Q2 2024 eGain Corp Earnings Call
Participants
Jim Byers; IR; MKR Group, Inc.
Ashu Roy; Chairman, President & CEO; eGain Corporation
Eric Smit; CFO; eGain Corporation
Richard Baldry; Analyst; Roth MKM
Jeff Van Rhee; Analyst; Craig Hallum
Presentation
Operator
Good day, and welcome to the eGain fiscal 2024 second quarter financial results call. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Jim Byers with MKR Investor Relations. Please go ahead.
Jim Byers
Thank you, operator, and good afternoon, everyone. Welcome to eGain's fiscal 2024 second 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.
Forward-looking statements 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 and various factors that could affect the eGain's results are detailed in the company's reports filed with the Securities and Exchange Commission. eGain is making these statements as of today, February 8, 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. Tables included with the earnings press release include reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. And our earnings press release can be found by clicking the press release link on the Investor Relations page of eGain's website at egain.com. And along with the earnings release, we will also post an updated investor presentation to the Investor Relations page on 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. Our top and bottom-line results for the quarter have exceeded our guidance, and our AssistGPT AI offering is being well received by the market and helping us win new logos.
Turning to business, we signed several new logos in the quarter. Some notable wins here. Our global investment management company chose eGain to modernize their knowledge management capability. Their services staff were struggling to find answers in what are long, complex documents in their business spread across many silos. They selected eGain based on our ability to unify that knowledge and deliver consumable answers using generative AI in a safe, auditable way.
Another new logo is a membership-based primary care practice, which is in hyper-growth mode. They selected eGain to enable their associates with a unified knowledge platform. Again, they will integrate all their content and knowledge sources on the eGain platform and use our AssistGPT capability to deliver easy answers and ramp up the new hires.
And lastly, I mentioned a pioneering US-based mutual auto insurance company. They selected us to streamline their agent experience, and therefore, improve their customer experience. They've gone live with eGain already for the service group and are now looking to roll out the knowledge capability across the enterprise.
We also saw good expansion from existing customers during the quarter. A couple of notable ones, a large P&C insurance company and a global electronic component distributor.
Turning to renewals, in the current macro environment, we are working hard to serve and retain customers as they look to reduce their operating costs. We've had good renewals in the quarter, including large healthcare insurance clients, an industry-leading HCM SaaS solution provider, and a large multi-national bank. At the same time, we have received notice from two large clients about their intent to not renew with us.
The first is a conversation hub client. They're choosing to consolidate vendors for all their digital customer communications. A second as an Analytics Hub client, they are choosing to build out their homegrown capabilities, we measure and manage their contact centers. The combined ARR of these two accounts is approximately $8 million. These churn events are challenging and they are not factored in our fiscal 2024 plan. At the same time, we are very encouraged by the growing interest in our assist GPT proposition. Our new logo pipeline is growing nicely with knowledge and opportunities. We're also feeling good about our new logo sales performance in the quarter. And as macro conditions improve, we believe we can grow our new logo acquisitions without adding sales capacity. Our new Assist, GPT and instant answers capabilities are generating lots of good market interest with assist GBG customers can speed up knowledge creation by four X for the Nordic clients in the energy vertical, we piloted with what historically would have taken eight weeks of human effort was done in less than two weeks with instant answers another AI product agents get much better and faster answers from our knowledge base of one of our insurance clients insurance. This is P&C insurance agents have seen more than a double improvement and speed to answer even as answer quality has improved, our product investments and leadership continues to be recognized by the market and clients. We were honored to be the sole recipient of the 2023 Kim promise award from KM World Magazine. This award recognizes the provider who best delivers on the promise to customers with innovative solutions integrated into their business process. Also in November, we again, was named a visionary in the Gartner Magic Quadrant for CRM customer engagement. We had mentioned this in our prior call, but that was followed by our receiving the top rating for knowledge management in the 2023 Gartner Critical Capabilities report, and that was something new that we had not mentioned before. We continue to invest at this intersection of AI knowledge and digital technologies to extend our product leadership.
To conclude, we see good momentum in new logo wins and pipeline activity. We continue to invest in innovative AI capabilities like assist GPT and instant answers to enhance our knowledge hub. And as market conditions improve, we are well positioned to capitalize on this big opportunity to help automate knowledge for customer service.
With that, I'll ask Eric Smit, our Chief Financial Officer, to add more color around our financial operations. Eric?
Eric Smit
Thanks, Ashu, and thanks, everyone, for joining us today, we delivered another quarter of significantly improved profitability and strong cash flow from operations. Both our top and bottom line results exceeded our guidance and Street expectations. Let me share more detail about our financial results for Q2 before getting into our outlook and guidance for Q3 and fiscal 2024, starting with revenue. Total revenue for Q2 was $23.8 million, another expectations but down 7% year-over-year, reflecting the current cautious spending environment and the tough comparison. Last year, we benefited from a seasonal volume increase of approximately $1 million that did not repeat this year.
And looking at the revenue by region, North America accounted for 79% of total revenue this quarter, up from 77% in the year-ago quarter. Total revenue from North America was 18.8 million, down 5% from last year, whereas in contrast, total revenue from Europe was 5 million, down 14% year-over-year.
Looking at non-GAAP gross profits and gross margins, gross profit for the second quarter was 17.1 million for a gross margin of 72% compared to 75% for the prior year quarter and 73% last quarter.
Now turning to operations. Non-gaap operating costs for the second quarter came in at 13.5 million, a 22% improvement from 17.3 million in the year-ago quarter, reflecting the expense controls we have implemented.
Looking at the bottom line, non-GAAP net income for Q2 was 3.4 million or $0.11 per share, up 100% on a dollar basis from non-GAAP net income of 1.7 million, or $0.05 per diluted share from the year-ago quarter. Adjusted EBITDA margin for the quarter was 16%, up 700 basis points from 9% in the year ago quarter.
Turning to our balance sheet and cash flows. We generated very strong cash flow from operations for the quarter of $7.7 million or a 32% operating cash flow margin during the second quarter under our share repurchase program we purchased we repurchased approximately 391,000 shares for $2.5 million at an average price of $6.39 per share of the 20 million authorized $11.2 million remain 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 $86.8 million, up from EUR18.9 million a year ago.
Now turning to our customer metrics with our continued focus on knowledge as outlined by Ashu open for this quarter and going forward, our share some additional customer metrics for our knowledge customers.
First, looking at our LTM dollar-based SaaS net retention from knowledge customers was 103%, while our net total net retention dropped down to 94%. The LTM dollar-based net expansion rate for knowledge customers was one three 113%, while our total net expansion rate was 106%.
Looking at our total AR, all with total CASA of knowledge customers increased 6% year over year. Of the total SAAR decreased 13% year-over-year.
Looking at our remaining performance obligation, total RPO decreased decreased 15% year-over-year to 77.9 million, and our short-term RPO was 55.8 million, down 4% year over year.
Now turning to our guidance for the third quarter of fiscal 2024 we expect total revenue of between EUR22.6 million to $23 million.
Turning to the bottom line, for Q3, we expect GAAP net income of 400,000 to $1 million or $0.01 to $0.03 per share, which includes stock-based compensation expense of approximately $1.2 million and depreciation and amortization of 100,000, we expect non-GAAP net income of 1.6 million to 2.2 million or $0.05 to $0.07 per share for the full year fiscal 2024 given the increased churn. As outlined by Ashu, we are revising our previously provided guidance as follows for fiscal 2024. For the year ending June 30th, 2023, we now expect total revenue of between 92 to 93 million, non-GAAP net income of 9.3 million to 9.8 million or $0.29 to $0.31 per share and GAAP net income of 4.5 million to $5 million or $0.14 to $0.16 per share. We estimate share-based compensation expense of approximately $4.8 million and depreciation and amortization expense of approximately 500,000 for the year. Looking at weighted average shares outstanding, we expect approximately 31.9 million for the third quarter and for fiscal 2020 for EUR32 million for the full year.
So in summary, while the macro environment remains challenging, we are very pleased with the increased number of new knowledge customer wins in Q2, and we expect to see continued positive momentum in new business activity going forward, given the level of interest for our new assist GPT. product offering the opportunity for again, this significant. And with our leadership and focus on knowledge and AI, we remain well positioned to capitalize on the expanding our market opportunity with our strong balance sheet and cash flow generation.
Lastly, on the investor relations calendar, again, we'll be presenting and meeting with investors at the Annual ROTH Conference taking place March 17th to March 19. 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.
This concludes our prepared remarks. Operator, we will now open the call for questions.
Question and Answer Session
Operator
(Operator Instructions) Richard Baldry, Roth MKM.
Richard Baldry
Thanks. And in terms of the unexpected attrition, can you talk about is there any commonality there in terms of geographies or vertical end markets? And then and in terms of the timing, it looks if I'm backing out right that most of it hits in the fourth quarter. Is that right? Or is there some, you know, residual pressures into the September quarter as well.
Ashu Roy
Okay. So let me address the first part, maybe, Richard and then. So no, there's nothing particularly common. One was a direct clients. The conversation offline to the direct client, the Analytics Hub client goes through a partner on and by exclusion, I guess neither of them are knowledge clients, but that's not to say that we may not have customers in that area of the usual sort of pattern for that. But I think both of them are under tremendous cost pressure in their businesses that we see. And as there's lower public news about them looking to reduce cost headcount reduction. So not I guess there's a commonality right now, but that's most of them have been using our products. Well, they seem to still be that the operational teams are still very happy with us seem to be engaged with the product, but they are being given marching orders.
And so that's that's where the our comments, Eric, you want to get ethic, but you're correct that for both of these accounts, the impact will be felt in the Q4.
Richard Baldry
And then flipping over to the aerospace side of the table. Could you talk about some of the early deal wins, sort of how it's impacting and deal sizes, deal cycles?
Yes.
And are you seeing a noticeable increase in the pipeline of people evaluating the AI type solutions? And sort of when do you think that if that becomes a tailwind when could that start to emerge?
Thanks.
Ashu Roy
Yes. So firstly, I would say that a couple of things. One, in terms of the I see the pilots that we do do the innovation in 30 days, we are doing more pilots now than we have done in the last several years, right? So and almost all of those projects are those AI pilots around them assist GBP or more at this point more instant answers, which is part of the SSGPT. And so we're seeing a lot of instant answers hundreds right now, both in prospect as well as existing accounts. So that's one thing.
Second thing we are seeing and this is early, but my sense is that the early engagement with prospects on early end of the funnel, people seem to be coming in within a I oriented budget and a value-oriented interest into knowledge saying what can I do with AI. And so that's something different from what we had seen, say, six months ago, there were not a lot ground level conversations that started with a I there was a lot of talk about it, but but people were not starting the conversations we're just chatting with our neighbors neighbor, the SDR team, and that's one of the trends that we are seeing much more now. And those are the two things I would point out.
Richard Baldry
And maybe last for me, is it the AI. traction seems to be picking up and you see sort of an inflection point ahead for growth, but not reflected in your current results term. Any arguably your valuation, do you think you'd find a period where you might be willing to get more aggressive on the buyback front, given the strength of the balance sheet, how do you view sort of the trade-offs there?
Ashu Roy
Yes.
I think that's a valid point. And I think certainly as we look at the cash generation that we've generated. Again, I'm certainly something that we'll continue to look at FirstCity for sure.
Richard Baldry
Thanks.
Operator
Jeff Van Rhee, Craig Hallum.
Jeff Van Rhee
Great.
Thanks for taking the questions, just maybe high level in terms of the splits of the business. So I from a from a revenue percent of revenue perspective, how much is sitting in I think you gave some splits, et cetera. But can you give us holistically where the revenue sits with respect to and knowledge management versus conversation hub versus analytics?
Ashu Roy
We have a sense of proportion.
I think just roughly speaking, the knowledge business is just under 50%. And then I would say the analytics business is probably in the 15% range and the compensation hub is in that 35% range.
Jeff Van Rhee
Okay. And then with respect to the two losses, I think it sounded like the some you had some visibility into where they're going in terms of whatever platforms are moving over to they're under cost pressure. Is the move that they're making? Is that your impression there is that substantial of a cost benefit by just consolidating onto the platforms of the existing providers? Or are there other motivations? I mean, certainly if they've got a platform provider, maybe there's some cost benefit, just a little bit more about why the why the shift and if you know what the cost benefit was, if there was some for their departure?
Ashu Roy
Yes.
So I can tell you what we know so far?
Yes, we were aware that that was an ongoing battle inside, let's say, the conversation of time. Let's talk about that.
First.
We were aware that that was a tussle going on between the people who were using the solution from us. And we're very happy with it. And sort of a company-wide agenda tried to reduce number of vendors ultimately I think what we have been told is that they are moving this direction. They'll see how the quality of that service goes in that migration and they are open to the idea and is still working with them, but no guarantees to see if we can continue to operate as a first and second, sorry. And so that's what we've done on the first front, the composition of one on the second one, the analytics one, I think the what we don't know enough about that, to be honest, because it's behind a partner and we don't have enough visibility to know what is the economic sort of trade-off between their homegrown and ours.
Jeff Van Rhee
Okay.
All right.
That's helpful. And then, Eric, you mentioned the year-over-year comparison I think you mentioned something about a value of $1 million in volume that didn't repeat.
Eric Smit
Can you just refresh me on what that was a year ago yet?
So I think what we had seen was some mixed accounts that was driving the increase in messaging business that was running a special program at the end of this quarter last year. That term, what drove that spike?
It was no increase in volume usage.
Jeff Van Rhee
Okay.
All right.
And then just on the SSGPTMA., obviously you're trying to get it in the hands of a lot of folks to let them use it and get feedback. I realize it's early, but any areas of pushback in places where you've decided to pivot accentuate deemphasize already?
Ashu Roy
Yes, a couple of learnings we have got one is that some people are very strong in the enterprise, not in the mid-market, but in the enterprise people are very focused on control safety and auditability. So we have and we are enhancing that significantly around generative capabilities. So that is that is a learning for us.
And the second is that the results that people are seeing in the pilots and the pilots are obviously trials, right? They're not production levels are at scale in a limited production trials. People seem to be very happy with the both the Solutions results. And so we're consistently seeing strong positive feedback saying, yes, we like this, right? So that's the second thing, the comparison.
Jeff Van Rhee
Okay.
And then maybe just one last And Eric, and we can take this off-line if it's easier just trying to you, there's obviously going to be some volatility in results next couple of quarters as you kind of reset to the new revenue level, do you have a sense of gross margins?
Q3, Q4?
Eric Smit
So we'll definitely see some pressure, obviously, given the on that transaction. But I think one of these accounts actually had some sort of the profile wasn't at a high level. So but yes, I think we will maybe I'll have to get back to you on the exact percentage where we see it, but certainly there will be some pressure.
Yes.
Okay.
Jeff Van Rhee
Fair enough.
I'll leave it there.
Ashu Roy
Thank you.
Thank you.
Operator
(Operator Instructions) And seeing no further questions, we'll conclude the question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Ashu Roy
Okay. Well, thanks, everybody. Appreciate you taking the time. We look forward to updating you as we continue to proceed versus exciting out knowledge driven by the SSGPTI. product.
Jeff?
Thank you.
Operator
This concludes the conference. Thank you for attending today's presentation. You may now disconnect.