eGain FY24Q3 Earnings Call Transcript

Ashu’s Section

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 function across the economy, improving customer experience and agent productivity 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, eGain AssistGPT, we are now breaking down the technology barrier that historically prevented companies from delivering trusted answers for customer service. The barrier was the manual effort in creating and curating knowledge within the hub that could serve as a single source of truth. As companies are looking to significantly reduce cost of customer service, our novel solution delivers on the promise of AI to reduce cost of customer service, while boosting the customer experience. These are exciting times for eGain.

Looking at our business, we signed some good new knowledge customers in Q3 including:

US mega bank, one of the big four. We are starting in one of their fast-growing multibillion dollar divisions. This group wants to contain costs as they are grappling with customer and agent experience in a rapidly growing service team. Following that, we have more opportunities with this client, and we are looking forward to becoming the platform for AI knowledge across the bank. This is big. A mega bank, an account we have been working with for a couple of years now.
Fortune 100 mortgage financing enterprise in the US. We’re starting out by replacing an existing solution for conversational service for one of their business units. Over time, the intent is to enable an enterprise-wide conversational service capability that is contextual and compliant, available both to customers and employees.
Fast-growing US-based property management company. They see AI knowledge as a core capability to improve customer experience and empower all employees as they drive growth in their billion-dollar business.
Leading manufacturer of high-end bicycles and related products. They are replacing their current knowledge platform with eGain to deliver trusted answers to customers and agents.

Our pipeline activity continued to improve in the quarter. In fact, over the last nine months of fiscal 2024, our new logo and RFP counts both grew by 50% year-over-year. This reflects a market trend we see emerging: knowledge management is a necessary foundation for effective use of generative AI in customer service.

The mega bank we won in the quarter is a case in point. For the past year and a half, the bank has been running multiple AI initiatives within the business. Having gone through the exploration and evaluation of AI in that context, they concluded that they needed a knowledge foundation to feed trusted content to their AI tools. For most large enterprises, as for this client, our composable architecture is critical for them to have the option to plug in internally developed LLMs whenever they want to.

Most new opportunities we are engaging with acknowledge that a modern knowledge foundation is critical for AI 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. One wrong or thoughtless answer delivered by uncontrolled AI tapping directly into un-curated content could easily result in a lawsuit or worse yet, sustained brand compromise, a la Air Canada.

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, in a well-attended 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.

We see continued momentum in new logo wins and supporting pipeline activity. And as such, we are investing in R&D and marketing to capitalize on this disruptive opportunity. At the same time, we are keeping a keen eye on costs, making sure that we are putting all wood behind this arrow to dominate the AI knowledge market for customer service.

Eric’s Section

Let me provide more details about our financial results for Q3 before discussing our outlook and guidance for Q4 and 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 ratable recognition than originally anticipated, which caused our revenue to come in below our expectations.
When 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 from North America was $17.4 million, down 2% from last year, whereas in contrast, total revenue from Europe was $5.0 million, down 4% year over year.

Looking at non-GAAP gross profits and gross margins:

Gross profit for the third quarter was $15.8 million, for a gross margin of 71%, compared to 69% for the prior year quarter and 72% last quarter.

Now turning to operations:

Non-GAAP operating costs for the third quarter came in at $13.8million, a 7% improvement from $14.9 million in the year ago quarter, reflecting the expense controls we have implemented.

Looking at our bottom line:

Non-GAAP net income for Q3 was $2.6 million, or $0.08 per share on a basic and diluted basis, up 142% on a dollar basis from non-GAAP net income of $1.1 million, or $0.03 per share on a basic and diluted basis, 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. For the first nine months, cash flow from operations was $17.6 million, or an operating cash flow margin of 25%.
During the third quarter, under our share repurchase program, we repurchased approximately 881,000 shares for $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 $83.0 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.

First, our LTM dollar-based SaaS net retention for knowledge customers was 97%, while total net retention was 96%.
LTM dollar-based SaaS net expansion rate for knowledge customers was 108%, while our total net expansion rate was 105%.
Looking at our total ARR. The total SaaS ARR for knowledge customers increased 2% year over year, while the total SaaS ARR decreased 1% year over year.
Looking at our Remaining Performance Obligation, total RPO decreased 22% year over year to $67.9 million.
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 bottom line for Q4, we expect GAAP net loss of $300,000 to $900,000, or $0.01 to $0.03 per share, which includes stock-based compensation expense of approximately $1.1 million and depreciation and amortization of approximately $100,000.
We expect non-GAAP net income of $200,000 to $800,000, or $0.01 to $0.03 per share.

For the full fiscal 2024, we continue to expect:

Total revenue of between $91.5 million to $91.8 million.
GAAP net income of $5.4 million to $6.0 million, or $0.17 to $0.19 per share
We estimate share-based compensation expense of approximately $4.6 million and
Depreciation and amortization expense of approximately $400,000
Non-GAAP net income of $10.0 million to $10.6 million, or $0.32 to $0.34 per share
Looking at weighted average shares outstanding, we expect approximately 30.5 million for the fourth quarter, and 31.6 million for the full fiscal year.

So, in summary:

We are pleased with the continued good momentum in new customer wins and business activity in the quarter, 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 continued to invest in knowledge and generative AI capabilities, and with our healthy balance sheet and cash flow, remain well positioned to capitalize on the significant opportunity ahead.