.03 per share, which includes stock based compensation expense of approximately $800,000 and depreciation and amortization expense of approximately $80,000 We expect non GAAP net income of breakeven to $500,000 or $0 to $0.02 per share. In summary, we won several new enterprise logos in the second quarter that drove our AI knowledge ARR up 17% year over year.

Speaker 2

We see our AI knowledge hub becoming more strategic, resulting in a growing number of 7 figure ARR deals in our sales pipeline. The strategic importance of these opportunities is extending the sales cycle, but we believe it sets us up well for continued acceleration in the growth of our AI knowledge business going forward. Lastly, on the Investor Relations calendar, eGain will be meeting with investors at the annual ROTH conference on March 17. We will provide more details as we get closer to that date and hope to see some of you there in person. This concludes our prepared remarks.

Speaker 2

Operator, we will now open the call for questions.

Operator

Thank you very much. We will now begin the question and answer session. Today's question comes from Jeff Van Rhee with Craig Hallum. Please go ahead.

Speaker 4

Great. Thanks for taking my questions guys. Couple just obviously professional services as you described the bulk of the reduction to the guide. Can you just talk about the evolution of what's gone on there? I haven't yet did a couple of million Q1, a million in half Q2 and a 2,000,000 cut for two quarters remaining is pretty substantial given the scope of that organization.

Speaker 4

So talk about just kind of what's played out there seems pretty rapid, whatever is playing out there. And then along with that question, obviously, if the revenue base is that substantially reduced, any staffing adjustments you need to make there or you expect that to come back at some point?

Speaker 3

All right. Ajit, this is Ashu here. So yes, let's start with the driver for the reduction. So as Eric mentioned, it's proven. The primary one is what Eric said, which is we keep trying to add more and more connectors and prebuilt capabilities in the product so that the effort required for custom integration goes down.

Speaker 3

So that's something which we are driving more and more. Also on the front end, we're building out more and more templates that are out of the box so that people can consume the knowledge faster without having to build custom interfaces to use it. So that's the primary driver. But the second one, which is also I think important, is that we are also developing some partnerships and that's still something we want more and more of We try to create third party capabilities to implement our solution. So the combination of those two is creating that big reduction that, like I said, outside of the estimation adjustment, this is a desirable thing for us.

Speaker 2

I think from the cost side, we'll certainly look to look at those spends appropriately, right? We'll see if those resources can be reallocated or reduced to align with the revised numbers.

Speaker 4

Okay. All right. Helpful. And then The U. S.

Speaker 4

Airline, it sounds like a pretty compelling, obviously large customer, large potential customer. Talk about the operating environment. What were they using on the knowledge management side? What did you displace? What was the competitive landscape in winning that deal?

Speaker 3

Yes. So a couple of points. One, they had multiple knowledge systems. I didn't get into the detail in the prepared remarks, but they had multiple knowledge systems. They had a legacy solution, which was a stand alone solution.

Speaker 3

They also had CRM platform, in this case, Microsoft, where they had a knowledge capability added to that as part of that as well. They have lots of SharePoint also because of, as you can imagine, a large organization. So this was as much a replacement as it was a consolidation play

Speaker 4

for them. Okay. Got it. I'll leave it there. Thank you.

Speaker 2

Thank

Operator

you. At this time, we are showing no further questions. I would like to turn the call back over to management for closing remarks.

Speaker 2

Thanks, operator, and thanks, everyone, for listening to the call, and we look forward to providing you an update on the next conference call and hope to see some of you at the ROTH event in March. Thank you.

Operator

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

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Earnings Conference Call
eGain Q2 2025
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