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Edited Transcript of EGAN earnings conference call or presentation 6-Sep-18 9:00pm GMT

Q4 2018 eGain Corp Earnings Call

MOUNTAIN VIEW Sep 12, 2018 (Thomson StreetEvents) -- Edited Transcript of eGain Corp earnings conference call or presentation Thursday, September 6, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ashutosh Roy

eGain Corporation - Co-Founder, Executive Chairman, CEO & President

* Eric N. Smit

eGain Corporation - CFO & Principal Accounting Officer

* Jim Byers

MKR Group, Inc. - SVP

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Conference Call Participants

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* Jeffrey Lee Van Rhee

Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst

* Mark William Schappel

The Benchmark Company, LLC, Research Division - Equity Research Analyst

* Richard Kenneth Baldry

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Ryan Michael MacDonald

Needham & Company, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the eGain Fiscal 2018 Fourth Quarter and Full Year Financial Results Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to Jim Byers of MKR Group. Please go ahead.

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Jim Byers, MKR Group, Inc. - SVP [2]

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Thank you, operator, and good afternoon, everyone. Welcome to eGain's Fiscal 2018 Fourth Quarter and Full Year 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 in the company's reports filed with the Securities and Exchange Commission. eGain is making these statements as of today, September 6, 2018, 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 non-GAAP financial measures in this conference call, 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. Tables included with the earnings press release include reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures.

In addition, a replay of this conference call will also be available in the Investor Relations section of eGain's website.

And with that said, I'd now like to turn the call over to eGain's CEO, Ashu Roy.

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [3]

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Thank you, Jim. And good afternoon, everyone. In fiscal '18, we executed very well as a SaaS business, and we finished the year strong.

Some highlights from the last quarter and the year. Our SaaS revenue was up 37% in both the fourth quarter as well as the full fiscal year. Recurring revenue in Q4 was up 15% year-over-year and comprised 86% of total revenue. Our gross bookings were up sequentially in Q4 and up 20% year-over-year. Total deferred revenue in the quarter was up a little under 30% year-over-year, up from $60 million to $77 million. And cash generated from operations in fiscal 2018 was up 22% year-over-year. So this has been a good year for us in terms of full year SaaS execution. All the metrics that we were tracking as a business and shared externally have trended the right way. And so I want to share some highlights on business that we did in the quarter.

Our partner-leveraged enterprise sales model is working well. We saw a mix of good business success across the board. For example, one of the exciting new customers we acquired is a diversified financial organization. This came to us as a result of a successful Try+ Buy we did in partnership with a digital consulting agency who was working with the bank in helping them transform their customer engagement operation. We worked with the client to demonstrate the value, and as a result now, we are rolling out the eGain platform across their service and sales groups across multiple countries.

Another nice deal in the quarter for us was with a mutual financial institution with over 15 million members. This also we won working with a partner. This client is now modernizing their customer engagement operation, and the first leg of the journey is to deliver a digital-first experience to its members, and eGain is their platform of choice.

We also saw good expansion from a number of existing accounts, including one of the largest electronic component distributors, where we expanded to add our digital channel capabilities on top of our analytics implementation. Another one was with a top 5 e-commerce operation in the world, where working with a partner in a fiscal ecosystem we expanded the use of our contact center analytics product across more of their contact center operations. And finally, with a large European bank, where we expanded to now offer our omnichannel adviser desktop for their entire service group. So these are very healthy expansions and gives me a lot of confidence in our ability to retain and expand in our existing customer base.

As we have talked about in the past, Q2 and Q4 have historically been strong quarters for us not just from a new business standpoint but also from a renewal standpoint. So we did see a healthy amount of renewals in the quarter. And that has been across the board, both in the U.S. as well as in Europe.

On the sales front, our growth drivers are threefold. First, our top priority is to retain, migrate and expand our existing customers. With continued investment in customer success, we are now seeing significant opportunities in our existing customer base to deliver value across the enterprise. Migrating our remaining on-premise customers to the eGain Cloud, who still account for roughly $4 million of quarterly recurring revenue in our business, and they include some marquee logos, is a priority for us in fiscal '19.

The next piece of our growth strategy is to acquire new logos through our partner-leveraged and product sales team. With the new overlay sales model that Todd, our head of sales, has put in place for the last several quarters, we are now seeing much better field collaboration and pipeline growth as we focus on the larger B2C contact centers in our target verticals.

We believe this model will scale well for us in fiscal '19 without necessarily a linear headcount and cost increases, based on a steady increase in average deal size as well as an improvement in win rate. We look to increase our investment in the partner ecosystem associated with this enterprise sales model to acquire, onboard and scale partners.

In fiscal '18, as we mentioned before, we launched a set of EV-API services for leveraging our AI knowledge and digital capabilities on our cloud platform. This year in fiscal '19 we will look to build on these powerful capabilities to help partners sell and deliver differentiated solutions using our APIs in the cloud.

The third piece of our growth strategy is something that we are going to turn more attention to, based on the success we have had in the U.S. over the last few quarters, is an experiment we conducted in the mid-market over fiscal '18. In that experiment, we acquired nice new logos like Waddell & Reed and American Eagle Financial (inaudible). We also delivered very quick business value to these clients, resulting in active customer success and increasing opportunities and to expand.

We see this as a profitable and scalable area of growth for us. And so we will scale our mid-market sales effort in fiscal '19 in the U.S. This team will focus on smaller than 100-feet contact centers in our target verticals. And I believe that it should become a meaningful part of our growth as we exit fiscal '19.

Along the lines of sales, investment and expansion, we recently completed a successful worldwide sales training event. Enthusiasm on our team was very high as we walked them through and trained them on how best to sell our AI-powered customer engagement platform. Now with exciting new additions like our new virtual assistant 3.0, our expanded messaging hub with integration to Apple Business Chat and our deep certified integration with Amazon Connect.

On the partner front, we continue to deepen our partnership with Cisco and work closely with its ecosystem partners. At the same time, we are now seeing early pipeline activity through some of the new partnerships we have developed in fiscal '18 like Avaya and Amazon Connect. These partnerships should become business relevant in terms of scale in fiscal '19.

Turning to the market trends. It's fair to say that it is buzzing with AI everywhere. For those who remember the early days of the commercial World Wide Web in the late '90s, this feels familiar. Not dissimilar from that time, there is a lot of promising good technology as well as a lot of snake oil being sold at the same time. The challenge for most businesses is to tell the difference. According to Gartner, executives they have surveyed on the topic of AI and its impact on their business tells the story. 67% of executive surveyed by Gartner find concern in terms of where to start with AI in their business. On average, organizations are taking 4 years to launch an AI application from the time they decide to begin the investment. 4 years. And in some cases, that number is closer to 10 years. And finally, only 4% of executive survey reported that they have actually deployed AI in a business value that they're able to see in their organization.

Given eGain's track record at scale with AI and knowledge-powered customer engagement solutions around process guidance and virtual assistance, we are very excited. Today we're announcing a new marketing offer, which is AI Value in 30 Days. In this program, we will demonstrate AI Value in 30 Days in a risk-free engagement for executives who are looking to see that AI impact in their business context, making it safe and easy for them to either see the value of AI or walk away without any strings attached. We are bullish about the emergence of AI in the market. With our ability to connect powerful dots like machine learning, AI, knowledge and digital in our platform, we are the preferred choice for businesses that are looking to build systems of automation and orchestration in their customer engagement. We believe that we are better at connecting these dots than anyone else in the market to deliver smooth experiences with 0 risk options like Try+ Buy. They're very exciting to us. And that leads me to the product, where we have continued to innovate, making it easy for clients to try our solutions. For instance, in May, we announced our virtual assistant 3.0. It's a third-generation, hence the 3.0, product from eGain that adds powerful machine learning and AI to our proven virtual assistant solution.

We are seeing good demand for this capability as part of our overall digital suite. Also in May, we announced eGain Solve for Amazon Connect, which seamlessly connects our solution with Amazon Connect to deliver an omnichannel experience that is unique in the market. And then in July, which is early fiscal '19, we announced our integration with Apple Business Chat. Now this solution showcases our capability around virtual assistance, integrated AI guidance and agent messaging very well. Our integration with Apple Pay, maps, search and deep links make the customer experience better than any other digital service channel out there.

Our thought leadership in marketing continues to keep eGain at the forefront. In May in London, we had a very successful Digital+ AI Day. Representatives from blue-chip companies like BT, Sky, Expedia and others enjoyed presentations from our clients including car2go, or Daimler e-business, and from experts like Brian Manusama from Gartner Research. Next up for us is our DX18 event, which is our digital experience event in Chicago on November 13 this year, November 13.

On the investor front, eGain joined the Russell 2000 in Q4, giving us greater visibility with investors.

So now looking ahead. For fiscal '19, our sales pipeline continues to be very robust even as we come off a strong Q4. The overall market, as I mentioned earlier, fueled by AI and still powerful digital trends continues to be positive. And executives are increasingly looking for quick value and impact of scale.

So we plan to increase our investment in growth and market share in fiscal '19. Given our typical sales cycle, which is 9 to 12 months in the enterprise market, these increased investments will have top line impact in early fiscal '20.

In closing, I want to congratulate my team for strong execution in fiscal '18. We as a team are super excited about our prospects as a proven innovator, and now we are driving and investing in building business scale.

With that, I'll ask Eric Smit, our Chief Financial Officer, to share his remarks on financial operations and guidance. Eric?

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Eric N. Smit, eGain Corporation - CFO & Principal Accounting Officer [4]

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Great. Thanks, Ashu. And thanks, everybody. As Ashu noted, we are pleased with our performance in fiscal 2018. Our execution is improving under our new SaaS review model, and we are seeing continued positive momentum in the business.

For our first year as a SaaS business, we are pleased to report that we exceeded the guidance that we set for the year. SaaS revenue was up 37% year-over-year, exceeding our guidance for annual growth of between 15% and 25%. Total revenue excluding legacy license was up 13% year-over-year, exceeding our growth guidance of between 5% and 10%.

And cash generated from operations increased 22% year-over-year to $6.6 million compared with our guidance of being cash flow positive from operations for the year.

Looking at some of the financial highlights for the year. Total recurring revenue was up 16% year-over-year and accounted for 83% of revenue, up from 75% in fiscal 2017. And non-GAAP net income of $1.7 million or $0.06 per share was up from a non-GAAP net loss of $3.3 million or $0.12 loss per share for fiscal 2017. We ended the year with a net cash position of $2.3 million, a significant improvement from the net debt position of $5.1 million at the end of fiscal 2017.

Looking at our financial results in more detail, starting with our fourth quarter. Total revenue was $15.6 million, up 8% year-over-year. When compared to Q3, there was a negative foreign currency impact for the quarter of approximately $200,000. Excluding this impact, our total revenue for the fourth quarter was approximately $15.8 million.

Our recurring revenue for Q4 was $13.3 million, up 15% from the year-ago quarter. For Q4, recurring revenue accounted for 86% of total revenue, up from the 79% in the year-ago quarter. Breaking out the revenue components in Q4, SaaS revenue was $9.3 million, up 37% from the year-ago quarter and up 5% sequentially. As expected, our legacy license revenue decreased to $182,000, down from $332,000 a year ago. And professional services revenue was $2.1 million compared to $2.7 million in the year-ago quarter. This reduction we're seeing in PS revenue is getting us closer to what we believe is industry standard for SaaS businesses who we see have PS revenue ranging from the low teens to the high single digits as a percentage of total revenue.

Now looking at non-GAAP gross profits and gross margins. Gross profits for the fourth quarter was $9.8 million or a gross margin of 63%. This compares to gross profit of $9.3 million or a gross margin of 64% a year ago. The decline in the overall gross margin is due to the decline in the higher-margin legacy license revenue as well as the decline in PS margin, which I will discuss shortly.

If you look at the breakout of gross margin by revenue type in Q4, our recurring revenue gross margin was 74%, which was consistent with the year-ago quarter. Professional services gross margin was negative 7% compared to a positive 14% a year ago. Again, this reflects the decreased level of PS revenue, as I previously mentioned. Our expectation is that we will continue to evaluate our expenditures on the PS side for next year to align the spend with the adjusted expectations on revenue.

Non-GAAP operating cost for the fourth quarter came in at $9.8 million compared to $9 million in the year-ago quarter.

As we anticipated on our last call, we saw an incremental increase in spend in Q4 for a couple of reasons. The first being an increase in our overall personnel cost of approximately $800,000 due to a company-wide annual compensation adjustment that became effective in April. Second, we hosted our European Digital Day during the fourth quarter, which added to our sales and marketing expense for the quarter. And then finally, as I mentioned on our previous call, we saw an increase in our G&A expense, primarily due to increased stocks and year-end audit expenses that have increased this year due to our new accelerated filing status. We also incurred additional expenses in connection with the adoption of the new ASC 606 revenue recognition standard. We expect to see the increased levels of G&A expenses continue into Q1 of 2019 as the work continues on the year-end audit and ASC 606 adoption.

Non-GAAP operating income in the fourth quarter was $54,000 compared to $250,000 in the year-ago quarter.

And looking at our net income. Non-GAAP net income for the fourth quarter was $300,000 or $0.01 per share compared to non-GAAP net income of $536,000 or $0.02 per share in the year-ago quarter. GAAP net loss for the fourth quarter was $536,000 or $0.02 per share compared to a GAAP net loss of $45,000 or $0.00 per share in the year-ago quarter.

Now turning to our full year results. Total revenue for the fiscal 2018, excluding legacy license, was $60.7 million, up 13% from $53.7 million in fiscal 2017. Recurring revenue was $50.8 million, up 16% from $43.6 million in fiscal 2017.

Breaking out the revenue components for the full year. SaaS revenue was up $32.7 million, up 37% year-over-year. And as expected, our legacy license revenue declined $585,000 -- to $585,000, down 87% from $4.6 million in fiscal 2017. And professional services revenue was $10 million compared to $10.1 million a year ago.

As I mentioned earlier, going forward we expect PS revenue to normalize at what we consider to be the SaaS industry standard for PS revenue as a percentage of total revenue; and as such, we would expect full year PS revenue to decline by approximately 15% to 20% in fiscal 2019.

Now looking at non-GAAP gross profits and gross margins for the fiscal year. Gross profit was $39.6 million or a gross margin of 65%, up from the gross profit of $37.4 million or a gross margin of 64% in the prior fiscal year.

Recurring revenue gross margin improved to 75% compared to 73% in the prior fiscal year. And professional services gross margin was 11% compared to 10% a year ago.

Turning to operations. Non-GAAP operating income improved to $2.7 million compared to a non-GAAP operating loss of $967,000 in fiscal 2017 and non-GAAP net income of $51.7 million or $0.06 per share from a non-GAAP net loss of $33.3 million or $0.12 per share for fiscal 2017.

GAAP net loss improved to $2 million or a loss of $0.07 per share from a GAAP net loss of $6 million or a loss of $0.22 per share in the year-ago period.

Now turning to our balance sheet and cash flows. Total cash and cash equivalents as of June 30, 2018, was $11.5 million compared to $10.6 million as of June 30, 2017. During the year, we generated cash flow from operations of $6.6 million, a 22% increase from $5.4 million in fiscal 2017. And total net accounts receivable was $7.4 million at June 30, 2018, compared to $7.2 million at June 30, 2017. And our DSOs improved to 43 days for Q4 compared to 44 days in the fourth quarter of last year.

Total deferred revenues was $77.6 million as of June 30, 2018, up 29% from $60.2 million as of June 30, 2017, in evidence of our strong bookings quarter. Deferred revenue includes both deferred revenue on the balance sheet of $26.2 million and unbilled deferred revenue that remains off balance sheet of $51.4 million, collectively representing contractual commitments that have not yet been recognized as revenue.

Total debt as of June 30, 2018, was $9.2 million, down 41% from $15.8 million as of June 30, 2017.

Before turning to our guidance, I want to highlight that for comparative purposes the guidance we are providing is based on the historical revenue recognition standard of ASC 605. Although what we do not expect any material changes to this guidance with the adoption of the new standard, ASC 606, we will provide further details on this when we report our Q1 fiscal 2019 results.

Now turning to our guidance. In fiscal 2019, we expect SaaS revenue growth for the year to be between 25% and 30% and recurring revenue growth for the year to be between 10% and 15%. While we plan to make increased investments to grow the business, we expect to be cash flow positive from operations for the year.

This concludes our prepared remarks. Operator, we will now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Richard Baldry with Roth Capital.

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Richard Kenneth Baldry, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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Can you talk a little bit about what's required on the client side to try the AI to Value in 30 Days in terms of the implementation? And then maybe what type of metrics you're monitoring to determine the value that's been created?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [3]

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Sure. So a couple of things. One, the AI Value in 30 Days program what we are asking for is taking some -- there are 2 ways that we see people taking advantage of the software. One is in terms of a virtual assistance capability or chatbot kind of capability on the front end of their business on the digital side. And that we can set up based on their historic chat transcripts. We can set up a virtual assistant that they can try on certain sections of their website. And that can then be monitored for effectiveness in terms of automated service deflection. And that's a metric that we would be able to show. The other place where we see AI value being used is in providing assistance to agents in responding to customer inquiries, which is where our AI guidance capability comes in. And there, we would ask for some subset of contact drivers and create a small group within the organization with an A/B test, which we know how to do in our cloud, and certain contacts being when handled by agents will be presented with a AI-based assistance of conversational guidance and will crack the -- both the handle times as well as the first-contact resolution rates of those conversations. That's the package that we will be offering.

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Richard Kenneth Baldry, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Okay. And then looking at the guidance, I understand the cash flow positive for the year, but you've been sustainably adjusted operating income positive now for about 5 quarters. So it's a bit of a different metric, but do you think that's also a target internally without necessarily being guidance to remain adjusted or pro forma, maybe EPS positive? Do you think there is a period maybe earlier in the year if you're investing it could actually turn slightly negative? How do we think about that trend?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [5]

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So I'll give you my qualitative view, and Eric please add to that. I do think that we will increase our investments in the year. The operating cash flow for the year metric that we're putting out there that, that will be still positive for the year. That gives us some flexibility through the year to increase investments and then to benefit from cash collections in the second half of the year. So yes, I think that sort of a nuance across quarters is something that we would like to have the ability to adjust. Eric?

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Eric N. Smit, eGain Corporation - CFO & Principal Accounting Officer [6]

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Yes, I think -- to add to that. I think given the momentum that we're seeing in front us and, as Ashu pointed out, the relatively long sales cycle, although we will be certainly careful as we increase those investments, it's going to be a function of -- if we see the visibility that the investments are making good progress, we want to have that flexibility to increase that investment to realize the opportunity that's in front of us. So I think from the perspective of being close to on a EBITDA basis, I don't anticipate that to change dramatically. But we're looking to have some flexibility if we feel that, that opportunity presents itself.

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Operator [7]

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We'll go next to Mark Schappel with Benchmark.

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Mark William Schappel, The Benchmark Company, LLC, Research Division - Equity Research Analyst [8]

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Ashu, starting with you. With respect to the sales force, has there been any major changes to the sales organization in the coming year with respect to the org structure or the comp structure or territory realignments?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [9]

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So I don't anticipate major changes. I think Todd's already got a system in place that he put right around the end of last calendar year. And so it's been about 9 months that we've had that new overlay model where the enterprise sales reps and the partner and the channel team work together and are comped on the deals without necessarily creating any conflict. So that is working well. We expect to continue to do that. On the mid-market side, I certainly think that in the U.S. as we scale that operation we'll probably put some management in place. But at this time, the organic model is working well, and we look to grow that for some time before we decide to put some management layers in that team.

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Mark William Schappel, The Benchmark Company, LLC, Research Division - Equity Research Analyst [10]

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Great. And Ashu, in your prepared remarks, you mentioned some nice customer wins, and you mentioned that a lot of them were partner driven or a partner contributed to. And I was wondering if Avaya -- the Avaya partnership, granted it's relatively new, but I was wondering if the Avaya partnership that was announced earlier this year helped to generate any of those deals?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [11]

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So for fiscal '18, no. Those deals and new wins I mentioned were not coming from the Avaya partnership. However, we are seeing some good activity now building up. And so I'm encouraged by that. And I think that, that will have some top line impact for us in this fiscal year.

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Mark William Schappel, The Benchmark Company, LLC, Research Division - Equity Research Analyst [12]

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Okay. And then with the company's focus on SaaS, has there been much in the way of changes in the competitive landscape over the last year or so?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [13]

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I would say the changes have not -- they don't have to do with SaaS necessarily. However, most of the new competition is cloud based and SaaS based. So I think there is a lot of new entrants in the AI-based customer service automation space. That is something that we're seeing more of. That -- we have our approach and what we think differentiates us, but that is an area where we're seeing more just because of investment from venture capital as well as just market availability of capital for AI-based technologies. And then on the other side, I would say that we are doing well against sort of established players. But I do think that we are seeing some more increased presence of people like Genesis, I'd say. That's one area that we see some more presence. So those are the 2 comments I would have.

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Operator [14]

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We'll go next to Ryan MacDonald of Needham & Company.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [15]

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I guess, first, I know you talked about in the prepared remarks about -- I think about $4 million of quarterly revenue that's recurring that's still on-prem. I guess as you look at -- I know your expectations for fiscal '19 and sort of that guidance you gave on the 25% to 30% growth, could you just talk about what the mix there you're looking at in terms of growth being driven by a transition from on-prem customers to SaaS? And then also, of course, any net-new customer opportunities?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [16]

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I think I understand the questions. You're saying is there some color on how that growth will -- where will that growth come from, will it come from migration or will it come from net new, right, logos?

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [17]

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Yes, that's correct.

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [18]

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I would say that it's -- I think it's going to be a mix. I think that we will have a good percentage of our growth come from new logos. In terms of percentages, I don't know what exactly we want to guide to. I don't think we have a number in mind. But at the same time, I also think that our existing customers are looking to move, and we will help them actively migrate with our promotional programs that we have in place. Sorry, I don't have a very clear number for you, but that's how I see it.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [19]

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Got it. And then around the partner activity, you mentioned Avaya, I think is doing -- I think will be more -- becoming more material in conversations for -- heading into 2019 here. But I guess, when you look at the newly announced [A. I.Connect] sort of integration and partnership there, is that perhaps the driving force in the mid-market opportunity that you see next year?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [20]

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Well, we're clearly working on a few. We think that these technology platforms where we can be complementary with our AI -- for instance with Avaya, the program that we have been partnering with them on is called the A.I.Connect program. So yes, the whole AI and knowledge proposition that we bring to these partners is very complementary. And that is something we think we can do for more partners, and we're working on those, but nothing that we are talking about yet.

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Operator [21]

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We'll go next to Jeff Van Rhee with Craig-Hallum.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [22]

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Actually, the shift to put more resources behind mid-market, just -- kind of what's been the evolution of the thinking, why now, why mid-market?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [23]

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So yes. Sure I can, Jeff. So this is not a shift. This is more expansion, right? So we are continuing to focus on the enterprise. That is our primary business. There is lot of growth there. The growth in that market we see as coming more from driving up demand through partners and then fulfilling it with our enterprise sales capacity and then seeing growth in terms of increased ARR, right, in terms of deal size. So that's our current thinking. And then on the mid-market, we see the opportunity to add more so-called bodies to the problem and see -- and that we believe can scale. Because there it's not gated by access to the right opportunities. We think that we can drive our digital marketing and our direct marketing to drive those demand gen funnels as well. So it's more driving more growth vectors in adding to the enterprise sales, primary sales engine that we have.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [24]

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In the guide, you talked about flexibility and essentially giving that cash flow positive guide to leave room for investments. If you just sort of top 1 or 2 areas where that investment is probably going to go? Just clarify that for me, if you would?

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Eric N. Smit, eGain Corporation - CFO & Principal Accounting Officer [25]

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Sure. So I would say 3 areas I see right now. One is the core product. I think with a lot of opportunity that we have to make our product easier to use, also to deliver some premium capabilities. For instance, we recently announced an always-on capability for our platform, which is a first in our market space. There are no application vendors who offer an always-on capability where you don't have any scheduled maintenance on a weekly or monthly basis, right? No SaaS vendor does that today. And that is a premium offering, and we see customers really liking that, and we're seeing people adopting that. That is an area we think that -- and again, it's an enterprise-class requirement. We are able to drive more value and therefore growth with those investments. The second area is to get [SIM] investment, which is customer success management, which is an area that we have been investing in for some time, but we think that we want to do more. And that gives us both retention benefit as well as expansion benefit. So that's the second. And then the third area is the combined piece that I mentioned around partner investments in terms of increasing more focus on enabling and training these partners, and other half of that is the mid-market sales investment. So those are the 3 areas now.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [26]

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Okay, great. And then just -- let me shift gears then to the just-reported quarter. So if you look at -- I guess, 2 questions. One, did bookings meet your expectations, meet are plan? And then two, in terms of the on balance sheet deferred revenue step down offset by an unusually large increase in the unbilled deferred, just maybe a little color there, in particular why the on balance sheet step down sequentially?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [27]

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Okay. So let me take the first one, and maybe, Eric, you can take the second one. So from a booking standpoint, yes, we did what we wanted to do, which is good. And as I mentioned in the look ahead, that's something that -- what I'm feeling encouraged about is that we are continuing to see our pipeline grow and strengthen even after a strong Q4. And that to me is a good indicator for our fiscal '19 prospects. And Eric, on the second question?

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Eric N. Smit, eGain Corporation - CFO & Principal Accounting Officer [28]

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Sure. No, I think that's a function of timing of some of the cash payments that we would receive that would impact. Because that's, just as a reminder, the on balance sheet number is a function of sort of whether we receive the cash or not. And so with the number of large bookings that happen right at the end of the quarter, we would not have received any of the cash for those items. So that way, most of that will show up in the unbilled component, if that makes sense.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [29]

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Was the back-end loading of the quarter more so than typical?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [30]

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No. No, no. It was not. It was not. Just the strength of the bookings is what exacerbates the off balance sheet nature because you don't collect -- for most of the deals that come in the last month of the quarter, you don't collect the cash for them in that quarter.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [31]

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Okay. And I guess just then 2 last quick ones -- quick last ones for me. You commented the effect of, I think, in your opening remarks, Ashu, about the increased win rates. Can you expand on that? Specifically, where are you seeing that? And versus who?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [32]

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So I think there are 2 comments there. One is that what we are doing better in the last few -- I would say in the last quarter or 2 quarters, yes, is we are qualifying much, much harder on things that we are working on. So that is an important piece of that increased win rate comment, which helps us. So our win rates now are really -- we are focusing on our sweet spot in the enterprise. So that. And the other piece that is happening is with the alignment with partners that is improving the win rate as well, whereas there is less conflict between our channel team and our direct team because the direct and channel are lumped together on these deals. That has created a better environment and, therefore, incremental win rate.

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Operator [33]

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And with no further questions in the queue, I would like to turn the call back over to management for any additional or closing remarks.

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [34]

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Thanks, everybody. We look forward to giving you the updates when we finish up our Q1. Thanks.

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Operator [35]

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This does conclude today's conference. We thank you for your participation. You may now disconnect.