Good day. And welcome to the eGain's Fiscal 2020 First Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jim Byers of MKR Investor Relations. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Welcome to eGain's First Quarter Fiscal 2020 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 on various factors that could affect eGain's results are detailed on the company's reports filed with the Securities and Exchange Commission. eGain is making these statements as of today, November 6, 2019, and assumes no obligation to publicly update or revise any 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. Our earnings press release can be found on the news release link on the Investor Relations page at eGain's website at www.egain.com. The tables included with the earnings press release include reconciliation of the historical non-GAAP financial measures to the most recently comparable GAAP financial measures. And lastly, a replay of this conference call will also be available at the Investor Relations section of eGain's website. And now with that said, I'd like to turn the call over to eGain's CEO, Ashu Roy.

Thank you, Jim, and good afternoon, everyone. We achieved a solid performance across the board in Q1. This included top and bottom line results that exceeded our guidance, and we're ahead of Street consensus. And we also generated good cash flow from operations in the quarter. Let me share some financial highlights. Our SaaS revenue grew 30% year-over-year. Our subscription revenue grew 13% year-over-year and comprised about 91% of our total Q1 revenue. We were GAAP profitable for the quarter with net income of $1.2 million compared to net income of $600,000 in the same quarter of last year. And finally, we generated $2.7 million in cash from operations in the quarter. So all in all, very strong numbers and a good start to the year. Looking at the business, the last quarterly earnings call we did was just a few weeks ago. So what I can tell you, which is all good, that we have nice bookings in the quarter with healthy mix of new customers and expansion opportunities. One of the things I want to talk about in terms of sort of market and customer feedback is the Experience 360 event that we had in Chicago, which is our customer event in North America. We had this event on October 15 and 16, and it was very successful. Some of you attended that event as well. I would say there are three things I want to bring out from that event, and they can speak to the state of our business and where we're going. First is around customers, second is around partners and the third is around products. So at this event, three of our clients presented their journey with eGain. It's fantastic to hear their perspectives. They were different, but there were commonalities as well. So…

Great. Thanks, Ashu. As Ashu noted, we achieved top and bottom line results that exceeded our guidance, and we're ahead of Street consensus. And we generated strong cash flow from operations in the quarter. Looking at the financial highlights for Q1, SaaS revenue was up 30% year-over-year, and 33% in constant currency. Our non-GAAP gross margins were 70% for the quarter, an improvement both sequentially and year-over-year. Non-GAAP net income was $1.7 million or $0.06 per share on a basic and $0.05 per share on a diluted basis, up from non-GAAP net income of $1.2 million or $0.04 per share a year ago. And we generated $2.7 million in cash from operations during the quarter, a cash flow margin of 16%. Now looking at our quarterly results in more detail. Total revenue in Q1 was $17.2 million, up 9% year-over-year, or 12% in constant currency. Subscription revenue was $15.6 million or 13% year-over-year, 16% in constant currency, and accounted for 91% of total revenue, which is up from 87% a year ago. Looking at the revenue components. SaaS revenue was $12.4 million or 30% year-over-year, and accounted for 72% of our total revenue in Q1. The trailing 12-month SaaS retention rates remained healthy with gross retention in the mid to low 90% range, and the net retention, including upsell and uplift, north of 100%, consistent with last quarter. Legacy revenue was $3.2 million, down 24% from the year ago quarter. And legacy accounted for 18% of total revenue in Q1, down from 26% in the year ago quarter. As we have noted on past calls, we are driving a more accelerated transition of our on-premise customers to our cloud offering. And as such, we expect to see a faster decline in legacy revenue over the next several quarters. We're targeting…

[Operator Instructions] We'll go first to Ryan MacDonald with Needham.

Good evening Ashu and Eric. Thanks for taking my questions. Congrats on the strong first quarter numbers. I guess, first off, in terms of the guidance you provided, Eric, I know you made some comments about maybe some impacts sort of throughout the year, some changes here. But I guess the guidance right now, at the high end, assume sort of a flat year-over-year, I guess, growth to maybe slightly down. Can you talk about maybe what some of the moving parts of that guidance are? And I think it also assumes in the SaaS growth guidance, a bit of a deceleration into maybe the mid-teens there. So we'd love to hear some more color on that, if possible. Thanks.

Just to confirm, Ryan, are you referring to the Q2 numbers? Is that...?

Yes, the Q2 numbers.

Yes. So I think if you recall, last year, we mentioned on the call approximately a $900,000 benefit from seasonal onetime revenue that, as I had mentioned in my prepared remarks, that as certain of these contracts have evolved, we are instead looking to see more sequential improvements in the growth of the SaaS revenue as opposed to, as I've mentioned, if you look at last year, we saw a huge spike and actually then decreases in the revenue that followed. So as I've mentioned, we've sort of maintained the guidance for the year. But instead of it being sort of more front-end loaded into Q2, we would expect to see that growth rate continue throughout the year, if that makes sense.

And then in terms of the, I guess, the planned investments, can you talk about how you're tracking to internal plan on sort of that increased level of investment on sales and marketing and R&D, and then sort of how we should expect the cadence of the additional investment to play out through the remainder of the year?

This is Ashu here, Ryan. So yes, so we talked about increasing our sales and marketing investments to a certain level, and I think we are right around that level for Q1. I think we'll continue to see the increases that we have indicated. Leading up, I think that we probably will exit Q4 around the 35% level, that's my sense, of sales and marketing investments as a percentage of revenue. Now that's not going to go jump up to 35% instantly, but that's the trajectory that we are on.

And I think one more point to add, Ryan, that just that there is an element of seasonality in the sales and marketing spend. So for Q2, where we've had the customer event that Ashu talked about, we certainly see to more increase sequentially from the Q1 numbers as a result of that.

Good point. And that applies to the Q4 as well because we do a significant event in London. So Q2 and Q4, you see those spikes on the marketing plan.

Thank you. And then I guess just one more for me. In terms of the migration or accelerated migration of customers to get them over to the cloud, I know you mentioned you want to have that sort of done by the end of calendar year '20. How should we think about sort of the pace of those migrations I guess through the remainder of the fiscal year here?

So I think, as we've said in the past, there's going to be somewhat of a step function in it, where we've looked at some of the larger remaining legacy customers, as we move them, we would see that step down. So I think, again, timing of these activities is not always that easy for us to predict. But as opposed to it being gradual, we would probably see some fairly steep declines in one or two quarters.

Got it, thank you very much.

We might see anywhere sort of some several hundred thousand dollars decline as a meaningful customer moves.

We go next to Richard Baldry with ROTH Capital.

Sort of curious that recurring cost line fell sequentially pretty meaningfully sort of more in line with what you had mid last year. So is there anything unusual in that? Or do you see any step function growth in that ahead? Should we look at this as a new sort of baseline?

So I think, Rich, the - a couple of factors. One, just to reiterate the point about the sales and marketing spend was generally lighter in Q1. So we would expect to see that pick up again in Q2. And we know that there were some year-end costs around our Q4 numbers that drove those costs up higher. So there were certain elements of it that we recorded in Q4. So I think just to clarify your final point about - is there a specific line item or just expenses in general? Can you repeat on the revenues on the - what --

Yes, more focused on the recurring line.

So that - I think we'll obviously continue to see that sort of increase as the revenue grows up, but we don't anticipate a dramatic change in the margin profile.

Yes. I'll add a little bit, maybe just a color to that. So the recurring line is somewhat sensitive at this scale because, as you know, we use partners for infrastructure as a service to public cloud with Amazon and Azure. And we keep working with them to drive better value for us. And so sometimes there is a little bit of a catch-up on those that happens, and I think Q4 may have some of that catch-up element as well.

And if I look back in the past two years, the pattern on deferred revenues sort of seasonally, it's been hard to discern, but it's been growing pretty significantly over the past several quarters on a sequential basis. So how do I think about evaluating the deferred revenue growth from a seasonal perspective? Or is the fact that you're kind of exiting the legacy line going to leave that number more of a sequential grower that gives us an indication of bookings and your future growth rates?

Yes. I think as we've said in the past, we're always a little cautious about sort of reading too much into the deferred revenue line, just given the timing of the renewals as they come in and for customers, as a multiyear renewal, that's replaced by a single-year renewal. So at this point, I'm not sure if we can provide any further insight into it at this stage.

And then your balance sheet has been improved for a couple of quarters now. So I'm sort of curious if you can talk about whether that's had any impact on your pipeline, your ability to engage with larger customers to attract higher-end employees, change your win rates in competitive deals, sort of what your takeaway is from that after a few quarters. Thanks.

It's a good question. It's hard to correlate that with - improved win rates right now is my assessment. Looks positive, customers like it. We hear good things from them. A couple of customers at the conference in Chicago commented about the fact that we have strong balance sheet now. So I mean that's sort of the level at which I see it as a positive, but I couldn't put my finger on it and say that we have had this much percentage increase. That's one element. And second part around company confidence and our ability to execute through growth initiatives, that is definitely there. That has changed materially. And some of the investments we're making on the sales and marketing side, we know that we can sustain it and we will work through the sort of the growing phase to get to a very sort of effective, scalable result at the end of it. So I feel like the internal impact is very positive and clear to me, the external one is there, but I feel like it's not something I can quantitate.

Right. And I think the only point I would add is that certainly, prior to the improved balance sheet, I had frequent requests from salespeople to participate in due diligence called around the financial viability. And certainly, since the financing, I have not had one single call of that nature.

And last one with the - if we look at the growth in the SaaS revenue sequentially from the June quarter to September, it's almost 2x to 3x the dollar sequential growth you saw in the year prior period. So I'm sort of curious if you can talk about, is that a material step-up to sort of your sales productivity? Is it maybe a go-live timing issue that we shouldn't think about as sort of like sort of an outlier execution given its dramatic improvement year-over-year? Thanks.

So I think largely, we should attribute it to this timing of deals earlier in the quarter. And sometimes it happens, as you know, deals slipped from prior quarters and some large ones happened earlier in the quarter. I think that's probably the most significant factor. And bookings have been good, but not - I wouldn't say that that's the single-biggest driver.

[Operator Instructions] We'll go next to Jeff Van Rhee with Craig-Hallum Capital Group.

This is Rudy on for Jeff. A couple from me. One, I think you said last quarter, in terms of the new bookings in Q4, it was about a little over 60% from existing, a little under 40% from new. I'm curious how that was in this quarter. And then in terms of the pipeline, just as you look over the last three months to six months, what sort of products have been driving the pipe? I know you touched a little around the Sales Advisor driving some good pipeline so far. But if you could just touch on the products driving the pipeline?

So sorry, Jeff. I got the first question. Can you just repeat the second question, please?

Secondly, on the pipeline, what products, if you had to rank order, the top couple, are driving growth in the pipeline?

Okay. So the first one, yes, the percentage of existing versus new or new versus existing is materially similar, I would say, for the Q1 as well, probably in that low 60s for the existing expansions and the rest for new. For the products that are driving the growth, we are seeing more and more now that the expansion sales are happening with all ours, like the suite of capabilities or bundle of solutions on the expansion side. On the new side, knowledge and AI are clearly the one - the top one, and the second one is messaging and digital. So those are the top two entry points we are seeing in new logos.

And then on the investments in S&M, I know one is marketing, two is channel, how much direct capacity do you think you guys are going to add, say, in the next 12 months or throughout the remainder of this year?

On the sales side, you mean?

Yes, direct, in terms of direct sales capacity or direct sales --

Yes. We're probably going to be adding, let's say, 30% or so of sales capacity. But the investment incrementally on the channel and marketing will be higher in percentage terms because we think that that's a bigger leverage for us.

[Operator Instructions] And at this time, I show no further questions.

Okay, thanks everybody. I appreciate you listening, and hopefully we'll get to see some of you in New York next week. Thank you.

Ladies and gentlemen, this does conclude today’s conference. We thank you for your participation. We may now disconnect.