Yahoo Finance eGain Corporation (NASDAQ:EGAN) Q3 2024 Earnings Call Transcript
eGain Corporation (NASDAQ:EGAN) Q3 2024 Earnings Call Transcript May 12, 2024
eGain Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, everyone. And welcome to the eGain Fiscal 2024 Third Quarter Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today’s event is being recorded. At this time, I’d like to turn the floor over to Jim Byers from MKR Investor Relations. Sir, please go ahead.
Jim Byers: Thank you, Operator, and good afternoon, everyone. Welcome to eGain’s fiscal 2024 third quarter financial results conference call. On the call today are eGain’s Chief Executive Officer, Ashu 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, and 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 report filed with the Securities and Exchange Commission. eGain is making these statements as of today, May 9, 2024, and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call. In addition to GAAP results, we will also discuss certain non-GAAP financial measures, such as non-GAAP operating income. 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 along with the earnings release, we have also posted -- we’ll post an updated Investor Presentation to the Investor Relations page of eGain’s website. And lastly, a phone replay of this conference call will be available for one week. And now, with that said, I’d like to turn the call over to eGain’s CEO, Ashu Roy.
Ashu Roy: Thank you, Jim, and good afternoon, everyone. We saw good momentum in new logo wins and business activity in the quarter, driven by our AI knowledge offering. A McKinsey report from last year talked about the potential of generative AI to revolutionize customer operations functions across the economy and talked about improving customer experience and agent productivity by using generative AI through digital self-service and enhancing agent skills. And it said that there was a potential to deliver $400 billion in savings annually for businesses who today collectively spend $1.5 trillion a year in customer service. I say this because with our latest AI knowledge offering, which is eGain AssistGPT, we are breaking down the technology barrier that prevented companies from delivering trusted answers for customer service at scale.
That barrier was the manual effort in creating and curating knowledge within a Hub that could serve as a single source of truth. As companies are looking to significantly reduce customer service cost, our comprehensive solution delivers on the promise of AI for them to reduce cost of customer service while boosting their customer experience. These are exciting times for us, right? So, looking at our business, we signed some new good knowledge customers in Q3. I’ll mention a few. The first one is the U.S. megabank, so one of the big four. We are starting with them in one of their fast-growing multibillion-dollar divisions. They’re looking to contain their costs as they’re grappling with customer and agent experience in a rapidly growing service group.
Right following that, we have more opportunities with this client in our pipeline and we are looking forward to becoming the platform for AI knowledge across the bank. It’s really exciting for us. megabank is something that we have been working with them for a couple of years now and I’ll talk to that opportunity a little more later on. The next one I want to bring out is a Fortune 100 mortgage financing enterprise in the U.S. We’re starting out with them by replacing an existing solution for conversational service for one of their business units. Over time, the intent is to enable an enterprise-wide capability that is contextual and compliant, available both to customers and employees. The next one I want to mention is a fast-growing U.S.-based property management company.
They see AI knowledge as a core capability to improve customer experience and empower their employees as they are driving growth in a $1 billion business. And the next one, and the last one I want to mention, is a leading manufacturer of high-end bicycles and related products. They’re replacing their current knowledge platform with eGain to deliver trusted answers to customers and agents. Looking at the market, our business activity in this market continues to improve and it improved in the quarter as well. In fact, over the last nine months of fiscal 2024, our new logo and RFP counts, both of them, grew by 50% year-over-year. This reflects the growing trust, sorry, the growing interest we are seeing in knowledge management as a foundation for effective AI use in customer service.
Now, the megabank I talked about that we won in the quarter is a case in point. For the past year and a half, they’ve been running multiple AI initiatives within their business, no surprise, and having run through their exploration and evaluation of AI in their context, they concluded that they needed a knowledge foundation to feed trusted content to their AI tools. In their case, as for most large enterprises, they like our composable architecture so they can plug in their LLMs whenever they are ready for prime time. Most of the new opportunities we are engaging with share this growing awareness of the complementarity of AI and knowledge to deliver trusted answers for customer service. As we all know, customer service is a business function where 80% answer accuracy is not good enough.
With a wrong or thoughtless answer delivered by uncontrolled AI tapping directly into uncurated content would easily result in a lawsuit, or worse yet, sustained brand compromise, a’ la Air Canada recently. Extending our product leadership in the AI knowledge market for customer service, we rolled out our AssistGPT solution in Q3 to help our clients automate knowledge creation and curation. In fact, earlier today on our well-intended marketing webinar, a European client of ours joined us to share their success story and lessons learned as we helped them slash their knowledge build effort by a factor of five and reduced, at the same time, the answer errors by improving quality by 6x using our solution. Our current market position gives us a unique vantage point in the AI knowledge innovation race and so we are taking full advantage of it to enrich our products faster and better, to orchestrate AI and experts to automate knowledge management, thereby driving down the cost of customer service with trusted answers.
To conclude, we see continued momentum in new logo wins and supporting pipeline activities, and as such, we are investing in R&D and marketing to capitalize on this disruptive opportunity. At the same time, we’re keeping a keen eye on costs and making sure that we’re putting all our wood behind this arrow to dominate the AI knowledge market for customer service. With that, I’ll ask Eric Smit, our Chief Financial Officer, to add more color around the financial operations. Eric?
Eric Smit: Thanks, Ashu, and thanks, everyone, for joining us today. Let me provide more details about the financial results for Q3 before discussing our outlook and guidance for Q4 of fiscal 2024. Starting with revenue, total revenue for Q3 was $22.4 million, down 3% year-over-year. Contribution from our Cisco OEM business in the quarter was lower than anticipated due to a timing issue on revenue recognition as Cisco continues to implement its shift from an on-premise model to the cloud. In this quarter, more revenue shifted to rateable recognition than originally anticipated, which caused our revenue to come in below our expectations. And looking at revenue by region, North America accounted for 78% of total revenue this quarter, the same as in the year-ago quarter.
Total revenue for North America was $17.4 million, down 2% from last year, whereas in contrast, total revenue from Europe was $5 million, down 4% year-over-year. Looking at non-GAAP gross profits and gross margins, gross profit for the Q3 was $15.8 million, for a gross margin of 71%, compared to 69% for the prior year quarter. Now, turning to operations, non-GAAP operating costs for the Q3 came in at $13.8 million, a 7% improvement from $14.9 million in the year-ago quarter, reflecting the expense controls we have implemented. Looking at the bottomline, non-GAAP net income for Q3 was $2.6 million or $0.08 per share, up 142% on a dollar basis from non-GAAP net income of $1.1 million or $0.03 per share in the year-ago quarter. Adjusted EBITDA margin for the quarter was 10%, up 500 basis points from 5% in the year-ago quarter.
Turning to our balance sheet and cash flows, we generated $1.7 million in cash flow from operations for the quarter or an 8% operating cash flow margin, up from $905,000 in the year-ago quarter. For the first nine months, cash flow from operations was $17.6 million or an operating cash flow margin of 25%. During the quarter, under our share repurchase program, we repurchased approximately 881,000 shares or $5.5 million, at an average price of $6.26 per share. Of the $20 million authorized $5.7 million remained available under the program at the end of the quarter. Our balance sheet remains very strong. Total cash and cash equivalents at the end of the quarter were $83.1 million, up from $81.3 million a year ago. Now turning to our customer metrics, with our continued focus on knowledge, I will share some additional customer metrics for our knowledge customers.
LTM dollar-based SaaS net expansion rate for knowledge customers was 109%, while our total net expansion rate was 105%. Our LTM dollar-based SaaS net retention for knowledge customers was 97%, while net retention was 96%. Looking at total ARR, SaaS ARR for knowledge customers increased 4% year-over-year, while total SaaS ARR decreased 1% year-over-year. Looking at our remaining performance obligations, total RPO decreased 22% year-over-year to $67.9 million. The decrease was driven by the customer losses we discussed last quarter and the lower number of accounts up for renewal in the quarter. Our short-term RPO was $48.1 million, down 8% year-over-year. Now turning to our financial outlook and guidance, for the fourth quarter, we expect total revenue of between $21.1 million to $21.4 million.
Turning to the bottomline, for Q4, we expect GAAP net loss of $300,000 to $900,000, or $0.01 per share to $0.03 per share, which includes stock-based compensation expense of approximately $1.1 million and depreciation and amortization of $100,000. We expect non-GAAP net income of $200,000 to $800,000 or $0.01 per share to $0.03 per share. For the full fiscal 2024, we now expect total revenue of between $91.5 million to $91.8 million. The slight reduction in full year guidance is to adjust for the accelerated shift in Cisco OEM revenue to a rateable model, where we see -- expect to see less revenue up front and more spread across the term of the contracts. We are increasing our guidance for GAAP net income to $5.4 million to $6 million or $0.17 per share to $0.19 per share per year.
We estimate share-based compensation expense of approximately $4.6 million, and depreciation and amortization expense of approximately $400,000 per year. We are also increasing our guidance for non-GAAP net income for the year to $10 million to $10.6 million or $0.32 per share to $0.34 per share. Looking at weighted average shares outstanding, we expect $30.5 million for Q4 and $31.6 million for Q4. In summary, we are pleased with the continued good momentum in new customer wins and business activity in Q4, which continues in Q4, driven by our AI knowledge offering. We continue to generate significantly improved profitability and strong cash flow from operations, while buying back shares of our stock. We continue to invest in knowledge and generative AI capabilities, and with our healthy balance sheet and cash flows, remain well-positioned to capitalize on significant opportunity ahead.
This concludes our prepared remarks. Operator, we will now open the call for questions.
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