Q3 2021 eGain Corp Earnings Call
Good day and welcome to the <unk> fiscal 2021 third quarter financial results Conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to Jim Byers of MK or Investor Relations. Please go ahead Sir.
Thank you operator, and good afternoon, everyone welcome to <unk> third quarter of fiscal 2021 financial results Conference call.
On the call today are gains Chief Executive Officer, Ashley Roy and Chief Financial Officer, Eric Smit.
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.
Forward looking statements are protected by Safe Harbor provisions contained in the private Securities Litigation Reform Act of 19 of 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 the gains results are.
Are detailed in the company's reports filed with the Securities and Exchange Commission of gaining is making the statements as of today and the 11th 2021 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 discuss certain non-GAAP financial measures such as non-GAAP operating income. The tables included with the earnings press release include a reconciliation of the historical non-GAAP financial measure measures. The most directly comparable GAAP financial measures.
Our earnings press release can be found on the news release link on the Investor Relations page at the game's website and he gained dot com and the phone replay of this conference call will be available for one week.
Now with that said I'd like to turn the call over to the gains CEO actually Roy.
Thank you Jim.
The good afternoon, everyone.
We are pleased with our performance of the third quarter.
Both our top and bottom line results exceeded our guidance.
We're ahead of street consensus of <unk>.
Revenue grew 14% year over year, and 19% year to date gross.
Gross margins improved by five percentage points over the prior year quarter.
We were GAAP profitable with net income of one point claim volume.
And our cash flow year to date is ahead of our expectations.
Turning to business progress in the quarter.
We continued to build on our sales and marketing and best of luck, let me share some metrics.
Oh, the brand awareness is up significantly.
Website traffic for the period, Jon first through April 30th this year was up from 44% over the same year ago period.
This awareness increase is driving more interest in opportunities.
The marketing generated leads in fiscal third quarter were up 49% year over year.
And that's the result at the end of Q3, our total number of opportunities were also up 17% compared to a year ago.
As I noted before.
The number one focus this year from a sales perspective.
Adding new logos.
And we're doing well of that from.
New sales wins continued to be up more than 100% year over year.
From the third quarter and year to date.
Specifically in the first nine months of fiscal 2021 that is the first three quarters of fiscal 'twenty 'twenty. One we have added 37, new SaaS customers compared to 11 during the same period last year.
Most of the total value of our new logo pipeline and the total number of new logo opportunities in the pipeline are up over 19%.
During the quarter, we won some nice new SaaS logos, let me share of some examples.
First of the Fortune 500 provider of cyber security software.
Another one is a big utility out of on the West Coast.
Third one is the large health care provider on the East coast and the last one I'll mention here is a telco based in EMEA.
We also saw healthy expansion bookings with clients during the Corp.
From multiple expansions include a large telco, where we continue to rollout our solution across multiple business units.
On the other financial services client, where we expanding our platform to proactively engage members across all touch points.
The third one is a large business service provider, where our solution is being deployed across the global client base.
And finally, the federal government entity in the U S where.
They are expanding the use of free game for digital service automation.
In terms of renewals, our net retention rate in the third quarter continued to be north of 100%.
And up sequentially.
For continued investment in customer success.
As the resulted in better value delivery and sustained account expansion.
But now we are at the point, where our million dollar a R R plus customers.
Count of millions of dollars. They are our customers embark has grown by 63% year over year.
This is a nice strength, we want to build on it.
Yeah.
On the sales front as you know we've been ramping out of investment in the past three quarters.
Oh, the mountain non-GAAP sales and marketing expense in Q3 as a percentage of total revenue was at 34 per cent.
Up from 27% from the same quarter a year ago.
The sales Rep cohort, we hired in the first half of fiscal 'twenty one.
The news to ramp up in the third quarter.
This cohort as I have mentioned before is focused on new logo acquisition.
Once fully ramped the steam we'll increase our sales capacity by 50%.
On the partner from we are building nice momentum as well.
Responding to demand from clients. We recently published our platform connects to the Adobe experience manager of marketplace.
This connector helps businesses leverage our capability in concert with Adobe's website publishing tools.
Our open architecture allows us to easily plug into other complementary solutions increasing market reach on the works.
As I had mentioned last quarter, we are seeing good interest from the U S Army community.
One of them a global Si is looking to now include our platform within the reference architecture for enterprise knowledge management.
The keen to provide clients with a unified AI powered knowledge solution overlaid on multiple CRM systems and content repositories.
Any large client environment.
We are jointly pursuing the handful of opportunities with the proposition.
Our Cisco partnership continues to deliver good results across the board with the combination of new expansion and renewal bookings in the quarter.
And finally.
Or the via partnership is now generating new logos with bookings across enterprise and public cloud offerings.
On the product front.
In March.
We launched our virtual financial coach.
AI powered proactive customer engagement solution targeting financial services.
We developed the solution in partnership with Green pass, a leading provider of financial wellness solutions.
This automated coach is powered by AI and machine learning from eating.
Comes pre packaged with best practice and compliant knowhow.
On the Green path.
With this solution our clients get incredible value time to value as well as.
The value.
Because it combines technology with the best practice content.
The sculptures Configurable and turnkey.
So our cloud clients can literally activated on the website within two hours.
And partnership of greenhouse we have now activated all of 25 credit unions in a pilot program, which runs through the end of June this year.
Our joint sales pipeline for the coaches building very nicely.
Our coach is a compelling option for banks of all sizes to accelerate the financial wellness programs.
We are very excited about this new solution, we have come out of us.
In conclusion.
Our new South logo wins in the first nine months of this fiscal year are trending nicely.
Our clients are actively expanding the use of the again platform.
Our sales and marketing investments are showing early results with Avaya now beginning to perform alongside the Cisco and our contact Center Channel program.
And.
Our new go to market investments.
In partner build out and the virtual financial coach are both progressing well.
We do expect to see the top line impact in the coming fiscal year.
With that I'll ask Eric Smit, our Chief financial officer to add more color around our financial operations Eric.
Great. Thanks, Joshua and thanks to everybody for joining us today as.
As Doug noted we are pleased with our strong performance in the third quarter with both of our top and bottom line results exceeding our guidance and coming in the head of street consensus.
We continue to see positive results from our increased sales and marketing activities in the third quarter with solid growth in all of search revenue increased gross margins and significant improvements in our new sets of logo acquisition.
Now looking at our quarterly results in more detail for.
For the third quarter SaaS revenue was $16 9 billion up 14% year over year and accounted for 85 per cent of total revenue.
For the first nine months search revenue was $49 million up 19% year over year and accounted for 84% of total revenue.
Our sales performance came in ahead of our expectations driven by a combination of healthy partner contributions in particular from Cisco and V T as well as expansion business within our installed base.
Our trailing 12 month says net retention rate, which includes upsell uplift and churn continued to be over 100 per cent and was up sequentially from Q2 with no unusual churned in the quarter.
Our trailing 12 months S expansion rates, which excludes customer churn was over 110%, which has been consistently over the last eight quarters.
Professional services revenue was 1.7 million for the quarter up 16% from the third quarter last year that accounted for 8% of total revenue. This is consistent with our expectation of P. S revenue remaining at under 10% of total revenue as our products of continued to be deployed with the quicker time to value for our costs.
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Legacy revenue was 1.2 million down 43% from a year ago, driven by the continued migration of our remaining legacy customers to SaaS and the sunsetting of our legacy non cloud offering.
6% of total revenue for the quarter, we are on track to reach our target of getting legacy revenue down two of run rates of 5% by the end of this fiscal year.
Looking at non-GAAP gross profit and gross margins.
Gross profit for the third quarter was 15 million for a gross margin of 76% up 500 basis points from 71% a year ago.
Subscription gross margin was 82% for the quarter of 400 basis points from 78% in the third quarter of last year we.
We are pleased with the significant margin expansion, which has been driven by increased automation with the now teams.
Officials services gross margin was 15%.
Compared to negative 18% in the third quarter of loss share.
Now turning to operations non-GAAP operating costs for the quarter came in at 13 billion compared to $10 7 million at year ago quarter. The increase was primarily driven by investments in sales and marketing, which increased to 34% of revenue up from 27% in the year ago quarter.
Looking at our bottom line of non-GAAP operating income in the third quarter was one 9 million or an operating margin of 10% compared to an operating margin of 4% in the year ago quarter.
Despite the increase in sales and marketing spend in Q3 our.
Our improved gross margins enabled us to keep operating profit essentially flat year over year.
Non-GAAP <unk>.
Net income for the third quarter was one 6 million of five cents per share. This compares to non-GAAP net income of $2 4 million for.
The eight cents per basic share in seven cents per.
For the diluted share in the year ago quarter.
GAAP net income for the third quarter was $1 3 million of four cents per share compared to GAAP net income of 1.9 billion or six cents per share for the year ago quarter.
Turning to our balance sheet and cash flows of balance sheet remained strong.
While we use the small amount of cash during the quarter.
Cash flow from operations for the first nine months is $5 million and we ended the quarter with cash and cash equivalents of $53 4 million up from $46 6 million in June 30 of 2020.
Now looking at our short term remaining performance obligation or all of P O.
As I've mentioned in the past due to customer concentrations of the timing of renewals can create fluctuations in the spills from quarter to quarter. However, with the healthier renewals, we experienced in the third quarter with over 30 customers renewing and no unusual tune of short term OPO increased 20% year over year to $50 2 million.
Now I want to of financial outlook and guidance before getting into the actual guidance. There are a few items of went to highlight.
With our focus on migrating our remaining legacy customers to SaaS, we expect to for the sequential decline in the legacy revenue to approximately 1 million for Q4.
The positive results for our investments in sales and marketing to date, we continue to invest in sales and marketing.
And as the percentage of total revenue, we expect it to increase to approximately 37% of revenue in the fourth quarter.
And finally, we estimate stock based compensation expense of approximately 500000 the.
Depreciation and amortization of approximately 100, thousands and the.
The weighted average shares outstanding of approximately $32 8 million.
So with that said for the fiscal 2021 full year ending June 30th 'twenty 'twenty. One we expect sales revenue of between 66 million to $66 4 million, which would represent growth of between 16 and 17% year over year.
Total revenue of $77 3 million to $77 9 million, which would represent growth between six and 7% year over year.
GAAP net income is expected to be in the range of $4 4 million to $5 3 million or 13.
The 216 per share of.
Non-GAAP net income is expected to be in the range of $6 2 million to $7 1 billion for 19th since.
<unk> 22 cents per share.
Although we are not initiating guidance for FY 'twenty, two or beyond at this time.
As we move into the final stage of a SaaS model transition of we'd like to provide an update on the target model.
For SaaS and total revenue growth rates.
No other legacy business is nearing five per cent of total revenue, we expect the GAAP in growth rates between Seth and total revenue to narrow.
So within the next one to two year timeframe, we expect our.
Our year over year of growth rates for SaaS revenue to move back into the 20% plus range.
And for our total revenue growth rates to move up into the mid teen percentage range.
Now looking out a little further into the three to five year time.
Time range.
We expect the SaaS and total revenue growth rates to converge as sort of assess becomes.
You're lucky to be north of 90% of the total revenue and that would then result in the toga.
Year over year of growth rates for both sets of total revenue to move into the mid 20 percentage range.
So in summary, we are pleased with the progress this quarter, we continued to invest to grow force to by ramping of sales and marketing to extend our reach into all of 175 obsessed accounts with customer success investments and to acquire new logos, both direct and through and expanding partner ecosystem.
We also focused on expanding our market opportunity, while driving knowledge hub standardization across the enterprise and creating virtual solutions to target mid market customers, starting with a virtual financial coach.
We believe we have several growth engines, and we look forward to updating you on our progress with each of them in the coming quarters.
Firstly looking at the Investor Relations calendar, you gain will be participating in three upcoming virtual investor conferences Tomorrow May 12, we will be participating in the Oppenheimer virtual emerging growth conference next week, we'll be participating at the Needham and company software conference on May 18th.
And we will be participating in the Craig Hallum virtual institutional Investor Conference, taking place June 2nd we hope to see some of you virtually at these conferences.
This concludes our prepared remarks, operator, we will now open the call for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Press Star one to ask the question.
The pause for just a moment to allow everyone an opportunity the signal for questions.
We will take our first question from Mark Chapell with benchmark.
Hi, Thank you for taking my questions.
Eric Thanks for putting out the the longer term targets there were helpful.
Yeah.
What do you foresee SaaS revenue growth kind of getting back to the the mid 20% range.
Is that gonna be a can exercise that takes place next year or is that.
Probably towards the end of the year at the end of the fiscal year at the beginning.
The following year.
Hi, Mark Yeah, I think as we've talked about sort of in this range.
In the target model, we setting.
Of the three to five year Horizon is what were describing the obviously, we'd like to get the sooner, but that's the target that we're setting to get back into the mid 20% range.
Into the <unk>.
So the low twenty's up to the 20% pedal, we expect that to come sooner, but once you go to the mid 20 per cent range it'll.
It'll be for the for the route.
Okay, Great and then as far as SaaS revenue growth was or is next quarter of fiscal Q4 is that expected to be the kind of low watermark as far as our growth for <unk> for SaaS revenue.
So I think we will have.
Another quarter, if you recall, we we've got a large customer true and that impacted us.
So we would start to see them.
You know that impacted the the.
The Q1 results. So you will be in another quarter before we sort of get through debt.
That sort of reduction impacted the managing through at this stage.
Okay, great. Thank you and then on the margin front.
Is it fair to US I know you didn't give targets or guidance for fiscal 'twenty, two and beyond the on margins, but is it fair to assume increase for the next year. So that the the plan is to just kind of basically run the business for cash flow breakeven or slightly positive and just plow of any kind of upside back into sales and marketing.
That's correct I think one item that we've been pleasantly surprised with is improvements in our gross margin. So that's obviously had a positive contribution that the adjusted EBITDA levels, which was ahead of where we had initially planned to be so.
I think we all continue to look for ways to improve those gross margin. So obviously those benefits will will help us, but you're correct I think in the current environment continue to plot of the money back into sales and marketing to accelerate the topline growth.
Certainly continues to be out of area of focus.
Great great. Thank you.
Thank you our next kind of our next question comes from Ryan Macdonald with Needham <unk> Company.
Hi, good afternoon, Thanks for taking my questions and congrats on a nice quarter here.
As we look out to fiscal 'twenty, two or start to think about that yeah. How should we think about this this return to you know high teens of 20% our SaaS revenue growth do you feel more confident in the opportunity with the continued new logo adoption or or is it you think it would be driven more by expansion opportunity.
<unk>.
Yeah.
Ryan it's gonna be of mix, but I think that.
Bulk of the increase.
Hey, all of our bookings will tend to come from existing account expansion, but the new logos of vital because we know and see the these new logos once they come in and get into sort of the.
The simple into our environment, then the scaling effect because of very nice so to me we need to do both of them.
As the number of new logos continues to move.
The move along at a nice pace and that bodes well for our ability to expand in those accounts in 'twenty two as well.
Yeah.
Excellent and then my follow up question is on the of the interesting pilot with the correct twenty-five credit unions can you talk about what the potential expansion of our upside opportunity is here, if you're able to sort of prove out the proof of concept out within the pilot. Thanks.
Yeah, So it's something which we are working through right now, but our expectation is that you know what.
Percentage of these costs.
The credit unions will become our customers.
And the entry point is going to be the virtual financial coach.
And at the same time, there is the opportunity to go in into these these organizations with our broader digital engagement capability and we have for.
Being that this segment of the market sort of the mid sized small to midsized financial services marketplace.
The level of penetration of digital engagement capability is quite low it's like under 50%. So I think there is an opportunity for us to use this as a beachhead and then expand behind.
Great. Thanks for taking my questions.
Okay.
Thank you we'll take our next question from Richard Baldry with Roth Capital Partners.
Sir your line may be muted.
Thanks could you maybe dig a little deeper into the sales hiring side weather.
How well you feel of the first cohorts going how large you think the hiring will be for cohort behind it and.
If theres any learning process thats brought debt.
It makes it easier to replicate sort of on a go forward basis as you're scaling up again.
Yeah. So the.
The current ramp up process is going well what's the.
What's the recognizes that the sales cycles are still what they are so since these the.
These new sales reps are engaging on new opportunities, new logos, which is where we want them to focus.
Then the.
The success is going to take a little time, given the sales cycle.
But so far we are seeing them doing a good job for you.
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Implemented a regionalized pod model. So these new hires are all paired up with experienced managers and so we feel that the the.
Cohort is going to become productive in this in the coming fiscal year.
In the first half of the country.
And so that's coming along the lines of what we expected.
And.
Our current thinking is that sometime this summer we're going to launch the next cohort.
And that.
And that would be the scale up from wherever you are correct.
Yeah.
So when you look at sort of the longer term growth goals. The cube illustrated now for US should we sort of expect the cadence that was like one of these cohorts of adding early each year.
Or is this sort of add a lot of firepower recently will it sort of scale down a little bit the lay on top of sort of smaller cohorts year after year. After this point.
I think from this point, we are small enough that we can probably.
The increase by the similar scale.
And the next and the next round.
As we grow we will see how that net.
The number of starts to trend, but for the next group that we bring on board would be about the same size of this one.
Okay.
Then on the legacy side, because that is getting to be so small now is there a thought process about when you'd put sort of a drop dead horizon for customers to either migrate or cancel support for the service the sort of cut any associated costs can be of pure play from that point forward.
Yes. That's the question, we continue to wrestle with and we still have some very nice logos in that lack of fee pool.
No.
What we have done is we have made it clear of that that the support of starting to become only.
On the maintenance mode no enhancements, that's been true for some time and frankly.
I would say.
90% of those the remaining logos now are in discussions with us to move so we are pretty confident that in the coming fiscal year, which is 22 by the end of it we would be at the point, where we can.
Either of the pull the plug or provide a firm deadline to cause of the plan.
Thanks, and congrats on the new logo momentum.
Thank you.
Thank you as a reminder to ask a question. Please press star one.
Take our next question from Jeff Van <unk> with Craig Hallum Capital Group.
Great. Thanks, Thanks for taking my questions guys.
In terms of the of the flow of these new the of the new logos as both of you signing them in and they're flowing through the pipeline you talk about what is the sort of the the hook. If you will that is getting them. The most the highest priority app or use case.
That's that's really drawing their interest and then and then secondly, just as it relates to pipeline, maybe a little deeper dive also into the pipeline I know, you're making that push in the mid market can you expand just a little bit more in terms of Ah is.
Is most of that momentum in the pipeline enterprise versus mid market and in any of their delineation you can make there.
Sure. So in terms of the leading apps I would say it's two fold.
One is the digital messaging based apps.
Combined with the virtual assistance and automation, that's one bucket the <unk>.
Second the knowledge and contact centers those of the two leading points that we see new.
The new logos gravitating toward.
And in terms of the.
Split between enterprise and mid market.
Most of the investment that we have made on the sales side to date has been on the enterprise side mid market. While it is there it hasn't we haven't grown that team significantly yet because we feel that there's still a lot of.
Now opportunity for us to choose from the enterprise and so in the mid market are thinking is we're going to use the kind of launch that we have done with the virtual financial coach create Oh.
The big sort of impact on the mid market to be able to get lots and lots of these logos.
As opposed to trying to go out at one of the time, which is the typical mid market cadence. So so our.
Pipeline growth is.
Heavily skewed toward the enterprise at this time.
Yeah.
Fair enough and the and last for me then obviously Cisco has been a key partner for for quite a while have bought some solutions themselves in.
To the extent that you've seen any changes in behavior had day held in there as a percent of revenue have you seen any negative impacts of some of the technologies that they acquired a where it may be displacing or just how is that playing out as you are getting a little more time behind you here to see what it means if anything to you.
So we continue to see good demand from the Cisco partner ecosystem, including from Cisco and Cisco partners.
<unk> said that.
Yes, they have acquired technologies, which can do some of what we do particularly around the SMS and messaging.
So our approach here is of the market is growing very very fast and we need to get our fair share of of Mark here and so we continue to see more opportunity in the Cisco ecosystem not less.
Clearly there is some.
Crouching propositions, which will come from Cisco as the core product.
Feel very confident that given the quality of solution, we have our integration into the Cisco platform.
At least on the enterprise side on the cloud, we haven't yet amongst kind of thing that.
We continue to have a long runway here in terms of opportunities and Thats, what we are prosecuting.
Yep.
Helpful. Thanks, so much.
Sure.
Thank you. That's the reminder, that star one to ask the question, we'll take our next question from Brett Knoblauch with Banbury capital markets.
Hi, guys. Thanks for taking my question.
I think last quarter you guys said, you added 20, new logos and net.
Year to date were up 37 of them you know.
Get.
Getting the or something in Q1 so.
So I guess why the the.
Sequential decline when it seems like everything is well ahead of its dean.
On the side of the marketing front and investments there.
I'm not sure of it I think those might of BNP.
Thank those of a year to date numbers, maybe that was just total.
That was the.
Okay.
My House.
And then just on that the.
Virtual coach with Green path how is that.
Potential solution going to the monetize is any different than your traditional solution. The.
[noise] solutions or is it more use of space any insights there.
Yes. So that's a good question we are working through the different pricing models and we have a couple of them out of Devon, we are working with these pilot.
Clients our sense of that.
We will gravitate more toward a.
Size of the member base and.
Youll see hitting our solution with that.
Because of that also encourages more usage and the more marketing of the solution. So that we see that is of good kind of.
Global acquisition.
Pricing strategy.
Strategy, but we haven't locked back yet so that's kind of still in the works.
Perfect. Thank you so much debt.
Okay.
Once again to ask the question. Please press star one.
At this time I show no further questions in queue I'll turn it back to you gained management for closing remarks.
Great well, thanks again, everybody for listening to the call and I look forward to providing.
Providing updates of with the fiscal year end and again the number of these virtual investor conferences the upcoming thank you.
Thanks.
This concludes today's call. Thank you for your participation you may now disconnect.
Okay.
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