eGain Q4 2023 Earnings Call Transcript

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September 14, 2023

There are 6 speakers on the call.

Operator

Good day and welcome to the eGain Fiscal 2023 4th Quarter and Full Year Financial Results Conference Call. All participants will be in a 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 2023 4th quarter and full year financial results conference call. On the call today are Egain's Chief Executive Officer, Ajay Roy and Chief Financial Officer, Eric Smith. Before we begin, I would I'd 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 and forward looking statements 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. Ebain is making these statements as of today, September 14, 2023, and assumes no obligation to publicly 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. In addition, the GAAP 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 post an updated investor presentation to the Investor Relations page of Egain's website.

Speaker 1

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 hello, everyone. We've had a solid year despite a difficult economic environment through the fiscal year. Our total revenue for fiscal 2023 grew 7% year over year to $98,000,000 Our non GAAP net income was $8,400,000 or $0.25 per diluted share. And we bought back $5,800,000 of our own stock, While we're still generating good cash flow from operations for the year of $4,600,000 growing our cash balance to just above $73,000,000 at the end of the fiscal year. Looking at the 4th quarter, both our top and bottom line results were ahead of of our guidance and street consensus.

Speaker 2

We saw good renewals from our existing customers during the quarter, including several big ones, multimillion dollar ARR clients. At the same time, new logo acquisitions continued to be challenging in the quarter As decisions continue to get pushed out, stepping back, as I look at the year, I want to share what I see as Market trends and that impacts how we are planning to operate in fiscal 2024. As you all know, in late 2022 calendar, the chat GPT announcement definitely ended up impacting Our new logo acquisition plans in an already challenging macroeconomic environment when businesses were retrenching and They were scrutinizing their technology investments. Many of our active enterprise opportunities paused to assess how ChatGPT and more broadly, generative AI would impact their customer engagement investments going forward. Now interestingly, over the last couple of months, we are seeing that Businesses seem to have mostly run through their initial assessment exercise and several of them we see But again, prioritizing a Knowledge Hub, which will serve as a reliable and compliance ready source of content for generative AI tools to learn from and contribute to.

Speaker 2

Specifically, we are now seeing enterprises looking for these modern knowledge of platforms where they can plug and play There's generative AI IP that they seem to be working on internally. At the same time, we are seeing some businesses with legacy knowledge systems, which Cannot take advantage of these generative AI capabilities as well. Both businesses seem to be looking to replatform. So these two trends, therefore, resulting in the volume of increased RFP and pilot activity for us, which has Ramped up nicely in the last 2, 2.5 months, essentially this is current quarter. What seems to us is that generative AI is elevating the importance of and Rejuvenating the demand for Knowledge Hubs, businesses are looking to optimize their business experience and drive productivity with AI powered automation.

Speaker 2

Customer engagement seems to be a popular beachhead to start that. Looking at our clients, we continue to do very well with them. Our client satisfaction levels are at an all time high, inching up to about 4.8 on a scale of 5 on the Gartner Peer Reviews website. Our clients are looking to invest more in implementing their knowledge strategies to drive more automation across All customer touch points, both agent assisted as well as self-service. Turning to business outlook for fiscal 2024.

Speaker 2

We are optimistic about the demand trends. As I mentioned, it's jumped up in the last two and a half months compared to the first half of calendar twenty twenty three. We see reengagement from several opportunities that have stalled in our pipeline and we see new ones coming in And I'm talking about Fortune 500 Companies here. So we do believe that we will see New global momentum improving in fiscal 2024. However, we believe it's prudent to remain cautious from a Planning and forecasting perspective because the macroeconomic environment continues to be somewhat uncertain.

Speaker 2

Over the past couple of quarters, we have made the necessary adjustments to reflect our caution and align our business operations through an environment where we can still continue to invest in product innovation and customer success as well as prosecute these sales opportunities effectively, but do it with a view that we are still navigating through what seems like the back half of the market slowdown. On the sales and marketing front, We are very excited about our upcoming annual customer conference, eGain Solve 23, which we are holding in London This is on September 25. Conference registrations are an all time high for us for this event, which includes clients, prospects, partners. We'll have clients, many as you stick to them, sharing customer stories and successes and journeys with eGain, The innovation and we, eGain, will be announcing and demonstrating some new exciting capabilities at the conference as well. To conclude, based on our recent improved pipeline activity, we believe that the market for Knowledge Hubs is working back on.

Speaker 2

As I mentioned, we are now engaged in more RFPs and pilots, In fact, more than we have ever been in the last 12 months. However, we continue to be cautious and mindful of the broader economic uncertainty. And so with the operational adjustments in place that we have made, we feel that we can continue to invest in product innovation and customer success, while pursuing these enterprise opportunities that have reengaged with us and the new ones that are coming in. Finally, we are super excited about Salt23 and we invite you to join us at this event in London if you can on September 25. With that, I'll ask Eric Smith, our Chief Financial Officer, to add more color around our financial operations.

Speaker 2

Eric?

Speaker 3

Thanks, Ashu, and thanks, everyone, for joining us today. Let me share some financial highlights for the quarter and full year before getting into our outlook and guidance for fiscal 2024. Total revenue for the 4th quarter was $24,600,000 up 5 Year over year and up 7% sequentially. Contribution from Cisco OEM was positive this quarter and helped drive revenue above our guidance. Cash revenue for Q4 was $22,700,000 up 10% year over year.

Speaker 3

And for the full year, Total revenue was $98,000,000 up 7% year over year or up 9% in constant currency. Net revenue for the full year was $89,600,000 or up 11% year over year or up 13% in constant currency. And legacy revenue in Q4 was down to just $99,000 And looking at revenue by region, in Q4, North America accounted for 80% of total revenue this quarter, up from 74% in the year ago quarter. For the full year, North America accounted for 78% of total revenue, up from 73% in the prior year. In Q4, total revenue from North America was $19,600,000 up 13% year over year, where in contrast total revenue from Europe was €5,000,000 a decrease of 19% year over year.

Speaker 3

Looking at non GAAP gross profits and gross margins. Gross profit for the 4th quarter was 18,200,000 Up 3% year over year for a gross margin of 74% compared to 75% for the prior year quarter, but up from 69% last quarter. For fiscal 2023, gross profit was 70 $2,200,000 for a gross margin of 74% compared to a gross margin of 77% for the prior year. Now turning to operations. Non GAAP operating costs for the 4th quarter came in at $14,900,000 down 12% from $16,900,000 in the year ago quarter, reflecting the expense controls we have implemented.

Speaker 3

Looking at our bottom line for Q4. Non GAAP operating income for the Q4 was $3,300,000 or an operating margin of 13%, up significantly from 3% in the year ago quarter and 4% last quarter. Non GAAP net income for Q4 was $3,600,000 or $0.11 per share. This compares to non GAAP net income of 893,000 or $0.03 per diluted share in the year ago quarter. Adjusted EBITDA margin for the quarter was 16% compared to 4% in the year ago quarter.

Speaker 3

For the full fiscal year, non GAAP operating income for the fiscal year was $7,600,000 or an operating margin of 8% compared to an operating margin of 10% for the prior year. Non GAAP net income was $8,400,000 or $0.26 per share on a basic basis and $0.25 per share on a diluted basis. This compares to non GAAP net income of $8,900,000 or $0.28 per share on a basic and $0.27 per On a diluted basis in the prior fiscal year. Adjusted EBITDA margin for the fiscal year was 9% compared to 11% in the prior fiscal year. Turning to our balance sheet and cash flows.

Speaker 3

We continue to generate good cash flows from operations while buying back Shares of our stock. For the full fiscal year, cash flow from operations was $4,600,000 or a 5% operating cash flow margin. During FY 2023, under our share repurchase program, we purchased approximately 786,000 shares totaling 5,800,000. Of the $20,000,000 authorized, dollars 14,200,000 remained available under the program at the end of the fiscal year. Our balance sheet remains strong.

Speaker 3

Total cash and cash equivalents at the end of the fiscal year was $73,200,000 up from $72,200,000 a year ago. Now turning to our customer metrics. We saw strong renewals from our existing customer base with over $20,000,000 in ARR renewing during the And as I've mentioned on previous calls, given our increased focus on North American markets, I will share some additional customer metrics on a regional basis. LTM dollar based SaaS net retention for North America customers was 106%, while in near customers retention continued below 100% due to the churn we have discussed on previous calls, resulting in our total MR net retention rates dropping to 100% compared to 105% a year ago. SaaS ARR for North America customers increased 8% year over year, while total SaaS ARR increased 3%.

Speaker 3

And looking at ARR by product line, Knowledge now makes up 47% of total SAS ARR as Knowledge deals have accounted for 2 thirds of new bookings in the last 4 months. Number of $1,000,000 ARR customers remained relatively constant year over year. Looking at our RPO, total RPO decreased 3% year over year to 97,300,000 It increased 11% sequentially with the strong renewals closed in the quarter. And our short term RPO was 66 $700,000 up 6% year over year, but up 28% sequentially, again due to the strong renewals in the quarter. Now turning to our guidance.

Speaker 3

For the Q1 of fiscal 2024, we expect Total revenue of between $23,500,000 to $24,000,000 Turning to the bottom line. For Q1, we expect Yes. Net income of $500,000 to $1,000,000 or 0 point 0 $2 to 0 point 0 $3 per share, which includes stock based compensation of approximately $1,200,000 and depreciation and amortization of approximately $120,000 We expect non GAAP net income of $1,700,000 to $2,200,000 or $0.05 to $0.07 per share. Looking at the fiscal 2024 full year ending June 30, 2024, we expect Total revenue of between $96,000,000 to $98,000,000 non GAAP net income of $11,800,000 to $4,300,000 or $0.37 to $0.38 per share and GAAP net income of $7,600,000 to 8,100,000 or $0.24 to $0.25 per share, where we estimate share based compensation expense of approximately 4,200,000 and depreciation and amortization of approximately $500,000 Looking at weighted average shares outstanding, we expect Approximately $32,200,000 for the Q1 and for the full fiscal year of 2024. So in summary, we have adjusted our business operations to a level where we can operate profitably in the current environment.

Speaker 3

Our sales and marketing investments are at the right level, and we are seeing more opportunities develop in the pipeline. Overall, Our existing business is doing well as evidenced by the healthy renewals we booked in the quarter. Innovation is on track with some exciting announcements to come at We implemented a share repurchase program that we plan to continue in fiscal 2024. And the opportunity for Egain is significant. We remain well positioned to capitalize on our expanding market opportunity and with our strong balance sheet and cash flow generation.

Speaker 3

Lastly, on the Investor Relations calendar, Again, we'll be meeting with investors at the 12th Annual ROTH New York Conference on November 15 and the Annual Craig Hallum Office Select Conference also in New York on November 16. We hope to see some of you there in person. This concludes our prepared remarks. Operator, we will now open the call for questions.

Operator

Our first question comes from Richard Baldry with ROTH MKM, please go ahead.

Speaker 4

Thanks. When you talk about the RFP pipeline starting to Accelerate, stop pausing whenever I think about it. Are the RFPs that are coming back explicitly talking about AI functionality either included or capable via APIs, sort of some demonstration of the ability to interact with the new REGENERATE AI engines? Is that sort of one of the signals that's telling you that that people are sort of getting through their analysis process? Thanks.

Speaker 2

That's exactly right, Richard. So what we are seeing is those RFPs in some cases have been Reissued. In other cases, they have not issued any RFPs because people were still kind of deciding whether they're going to invest or not, right? There were lots Conversations, but no structured RFP yet. But I would say pretty much every single RFP now in the last 2 months that we have been working with have generative AI in one of those three configurations or What all can you do, right?

Speaker 2

Do you have in build generative? In your knowledge platform, do you have it as an option that I can plug in? Or Is there something else that you do that is different? So those sort of three questions come up.

Speaker 4

And with the pace of the RFPs coming back and you recently streamlined some of your costs in the sales and marketing side, do you feel like you're Appropriately staffed to handle it for now, what kind of signals or growth in the RRP volume would you need to see to say maybe we should go back and start adding Headcounts given it takes some time to get them up and running?

Speaker 2

Yes. Yes. So this time around, we are sort of staying close to our meetings, which is the large opportunities. And so that gives us good headroom at this time. I would say for the next couple of quarters, I don't think that we'll need to has more headcount.

Speaker 2

So maybe in the fiscal Q4, assuming things continue to ramp, That would be the time to look at additional net income.

Speaker 4

Thanks. And Yes, you've been active in the buyback. Can you talk about do you have a theory since your profitability stepped up of how much of cash flow should be allocated to that Return of capital, is it dependent on M and A opportunities you might see? How do we think about how to expect that buyback to deploy?

Speaker 3

Good question. I mean, I think that's exactly the way we're evaluating it. I think certainly in this environment, Exploring inorganic opportunities is an area that we will likely take closer attention to. I think given our strong balance sheet and the challenges that others are having in the marketplace, We certainly want to have funds available and we'll look to more carefully at this than we've done in the past. But with that said, given our current, I would say, sort of optimized Cost structure given the current run rates, we certainly feel comfortable about continuing to execute to the plan at the rate we've done and hopefully accelerate it If possible given sort of where the current stock price is.

Speaker 4

And lastly maybe When you think about the AI functionality that customers are looking for, how much of that do you think is important to be able to do or provide in house Sort of bespoke versus being able to use APIs whatever to plug into our best of breed whichever the customer wants to work with externally. And if you were to look in the M and A side of the table, would it be something around the AI world you'd be looking at? Or are there other things that'd be interesting? Thanks.

Speaker 2

Right. So I would say, Rich, except for the very, very high end of the market, Sure. Most companies, I believe, will look for all in one solutions around generative capability, But not necessarily the core technology of generative being different, but the way it is applied and the way you fine tune it, those things We intend to do ourselves, but not the core technology, which clearly is not our daily weight and we don't think That's our place to invest in innovation. But how we connect the dots and compose the solutions? Absolutely.

Speaker 2

How we take advantage of all the loops of improvement and optimization? Absolutely. Those are going to be the place we invest in. And then the We have several of these larger prospects who clearly want to have their own generative capability, but they want to plug it into our Knowledge platform very tightly so that they can get the best of both worlds. So that's the level we're playing at.

Speaker 2

So I think we'll have our own with fine tuning and contextual optimization as the way to differentiate and then have the ability to compose and connecting to Someone who may have their own generative capabilities.

Speaker 4

Maybe one last one if I could. The recurring revenue line sequentially was up quite strongly. Was there any one time oriented sort of impact Inside of that, we need to be careful about when we're modeling looking forward. Thanks.

Speaker 3

Yes. I think sort of as I Pointed out and if you recall on the previous call, we do see some variability from quarter to quarter on the Cisco OEMs. So Last quarter, it came in below the number and resulted in the decline. We're on the flip side and as we sort of It's expected to some extent, so given the commentary we've heard that business journey has been positive that what we saw This quarter was a healthy uptick in that. So there's definitely that fluctuation that Come from that Cisco OEM business that we would be mindful of, not necessarily repeating again in the 7 quarter.

Speaker 3

So that's the one call out I would make.

Speaker 4

Great. Thanks for your help.

Operator

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

Speaker 5

Great. Yes. Thanks for taking my questions. So on the annual guide, talk to me about what else you might be seeing that's giving you the caution? I mean, you commented that the pipeline in many respects pilots etcetera are really breaking out to the positive yet the forward guide essentially guides for flat sequentials for a while.

Speaker 5

Talk beyond what you can see in your pipeline that's causing you not to put any EBIT really through into the guide because it's obviously well below

Speaker 2

Yes. This is so Jeff's thing is timing of closing those deals is where We need more evidence to have closed some big deals in the this quarter and next to say, okay, the cadence is I think to be more predictable on the close, right? So we have several opportunities where we deepen the Discussion and agreement and everything is fine, but the question is when are we going to sign and that process still seems a little bit macroeconomic influenced, Right. So that's the challenge we are trying to navigate the discussion.

Speaker 5

Okay. That's helpful. And then the AI deals you mentioned kind of GPT came out, froze things a lot of people took a look at it, Went away, some came back. Of the ones that didn't come back, what did you learn? I mean, what did they choose to do?

Speaker 5

And how do you react to that to potentially make yourself more attractive To those customers as well.

Speaker 2

It's a good question. My sense is that To be honest, I don't know the exact answer. But what we are seeing is that Some companies have decided that they could apply GPT or broadly generative capability On existing content stores that they have, right? And so that There is a school of art there. We don't believe that works with quality and compliance and cost effectiveness, but That's always been one of the things that is a substitute is that you have SharePoint and if I just put GPC on it, will it solve the problem?

Speaker 2

So that's kind of the I think there's going to be crossovers on that line both ways over time.

Speaker 5

Yes. Helpful. And then last just for me, the partners. I think you touched on Cisco kind of ebbing and flowing. You've got a lot of key relationships.

Speaker 5

So maybe spend a second just talking about both your outlook on Cisco for the year, how you feel about that and why? And then the other key 2 or 3 that either are showing traction or what are you calling out?

Speaker 2

Yes. So on Cisco, I think it's kind of Last to modest upside, I would say. I wouldn't say anything more than that, probably flat. But Eric, what's your answer? Yes.

Speaker 3

I think that That seems consistent. Yes.

Speaker 2

We've seen that year over year, Ashok. So that would probably be the outlook there. But with other partners, which is yes, you're right, we have invested in some of the larger They are equally challenged at this time. Many of their large projects are kind of not getting The big engagements and investments that clients have stalled on over the last few quarters. So In fact, I think that we are starting to see more engagement.

Speaker 2

Maybe we're not deep into that. We don't have visibility into their pipeline as much. So I wouldn't really comment on that. But I do think that the system integration partners seem quite Interesting to us, especially in Financial Services. Some of the partnerships we were talking to prospects Who are banks and insurance companies who have been working with these partners and those seem to be working back up as well.

Speaker 5

Okay. Got it. Great. Thanks for taking my questions. Appreciate it.

Operator

As I show no further questions at this time, I would like to turn the call back over to the management for any closing remarks.

Speaker 3

Thanks, Alfredo, and thanks, everyone, for enjoying the call today. We look forward So we're obviously seeing some of you at the customer events in London and then the upcoming investor conferences, and We'll be providing an update once we close out our Q1. Thanks very much.

Operator

Thank you. This concludes the conference today. Thank you for attending today's presentation. You may all now disconnect.

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eGain Q4 2023
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