Q2 2023 eGain Corp Earnings Call
Good day and welcome to the gain fiscal 2023 second quarter financial results call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on you touched.
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Now I'd like to turn the conference over to Jim Byers of N. K R. Investor Relations. Please go ahead.
Thank you operator, and good afternoon, everyone welcome to gain shares.
<unk> 2023 second quarter financial results Conference call.
On the call today are you gained chief Executive Officer, Ashley ROI, 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 <unk>.
Natural and operational performance.
Forward looking statements are generally 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.
Form 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 your gains results are detailed in the company's reports filed with the Securities and Exchange Commission.
Gaming is making these statements as of today February 14th 2023.
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.
Tables included with the earnings press release include reconciliation of the historical non-GAAP financial measures.
Most recently comparable GAAP financial measures.
Our earnings press release can be found by clicking the press releases link on the Investor Relations page of the game's website Eddie gained dot com along with the earnings release, we have also posted an updated investor presentation to the Investor Relations page of your games site.
And lastly, a phone replay of this conference call will be available for one week.
And with that said I'd like to turn the call over to gains CEO actually really.
Thank you Jim.
Hello, everyone.
We delivered another quarter of record revenue.
Our total revenue was $25 $6 million up.
10% year over year in constant currency.
We exceeded our guidance and consensus estimates.
Our SaaS revenue grew 18% year over year in constant currency.
And we generated strong cash flow from operations in the quarter.
Well over $7 billion.
Turning to business highlights, let me share some notable customer expansions in the quarter.
The first was the significant expansion with a leading healthcare services provider.
They continue to digitally transform their business.
The second was with a global provider of specialty insurance products as they are driving more cloud adoption.
The third one was with a multinational retailer in Europe .
Last one I want to mention is with a fast growing insurance company. That's technology first and has adopted the gaming solutions as their customer engagement.
I'll focus on stabilizing client attention, especially in Europe , and our continued expansion with clients is showing results.
Moving to an exciting product update this past week, we announced the general availability you gained instant answers.
First of its kind capability instant answers enables knowledge users to find relevant downstairs.
Attributable responses.
By tapping into enterprise content repository, using generative AI technology like GPT.
We've been Trialing instant answers savings.
Late last year.
It's been a hit without a limited release plans because the solution addresses outstanding pinpoint and knowledge management.
How's the deliver relevant answers with minimal knowledge curation indeed.
Indeed.
We are the first in the knowledge management market with such a solution.
We are especially excited because we believe this approach presents.
Breakthrough automation opportunities.
When combined with critical attributes our platform offers and this is key.
Attributes like.
Lions analytics designed experiences and more.
Bringing this new technology around January because we are combining.
Combining it smartly with all of the required critical attributes for enterprise knowledge management is what we think delivers a solution that is going to be consumables safe and responsible.
Thanks to our component was the architecture, we can quickly incorporate new technologies are going to come over here.
And so given the trajectory of.
This disruptive technology.
We are bullish about marshalling it and using it to drive user friendly automation.
Looking at the market and our overall business.
Market demand remains high for our knowledge powered customer engagement offering.
New inbound interest continues to be steady with more opportunities in our sweet spot of the large DTC businesses.
The focus.
Of customer experience improvement and service cost reductions.
As we know not noticed top technology recommendation for customer service and support leaders and he needs to be investment grade and knowledge management tools and we also know the market penetration for knowledge management tools.
Low according to Gartner was the fastener between 5% and March.
Yeah.
So now with our comprehensive solution.
We believe we have the best solution for this market need and we are confident.
This need around knowledge management will become increasingly mission critical Indiana prices.
At the same time in the current environment, we continue to see sales cycles lengthening buying decisions are slowing down.
You too cautious spending.
I'm careful reconsideration of priorities.
Given these longer sales cycles, and the fact that we are focusing on enterprises.
We are refining in an ongoing way our direct sales model.
So we are hiring more seasoned sales professionals versus having a larger number of doing our team members.
In parallel we are maintaining marketing around brand leadership.
Highlighting customer success and ecosystem expansion.
In fact, our next scheduled customer success webinar is with one of our marquee parts Veterans Affairs answer.
February the 28.
With the strength of our balance sheet, we intend to maintain a healthy level of sales and marketing investments. So that we are well positioned to capture market share as business conditions improve.
In summary, we delivered another quarter of record revenue with strong cash flow, we continue to see a large market opportunity for our knowledge led offerings.
We continue to innovate and improve our offering with.
Innovation like instant answers as we lead the market and delivering solutions.
Our technology and AI for customer engagement.
New inbound interest remained steady even in this environment.
And so we are continuing to build our new business pipeline.
We are refining our sales model.
And hiring more seasoned salespeople focusing on enablement of the team and sales productivity.
And finally with a strong balance sheet, we intend to maintain a level of sales and marketing investment that allows us to be well positioned as business conditions improve.
With that I'll ask Eric Smit, our chief financial officer to add more color around our financial operations.
Thanks, Joshua and thanks, everyone for joining us today.
Let me share some financial highlights for the quarter before getting into our outlook and guidance for Q3 and fiscal 2023.
Total revenue for Q2 was a record $25 6 million up 11% year over year or 15% in constant currency and up 3% sequentially from Q1.
SaaS revenue was $23 4 million up 15% year over year or 18% in constant currency and up 4% sequentially from Q1.
Legacy revenue in Q2 was down to just 185000 feet and accounted for less than 1% of total revenue in the quarter.
When looking at revenue by region, North America accounted for 77% of total revenue this quarter up from 73% in the year ago quarter.
Total revenue from North America was $19 8 million up 18% year over year, where in contrast, total revenue from Europe was $5 8 billion, a decrease of 8% year over year.
Looking at non-GAAP gross profits and gross margins gross profit for the second quarter was $19 3 million of.
Up 7% year over year for a gross margin of 75% compared to 78% for the prior year quarter and 76% in the preceding first quarter.
Now turning to operations.
non-GAAP operating costs for the second quarter came in at $17 3 million compared to 14.
$14 8 million in the year ago quarter, and $17 5 million in Q1.
Given the current macro convictions and lengthening sales cycles, we continue to refine our direct sales model is actually you mentioned hiring more seasoned sales professionals versus having a larger number of junior team members, but we continue to maintain the level of sales and marketing investments given the large market opportunity.
We see.
Looking at our bottom line non-GAAP operating income for the second quarter was $2 million or an operating margin of 8% compared to an operating margin of 14% in the year ago quarter and up from 6% in the preceding first quarter.
non-GAAP net income for Q2 was $1 7 million or five cents per share. This compares to non-GAAP net income of $3 million of 10 cents per share on a basic 19, especially on a diluted basis in the year ago quarter.
And adjusted EBITDA margin for the quarter was 9% up from 6% in the preceding first quarter.
Turning to our balance sheet and cash flows cash flow from operations for the quarter was $7 4 million or 29% operating cash margin.
Our balance sheet remains very strong total cash and cash equivalents at the end of the quarter was $89 million up 18% from a year ago.
Now turning to our customer metrics.
Consistent with our focus on selling to large BDC businesses interested in knowledge management to improve customer experience and reduce service cost the.
The number of 1 million <unk> customers increased 21% wherever you are.
Our average revenue customer of 480000.
Up 20% year over year.
And our knowledge now makes up approximately 50% of our total says it all.
Turning to our LTM dollar based test retention metrics.
For the quarter as the total number came in at 105%.
This compared to $1 12, a year.
Since a year ago, but on a sequential basis, we saw an improvement from 103% in the first quarter.
Looking at the retention rates by region.
Tension is expansion within our U S space continues to be healthy with a slight improvement in our all in the quarter to just over 110% and Europe . The number was still below 100%, but we also saw a slight improvement quarter over quarter as the customer base in Europe has stabilized with no <unk>.
<unk> significant reductions in the quarter.
However, the losses, we discussed last quarter, we'll begin to impact our revenue in Q3.
Assessor, all excluding OEM increased 12% year over year and looking at our Apio total OPO increased 3% year over year to $92 1 million.
Before moving on to our financial outlook and guidance I'd like to highlight a few items that we have.
Taken into account.
Our guidance.
For the third quarter.
First with the current strength of the U S dollar to the pound and Euro for comparison purposes. We are also providing revenue estimates on a constant currency basis to provide better visibility to the underlying business trends.
In addition, as we experience every year there are two fewer days in our fiscal third quarter than in the second quarter, resulting in approximately $400000 in less revenue.
In addition, our second quarter revenue benefited from a significant uptick in seasonal volume that accounted for.
Approximately $1 million in revenue that we do not anticipate recurring in our fiscal third quarter.
And finally, the loss of the EMEA customers, we discussed last quarter will reduce Q3 revenue.
$800000.
With that said for the third quarter of fiscal 2023, we expect total revenue of between 23 million to $23 5 million adjusted for constant currency. We expect Q3 total revenue of between $23 5 million to $24 million.
Turning to the bottom line for Q3, we expect a GAAP net loss of $1 2 million to $1 6 million or 45 cents per share which includes stock based compensation expense of approximately.
One 6 million and depreciation and amortization amortization expense of approximately 125000.
We expect non-GAAP net income of breakeven to $400000 or 021 cents per share.
And the weighted average shares outstanding are expected to be approximately $32 1 million for the third quarter of fiscal 'twenty to 'twenty three.
For the full year fiscal 2023, given the macro given the current economic environment.
Timelines extending for deals to close we are revising our previously provided guidance. So for the full fiscal 2023 full year ending June 30th 'twenty to 'twenty. Three we now expect total revenue of between $97 million to $99 million.
Adjusted for constant currency that could equal $100 million to $102 million.
non-GAAP net income of $4 3 million to $6 3 million or 13 cents to <unk> 20 per share.
GAAP net loss of 700000 to $2 7 million or <unk>.
Two cents to eight cents per share.
Where we estimated share based compensation expense of approximately $7 million for the year and depreciation and amortization expense of approximately $600000.
Our currency conversion rates assumptions are as follows for Q3 23, and the remainder of fiscal 'twenty. Three we are assuming USD two British pound of $1 22, a dollar went to one pound this.
This compares to Q3 'twenty two when the USDA to G. B P rate was 134 to one and for fiscal year 'twenty two.
When the USDA to GBP rate was $1 33 to one.
So in summary, we delivered record revenue and strong cash flow in the quarter.
While sales cycles continue to lengthen in the current environment market interest.
Knowledge about customer engagement remains high.
You have made adjustments to our sales team by focusing on enterprises and refining our direct sales model.
Bring more seasoned sales professionals.
Having a large number of junior team members, but with our strong balance sheet, we plan to maintain a level of sales and marketing investment that allows us to be well positioned as business conditions improve.
Lastly, on the Investor Relations calendar, you gain will be presenting and meeting with investors at the annual Roth Conference taking place March 13th and 14th in Dana point, California will be providing more details as we get closer to that date and hope to see some of you there in person.
So we are going to be doing a virtual product demo at the end of March we will be highlighting the attributes of our new instant answers features that she spoke of as well as a broader knowledge management offering we will provide more details on that event in the coming weeks.
This concludes our prepared remarks, operator, we will now open the call for questions.
We will now begin the question and answer session Task. A question you May Press Star then one on you touched on phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble our roster.
Our first question comes from Richard Baldry from Roth Capital. Please go ahead.
Thanks could you talk a little bit more about the changes in the sales teams or was this a proactive effort to sort of weed out underperformers.
And replace them with more seasoned reps how is that effort going to find those people is that easier given the sort of layoffs were hearing about in the tech space or is it still challenging to find the right people.
Yeah.
Richard This is actually there yet so.
Two things one the.
The refinement.
Part of it is what you said, which is just looking at we had hired as we intended to scale up the sales team quite significantly and then as we started to look at the Naval Mountain.
Seeing the productivity, we felt like we had.
Performance manage some of the people. So that was one element that we continue to do the other one is that as we are seeing the opportunities coming more in the larger enterprises.
Feel that it's better for us to go.
Upgrade some of the team in the more seasoned sales reps and that's the other part that renewing and then again, we're driving performance management on the bottom.
Okay, and could you talk a little bit more about the generative.
AI technology piece for the instant answers now will that add on to what you have will it be standalone, Oh, I didnt catch quite quickly enough.
And embedded version of what a chat to GTP is or is it just similar to that type of technology, but something you built on your own.
And how do you see the economics on an offering like that being similar to what you've done in the past are different depending on chart.
Technologies embedded in it that might have higher costs.
Right. So first of all the <unk>.
Instant down service capability is very much going to be layered on top of our knowledge hub.
So, it's just a better way to get to the answer using.
The generative AI capabilities and the underlying large language module technologies.
As you and others, who are following this space know chop GPT is one manifestation.
Paul.
Underlying large language module capability that is pre trained on a humongous amount of content billions of tobacco right. So what we are doing is taking the underlying lodge language models and training them. So using some of the core training that is pre training of chart GPT, but then fine tuning back.
With enterprise content, which is specific to the business and making sure that for those businesses, especially in enterprises. They care about privacy of their content, but that is done in a secure way so that the economies are not bleeding into back into the <unk>.
Harman pre trained elements of chat GPT. So that so it's a search tool where youre search still works pretty much the way you used to except that the ability to find the right answer and forget summary results summary results, let's say you have long documents and enterprises.
Very detailed.
Content.
You're asking a question the intent of that question and we responded to with a 50.
<unk> 50, or 75 word answer as opposed to having to read the whole document that's where the generative part becomes really I think so that's the second part.
The third part around cost.
It's something you're still figuring out the sense that there is a base level of capability that we are going to embed as part of the product, but we'll get into more advanced and large scale training on the amount of content that an enterprise might expose two hour two hour service, that's something that is quite likely.
We will have as an add on solution.
That's something we're still working with some of our early customers.
We are cognizant of the fact that there is a larger cogs element.
We're doing that very large conference.
Public boards.
Great and last quick one for me would be you know while the market headwinds are pretty tough start curious a your cash generation has been good is there any plan to begin or aggressively deploy the buyback that you had announced previously.
Sure. So we have the buyback in place.
So we've put a structured plan.
Last quarter, there was no purchases through the quarter, but obviously, we'll be evaluating that now we've just made this announcement to see what if any adjustments will be made.
Thanks.
Again, if you have a question. Please press Star then one.
Our next question comes from Jeff Van <unk> from Craig Hallum. Please go ahead.
Great. Thanks, Thanks for taking my questions a couple for you on.
On the sales motion front talk I know rich was asking about the direct side I want to touch on the channel. Maybe you know what have you seen in terms of the sales motion now and particularly the motion or the excuse me the momentum there in the channel versus maybe the rest of the business.
Yes, good question.
The channel is still generating opportunities we see that.
I think that the larger opportunities that we're chasing are coming in through the direct channel.
Sorry.
And the channel is.
Theyre the logos are still the right kind of logos, but the opportunity sizes or add on opportunity sizes, particularly in the under the CCAR channel back is what we see.
Difference with the Si channel and that is an area, where we are steadily building it up more sort of Si partnerships. So those are the right kinds of large opportunities of course, we have some there do you have a cycle to them because they are or at least stage conversations in large organizations to ESI.
Looking at our strategic knowledge project, but we are seeing more and more of those coming into our conversation. So that means that is very encouraging.
Uh-huh.
Fair enough and then on G. P. T. You know as you look at your prospects and customers.
Understanding. It's it's you know it's happened recently, if you haven't had a lot of time to get feedback, but what what what are the customers and prospects, saying and how is that potentially surprising you.
Uh huh.
So everyone is talking about it not just as far as partners analysts and we talked to Gartner. We have two other analysts and there is a lot of conversation around it at every level now when we get to the details.
Senior levels I think people are saying how are we taking advantage of it and the fact that we have a solution at this time that we and we had been demonstrating for the last few months, but now we are making generally available.
That puts us in a good position to say we are here, we are now and we can.
Make sure that you can take advantage of this event like we say safe responsible way right because everyone is well aware of the snafu.
You guys know it well enough with what happened with Google and it has nothing to do with Google, which has to do with the fact that in.
Only 1% of the case or in their case whatever that was.
Do you have to know how would you attribute that.
Our judgment anyway, and customer engagement, which is where we are in a business environment where answers.
Matter in terms of correctness.
You have to have a system that manages the generators. So that you minimize absolutely the risk off providing.
Providing an answer that as.
Grossly correct right and so people are really keen to understand how to make it work in their enterprise.
Strange stride compliance security attribution correctness. So those are the things that we feel we are being brought in who talk about let's say and you do it and we are happy because that's what we've been doing in the last several months.
Working those kinks out.
Mhm, Okay also Apple so maybe last for me then on the sales side the bookings environment. You've commented on the macro obviously last quarter. You had said as well was was difficult cycles are lengthening their blanks.
A bit more here and you referenced a number of reasons re prioritization of spend in a number of other things that might be taking place.
Just expand on that a little bit with respect to what you saw on the bookings and the sort of the ability to close business this quarter and specifically on things that didn't get done what are what are people re prioritizing what's getting done what's not getting done just maybe expand a little bit more on what's going on there.
Yeah. So what we're seeing is not in every case, but in.
In several cases, we are seeing people, saying, we are going to evaluate right. So this is the quarter in which people are evaluating their priority. So thats. The thing. We are hearing also we are seeing people.
I am talking about the ones that are not moving fast enough.
People, saying, let's let's watch for the market and then we will open up the budgets towards the middle of the calendar you're right. Those are the two things. We are hearing right now on the deals which are slowing down.
Hmm.
Okay, and maybe if I could just sneak one last one in on the sales side as well on the you'd you'd commented on the healthy S. N M spend that you you expect to continue can you put a little finer point on that what are you thinking in terms of I don't know, if it's dollars or percentage and and and or if you want to quantify it from a rep standpoint, like where did you end 'twenty two what do you think you are.
23.
I mean, we are still even at the current capacity. We are we have doubled our capacity from where even where we are today, we have doubled the capacity, where we were 18 months right.
So that's what I mean by healthy if he like we have a good set of sales team members and our structure in the enablement has been has been.
Executor of course, we continue to drive that so unless it's a matter of making sure that they become productive and that's really the focus at this point.
Okay.
Okay. Thanks for taking my questions.
Welcome.
Showing no further questions. This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Thanks, operator, thanks, everybody for listening and look forward to providing you an update so when you put out our Q3 results.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.