The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and the related notes included in Item 1 of Part I of this
Quarterly Report on Form 10-Q, and with our audited financial statements and the
related notes included in our Annual Report on Form 10-K for the year ended
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future periods, future events or our future operating or financial plans or performance. Often, these statements include the words "believe," "expect," "target," "anticipate," "intend," "plan," "seek," "estimate," "potential," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," "might," or "may," or the negative of these terms, and other similar expressions. These forward-looking statements that involves risks and uncertainties include statements as to:
the benefits of our SaaS only business model, including our belief that it
? affords recurring revenue visibility, more predictability and 50% faster time
to value to SaaS clients;
? our belief that SaaS revenue better reflects business momentum;
? expected benefits of our solutions to our clients and partners;
? customer and market expectations in the market in which we operate;
? our lengthy sales cycles and the difficulty in predicting timing of sales or
delays;
? our expectations regarding innovation in cloud and growing API economy;
? our expectations with respect to revenue, cost of revenue, expenses and other
financial metrics;
? our business plan and growth strategies;
? competition in the markets in which we do business and our competitive
advantages;
? our beliefs regarding our prospects for our business;
? changes in demand for our solutions;
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? our expectations regarding the composition of our customers and the result of a
loss of a significant customer;
? our reliance on strategic and third party distribution partnerships;
? the risk of unauthorized access to a customer's data or our data or our IT
systems and cybersecurity attacks;
? our ability to timely adapt and comply with changing European regulatory and
political environments;
? the effect of recent changes in
? the effect of compliance with privacy laws and regulations on our business and
our customers;
? our ability to take adequate precautions against claims or lawsuits made by
third parties, including alleged infringement of proprietary rights;
? the adequacy of our capital resources and our ability to raise additional
financing;
? the effect of our international operations;
? the potential impact of foreign currency fluctuations; and
? the potential impact of the COVID-19 pandemic on our business, employees and
customers.
These forward-looking statements reflect our current views with respect to future events, are based on assumptions and are subject to risks and uncertainties. These risks and uncertainties could cause actual results to differ materially from those projected and include, but are not limited to:
? our ability to manage our business plans, strategies and outlooks and any
business-related forecasts or projections;
? our ability to improve our current solutions;
? our ability to innovate and respond to rapid technological change and
competitive challenges;
? our ability to execute our sales and marketing strategy;
? customer acceptance of our existing and future solutions;
? our ability to predict subscription renewals;
? the impact of new legislation or regulations on our business;
? the impact of accounting pronouncements and our critical accounting policies,
judgments, estimates, models and assumptions on our financial results;
? our ability to compete against third parties with greater resources than ours;
? the success of our partnerships;
? our ability to obtain capital when needed;
? our ability to manage future growth;
? our ability to retain key personnel and hire additional personnel;
? risks related to protection of our intellectual property;
? foreign currency fluctuations;
? the global economic environment;
? risks related to public health pandemics such as the COVID-19 pandemic; and
? the risks set forth under "Risk Factors."
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Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by federal securities laws, we undertake no obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
All references to "eGain", the "Company", "our", "we" or "us" mean
eGain and the eGain® are trademarks of
Summary Risk Factors
Our business is subject to numerous risks and uncertainties that could affect our ability to successfully implement our business strategy and affect our financial results. You should carefully consider all of the information in this report and, in particular, the following principal risks and all of the other specific factors described in Item 1A. of this report, "Risk Factors," before deciding whether to invest in our company:
? Our business is influenced by a range of factors that are beyond our control
and that we have no comparative advantage in forecasting.
We face risks related to health epidemics, including the COVID-19 pandemic,
? which could have a material adverse effect on our business, financial condition
and results of operations.
Our revenue and operating results have fluctuated in the past and are likely to
? fluctuate in the future, and because we recognize revenue from subscriptions
over a period of time, downturns in revenue may not be immediately reflected in
our operating results.
? We cannot accurately predict subscription renewal rates and the impact these
rates may have on our future revenue and operating results.
? Our lengthy sales cycles and the difficulty in predicting timing of sales or
delays may impair our operating results.
Because we depend on a relatively small number of customers for a substantial
? portion of our revenue, the loss of any of these customers or our failure to
attract new significant customers could adversely impact our revenue and harm
our business.
? The market for customer engagement software is intensely competitive, and our
business will be adversely affected if we are unable to successfully compete.
If we fail to expand and improve our sales performance and marketing
? activities, or retain our sales and marketing personnel, we may be unable to
grow our business, which could negatively impact our operating results and
financial condition.
? Our failure to maintain, develop or expand strategic and third-party
distribution channels would impede our revenue growth.
? Difficulties and delays in customers implementing our products could harm our
revenue and margins.
We conduct a significant portion of our business and operations outside of the
?
financial condition to suffer.
Unplanned system interruptions, delays in service or inability to increase
? capacity, including internationally, at our third-party data center facilities
could impair the use or functionality of our cloud operations and harm our
business. 22
? Software errors could be costly and time-consuming for us to correct, and could
harm our reputation and impair our ability to sell our solutions.
The terms we agree to in our Service Level Agreements or other contracts may
? result in increased costs or liabilities, which would in turn affect our
results of operations.
If we are unable to increase the profitability of subscription revenue, if we
? experience significant customer attrition, or if we are required to delay
recognition of revenue, our operating results could be adversely affected.
We depend on broad market acceptance of our applications and of our business
? model. If our expectations regarding the market for our applications are not
met, our business could be seriously harmed.
We may be unable to respond to the rapid technological change and changing
? customer preferences in the online sales, marketing, customer service, and/or
online consumer services industries and this may cause our business to suffer.
We employ third-party technologies for use in or with our platform and the
inability to license such technologies on commercially reasonable terms or the
? inability to maintain these licenses or errors in the software we license could
result in increased costs, or reduced service levels, which could adversely
affect our business.
Our offshore product development, support and professional services may prove
? difficult to manage or may not allow us to realize our cost reduction goals,
produce effective new solutions and provide professional services to drive
growth. Overview
eGain automates customer engagement with an innovative Software as a Service
(SaaS) platform, powered by deep digital, Artificial Intelligence (AI), and
knowledge capabilities. We sell mostly to large enterprises across financial
services, telecommunications, retail, government, healthcare, and utilities.
That is, organizations seeking to better serve customers at scale while coping
with content silos, process complexity, and regulatory compliance. With our
mantra of AX + BX + CX = DX™, we guide clients to effortless digital experience
(DX) by holistically optimizing agent experience (AX), business experience (BX)
and customer experience (CX). Leading brands use eGain's cloud software to
improve customer satisfaction, empower agents, reduce service cost, and boost
sales. We are headquartered in
We have transitioned from a hybrid model, where we sold both SaaS and perpetual license solutions, to a SaaS only business model. Today, we only sell SaaS to new clients and are actively migrating our remaining perpetual license clients to SaaS. As we continue to migrate our legacy perpetual license clients to SaaS, we expect our legacy revenue, primarily comprising annual maintenance and support fees for legacy perpetual license clients to continue to decline.
We believe our go-forward SaaS business model affords us recurring revenue visibility and more predictability. Historical fiscal years affirmed our view that SaaS clients adopt our product innovation much faster than the perpetual license model and get better service levels. We believe SaaS clients enjoy up to 50% faster time to value from their eGain investment.
COVID-19
Since early 2020, several public health organizations have recommended, and many local governments have implemented, certain measures to slow and limit the transmission of COVID-19, including shelter-in-place and social distancing orders, which has resulted in a significant deterioration of economic conditions in the countries in which we operate.
The impact of COVID-19 and the related disruptions caused to the global economy
and our business has not had a material adverse impact on our business. However,
the ongoing spread of the COVID-19 virus, including new variants, current
availability of COVID-19 vaccinations, and lockdown orders in
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In response to the ongoing spread of COVID-19, we have taken the following measures to date:
? Implemented hybrid work model and social distancing policies throughout our
organization; ? Limited employee travel;
? Cancelled certain sales and marketing events; and
? Looked to our customer's needs to best support their operations during this
crisis.
The effect of the COVID-19 pandemic, may not be fully reflective in our results of operations and overall financial performance until further periods, if at all. The impact, if any, of operational changes we may implement is uncertain, but changes we have implemented as of the filing date have not affected and are not expected to affect our ability to maintain operations. We will continuously monitor the situation to determine what actions may be necessary or appropriate to address the impact of the COVID-19 pandemic, which may include actions mandated or recommended by federal, state or local government authorities. See our "Risk Factors" for further discussion of the possible impact of the COVID-19 pandemic on or business.
Key Financial Measures
We monitor the key financial performance measures set forth below as well as cash and cash equivalents and available debt capacity, which are discussed in "Liquidity and Capital Resources," to help us evaluate trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational effectiveness and efficiencies.
SaaS Revenues
With our transition to a SaaS only business model, we believe SaaS revenue better reflects our business momentum, and, to analyze progress, we disaggregate our subscription revenue growth between:
? SaaS revenue, which is defined as revenue from cloud delivery arrangements,
term licenses and embedded OEM royalties and associated support; and
? Legacy revenue, which is defined as revenue from maintenance and support
contracts on perpetual license arrangements that we no longer offer.
The following table presents a break out of subscription revenue between SaaS and legacy revenue for each of the following periods:
Three Months Ended September 30, (in thousands) 2022 2021 Change SaaS revenue$ 22,628 $ 19,194 $ 3,434 18 % Legacy revenue 295 951 (656) (69) %
Total subscription revenue
As we continue to migrate our legacy perpetual license clients to SaaS, we expect our legacy revenue to continue to decline.
SaaS and Professional Services Revenue
As we continue to shift to a SaaS only business model, substantially all of professional services revenue is now generated from our SaaS customer base. We believe the combination of SaaS and professional services revenue is a useful measure to value our business on a forward-looking basis.
The following table presents total SaaS and professional services revenue for each of the following periods:
Three Months Ended 24 September 30, (in thousands) 2022 2021 Change SaaS revenue$ 22,628 $ 19,194 $ 3,434 18 % Professional services revenue 1,840 1,306 534 41 %
Total SaaS and professional services revenue:
Non-GAAP Operating Income
Non-GAAP operating income is defined as (loss) income from operations, adjusted for the impact of stock-based compensation expense.
Management believes that it is useful to exclude certain non-cash charges and
non-core operational charges from non-GAAP operating income because (i) the
amount of such expenses in any specific period may not directly correlate to the
underlying performance of our business operations; and (ii) such expenses can
vary significantly between periods as a result of the timing of new stock-based
awards. The presentation of the non-GAAP financial measures is not intended to
be considered in isolation or as a substitute for, or superior to, the financial
information prepared and presented in accordance with generally accepted
accounting principles in
The following table presents a reconciliation of GAAP (loss) income from operations to non-GAAP income from operations for each of the following periods:
Three Months EndedSeptember 30, 2022 2021
(Loss) income from operations
2,065 2,107
Non-GAAP income from operations
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.
We believe that the assumptions and estimates, which are described in Note 1 "Summary of Business and Significant Accounting Policies" to our condensed consolidated financial statements, associated with revenue recognition, stock-based compensation, allowance for doubtful accounts, the valuation of goodwill, the valuation of deferred tax allowance, and legal contingencies have the greatest potential impact on our condensed consolidated financial statements. We evaluate these estimates on an ongoing basis. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Sources of Revenue
Our revenue is comprised of two categories, subscription and professional services. Subscription includes SaaS revenue and legacy revenue. SaaS revenue includes revenue from cloud delivery arrangements, term licenses and embedded OEM royalties and associated support. Legacy revenue is associated with license, maintenance and support contracts on perpetual
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license arrangements that we no longer sell. Professional services include consulting, implementation, training, and managed services.
Subscription Revenue
For our cloud delivery arrangements, our maintenance and support arrangements and our term license subscriptions that incorporate substantial cloud functionality, the combined performance obligation is recognized ratably over the contract term as the obligation is delivered. For contracts involving distinct software licenses, the license performance obligation is satisfied at a point in time when control is transferred to the customer.
We typically invoice our customers in advance upon execution of the contract or subsequent renewals. Invoiced amounts are recorded in accounts receivable, deferred revenue or revenue, depending on when control is transferred to our customers based on each arrangement.
We have a royalty revenue agreement with a customer related to our embedded intellectual property. Under the terms of the agreement, the customer is to provide a combined fixed fee, per agent, for each software license sold containing the embedded software to us. These embedded OEM royalties are included as subscription revenue. Under revenue guidance, since these arrangements are for sales-based licenses of intellectual property, we recognize revenue only as the subsequent sale occurs. However, since such sales are reported by the customer with a quarter in arrears, such revenue is recognized at the time it is reported and paid by the customer given that any estimated variable consideration would have to be fully constrained due to the unpredictability of such estimate and the unavoidable risk that it may lead to significant revenue reversals.
Professional Services Revenue
Professional services revenue includes system implementation, consulting, training, and managed services. The transaction price is allocated to various performance obligations based on their stand-alone selling prices. Revenue allocated to each performance obligation is recognized as work is performed. Managed services include a comprehensive set of processes and activities that range from implementation to monitoring the evolution and support of eGain solutions in a company. Our consulting and implementation service contracts are bid either on a time-and-materials basis or on a fixed-fee basis. Managed services contracts are bid on a time-and-material basis. Fixed fees are generally paid on milestone billing at pre-determined points in the contract. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether transfer of control to customers has occurred.
Training revenue that meets the criteria to be accounted for separately is recognized when training is provided.
Remaining Performance Obligations
Remaining performance obligations represent contracted revenue that had not yet been recognized, and include billed deferred revenue, consisting of amounts invoiced to customers whether collected or uncollected which have not been recognized as revenue, as well as unbilled amounts that will be invoiced and recognized as revenue in future periods. The transaction price allocated to the remaining performance obligation is influenced by a variety of factors, including seasonality, timing of renewals, average contract terms and foreign currency exchange rates.
As of
We expect our remaining performance obligations to change quarterly for several reasons including the timing of new contracts and renewals, duration and size of our subscription and support arrangements, variable billing cycles and foreign exchange rate fluctuation. We typically issue renewal invoices in advance of the renewal service period. Depending on timing, the initial invoice and subsequent renewal invoices may occur in different quarters. This may result in an increase or decrease to our accounts receivable and deferred revenue.
Costs Capitalized to Obtain Revenue Contracts
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Under Topic 606, we capitalize incremental costs to obtain non-cancelable subscription and maintenance and support revenue contracts with amortization periods that may extend longer than the non-cancelable subscription and maintenance and support revenue contract terms.
We capitalize incremental costs of obtaining a non-cancelable subscription and maintenance and support revenue contract with amortization periods of one year or more. The capitalized amounts consist primarily of sales commissions paid to our direct sales force. Capitalized amounts also include (i) amounts paid to employees other than the direct sales force who earn incentive payouts under annual compensation plans that are tied to the value of contracts acquired and (ii) the associated payroll taxes and fringe benefit costs associated with the payments to our employees.
Costs capitalized related to new revenue contracts are generally deferred and amortized on a straight-line basis over a period of benefit that we estimate to be five years. We determine the period of benefit by taking into consideration the period from initial contract through renewal, which constitutes the length of our customer relationship or customer life. Amortization of costs capitalized related to new revenue contracts is included as a component of sales and marketing expense in our operating results.
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Results of Operations
The following table sets forth certain items reflected in our condensed consolidated statements of operations expressed as a percent of total revenue for the periods indicated: Three Months Ended September 30, 2022 2021 Revenue: Subscription 93 % 94 % Professional services 7 % 6 % Total revenue 100 % 100 % Cost of revenue: Cost of subscription 16 % 16 % Cost of professional services 9 % 9 % Total cost of revenue 25 % 25 % Gross profit 75 % 75 % Operating expenses: Research and development 28 % 26 % Sales and marketing 38 % 35 % General and administrative 11 % 11 % Total operating expenses 77 % 72 % (Loss) income from operations (3) % 3 % Revenue
We classify our revenue into two categories: subscription and professional services revenue. We further break down subscription revenue into SaaS revenue and legacy revenue, with SaaS revenue being a key metric.
The following table presents our subscription and professional services revenue
during the three months ended
Three Months Ended September 30, (in thousands, except percentages) 2022 2021 Change Subscription$ 22,923 $ 20,145 $ 2,778 14 % Professional services 1,840 1,306 534 41 % Total revenue$ 24,763 $ 21,451 $ 3,312 15 %
Total revenue increased approximately
Our revenue was impacted by foreign exchange rate fluctuation between the
28 Subscription Revenue SaaS Revenue Three Months EndedSeptember 30 ,
(in thousands, except percentages) 2022 2021 Change SaaS revenue
$ 22,628 $ 19,194 $ 3,434 18 % Percentage of total revenue 91 % 89 %
SaaS revenue includes revenue from cloud delivery arrangements, term licenses
and embedded OEM royalties and associated support. Revenue from SaaS increased
by
SaaS revenue represents 91% of total revenue for the three months ended
Excluding a decrease of
Legacy Revenue
Three Months Ended September 30, (in thousands, except percentages) 2022 2021 Change Legacy revenue$ 295 $ 951 $ (656) (69) % Percentage of total revenue 2 % 4 %
Legacy revenue is associated with license, maintenance and support contracts on
perpetual license arrangements that we no longer sell. We experienced a decrease
of
Excluding a decrease of
29 Professional Services Revenue Three Months EndedSeptember 30 ,
(in thousands, except percentages) 2022 2021 Change
Professional services revenue
7 % 6 %
Professional services revenue includes consulting, implementation, training, and
managed services. Revenue from professional services increased by
Excluding a decrease of
Revenue by Geography
Three Months Ended September 30, (in thousands, except percentages) 2022 2021 Change North America$ 19,120 $ 15,228 $ 3,892 26 % Europe, Middle East, & Africa 5,643 6,223 (580) (9) % Total revenue$ 24,763 $ 21,451 $ 3,312 15 %
Revenue from
Revenue from
Cost of Revenue Three Months Ended September 30, (in thousands, except percentages) 2022 2021 Change Subscription$ 3,978 $ 3,487 $ 491 14 % Professional services 2,304 1,811 493 27 % Total cost of revenue$ 6,282 $ 5,298 $ 984 19 % Percentage of total revenue 25 % 25 % Gross margin 75 % 75 % Subscription
Cost of subscription revenue consists primarily of expenses related to our cloud services and providing support to our customers. These expenses are comprised of cloud computing costs, personnel-related costs directly associated with cloud operations, and customer support, including salaries, benefits, bonuses and stock-based compensation and allocated overhead.
Cost of subscription revenue increased by
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Excluding a decrease of
Professional Services
Cost of professional services consists primarily of personnel-related costs directly associated with our professional services and training departments, including salaries, benefits, bonuses, and stock-based compensation and allocated overhead.
Cost of professional services increased
Excluding a decrease of
Operating Expenses Research and Development Three Months EndedSeptember 30 ,
(in thousands, except percentages) 2022 2021
$ 6,874 $ 5,609 $ 1,265 23 % Percentage of total revenue 28 % 26 %
Research and development expense primarily consists of personnel-related expenses directly associated with our engineering, product management and development, and quality assurance staff. Included in these costs are salaries, benefits, bonuses, and stock-based compensation and allocated overhead. Research and development expense also includes outside consulting services contracted for research and development.
Research and development expense increased by 23% to
Sales and Marketing Three Months EndedSeptember 30 ,
(in thousands, except percentages) 2022 2021 Change Sales and marketing
$ 9,459 $ 7,404 $ 2,055 28 % Percentage of total revenue 38 % 35 %
Sales and marketing expense primarily consists of personnel-related expenses directly associated with our sales, marketing and business development staff. Included in these costs are salaries, benefits, bonuses, and stock-based compensation and allocated overhead. Sales and marketing expenses also include amortization of commissions paid to our sales staff, lead generation activities, advertising, trade show and other promotional costs, and, to a lesser extent, occupancy costs and related overhead.
Sales and marketing expenses increased by 28% to
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General and Administrative
Three Months EndedSeptember 30 ,
(in thousands, except percentages) 2022 2021 Change General and administrative
$ 2,818 $ 2,449 $ 369 15 % Percentage of total revenue 11 % 11 %
General and administrative expense primarily consists of personnel-related expenses directly associated with our finance, human resources, administrative and legal personnel. Included in these costs are salaries, benefits, bonuses, and stock-based compensation and allocated overhead. General and administrative expenses also include fees for professional services, provision for doubtful accounts and, to a lesser extent, occupancy costs and related overhead.
General and administrative expenses increased 15% to
(Loss) Income from Operations
Three Months EndedSeptember 30 ,
(in thousands, except percentages) 2022 2021 Change
(Loss) income from operations
(3) % 3 %
Loss from operations was
Interest Income
Interest income primarily consists of interest earned on money market accounts.
Interest income was income of
Other Income, Net
Other income, net was income of
Income Tax Provision
Provision for income taxes consists of state and foreign income taxes. Due to
cumulative losses, we maintain a valuation allowance against
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Liquidity and Capital Resources
Overview
As of
Based upon our current business plan, we believe that existing capital resources will enable us to maintain current and planned operations for at least the next 12 months. From time to time, however, we may consider opportunities for raising additional capital. We can make no assurances that such opportunities will be available to us on economic terms we consider favorable, if at all. Our expectations as to our future cash flows and our future cash balances are subject to a number of assumptions, including assumptions regarding anticipated increases in our revenue, our ability to retain existing customers and customer purchasing and payment patterns, many of which are beyond our control.
Cash Flows
For the three months endedSeptember 30, 2022 and 2021, our cash flows were as follows (in thousands): Three Months EndedSeptember 30, 2022 2021
Net cash provided by operating activities
Cash provided by operating activities mainly consists of net (loss) income adjusted for non-cash expense items such as depreciation and amortization, expense associated with stock-based awards, the timing of employee related costs including commissions and bonus payments, and changes in operating assets and liabilities during the year.
Net cash provided by operating activities decreased by
Net cash used in investing activities decreased by
Net cash provided by financing activities decreased by
Commitments
Our principal commitments consist of obligations under leases for office space.
Lease agreements are evaluated to determine whether an arrangement is or
contains a lease in accordance with ASC 842, Leases. As of
Off-Balance Sheet Arrangements
As of
New Accounting Pronouncements
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See Note 1 "Summary of Business and Significant Accounting Policies" to the condensed consolidated financial statements for our discussion of new accounting pronouncements adopted and those pending.
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