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Edited Transcript of EGAN earnings conference call or presentation 3-Sep-19 9:00pm GMT

Q4 2019 eGain Corp Earnings Call

MOUNTAIN VIEW Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of eGain Corp earnings conference call or presentation Tuesday, September 3, 2019 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

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Conference Call Participants

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* Alex Narum

Needham & Company, LLC, Research Division - Associate

* Jeffrey Lee Van Rhee

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

* Mark William Schappel

The Benchmark Company, LLC, Research Division - Director of Research & Supervisory Analyst

* Richard Kenneth Baldry

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

* Jim Byers

MKR Group, Inc. - SVP

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Presentation

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Operator [1]

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Good day, everyone and welcome to the eGain Fiscal 2019 Fourth Quarter and Full Year Financial Results Conference. 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.

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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 2019 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 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, and 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 is detailed in the company's reports filed with the Securities and Exchange Commission. eGain is making these statements as of today, September 3, 2019, 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 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 egain.com. The 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 lastly, a replay of this conference call will also be available in 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.

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

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Well, thank you, Jim. And good afternoon, everyone. At the top level, we executed quite well in fiscal 2019. Our full year revenue came in ahead of our guidance and Street consensus. We also generated strong cash flow and profits for the year. And finally, we completed a successful capital raise, with those funds we've paid down our debt and now we are investing in growth.

Let me share some financial highlights from the full year. We grew our SaaS revenue 37% over the prior year to almost worth $5 million. Our subscription revenue grew 17% year-over-year to $60 million, and comprised 89% of our total revenue. We were GAAP-profitable with net income of $4.2 million compared to a net loss for the prior year. And our non-GAAP net income increased to $6.2 million or $0.21 per diluted share from $1.7 million or $0.06 per diluted share a year ago. We also had strong cash flow from operations of $7 million for the year.

Looking at the business highlights. We continue to see strong demand or AI-powered customer engagement capability, particularly in our partner ecosystem, and so we are ramping our investment in those partner engagements and the channels that we are able to reach, both through product integrations as well as channel enablement. We had several new customer wins in fiscal 2019, so let me walk you through some notable ones and their experience with eGain.

I'll start with the U.S.-based tax services provider who we helped develop a solution for automated service and sales for their DIY tax offering in 2019. Using rich capabilities in the eGain platform for virtual assistants, chat and Cobrowse, we rolled out in 3 months, a new solution for their website and mobile properties. The solution delivered over 50% automated service resolution rates and improved NPS in their latest factories in 2019. Since then this client has rolled out 2 more virtual assistants on the eGain platform, 1 for enterprise-facing IT and other for human resources, each time improving the contacted -- contact deflection rates. So much so that now the client is standardizing on the eGain platform across its entire business. All this was delivered at scale in less than 9 months. Just to put it in perspective, when they approached us last year, this client had already spent over a year, according to them, working with multiple vendors, 1 for virtual assistant, 1 for a chat, 1 for Cobrowse, and they have very little to show for all that.

This difference in client experience is what sets us apart. We are able to easily deliver to scale the kind of connected digital engagement journeys that typically are gathering dust on drawing boards with other providers, who keep hammering point capabilities. The next one I want to talk about is the new customer we won in partnership with Cisco. They are one of the top apparels and whole retailer in the U.S. They have been grappling with multiple point tools again for chat, for e-mail, for knowledge, and they wanted to kind of sweep all that out and develop an omnichannel capability that would be connected and scalable. Working with Cisco, we went live with a competitive production replacement of the chat capability in 6 weeks, which, by the way, would happen to be LivePerson, integrating the client's Cisco contacts and other capability with our cloud. Now the client is migrating their customer e-mail handling with the eGain platform, away from another point tool they had been using. So what you see here is that our capabilities in terms of comprehensive risk solutions integrated when needed with folks like Cisco and the contact center, help us deliver this sort of easy, valuable and differentiated experience. The third client I want to talk about is the global payment processing provider in the U.S. We acquired them last quarter. This client, when they approached us, was using Salesforce for contact center knowledge management. But they were struggling with poor user adoption and business value. Once we won the opportunity we got going, and we are now in the month of September when we we're rolling out our knowledge solution integrated with their Salesforce desktop and using our certified eGain connector to Salesforce. Another client we recently won is a leading building products manufacturer in the U.S. Dozens of brands and they wanted to deliver a personalized experience for each brand, all from a central platform. Again, in a matter of couple of months, we'd be delivering this common knowledge base across the website, virtual assistants and contact centers, and that's just the first of many brands that will be coming out in the next few months. Other couple of names I want to talk about or examples. One is the global high-tech company we won, this was late in 2019. They had Salesforce for sales force automation and Eloqua for marketing automation. They needed a solution for omnichannel customer engagement. We have now rolled out virtual assistants, chats, e-mail and social handling, all connected on a common platform in a matter of months.

For this client, we have already displaced 3 point tool providers and activated virtual assistants as a new capability. The last one from fiscal '19 I want to bring out is a European manufacturer of globally marketed consumer products. We won them in partnership with Cisco. This client is driving their digital transformation agenda on the eGain plus Cisco platform and now we're working to implement their solution for improving their customer experience. Even in fiscal '20, we have been accelerating for new logo wins. Early in this quarter, which we are in now, we've been off to a good start. We had an exciting new client win in partnership with Amazon. Together with Amazon, we are delivering an omnichannel solution to a large state agency in California with Accenture as the system integrator. This is a 2,000-plus feet contact center that's moving from legacy to the cloud and they have selected Amazon and eGain as their go-forward solution. And final one, I want to mention, again, in Q1, which is this current quarter, but very nice win for us is a large health insurance client in the U.S. In partnership with Deloitte, we won this knowledge management opportunity in July. And this engagement is going to be the foundation for the digital transformation program that this client is driving around service automation. The win with Deloitte in this case is now feeding a potential partnership for us with them, and they've already brought us into another opportunity, early days though, at another client potentially in the U.S. So what you see here is the new client wins we are getting are all serving a need, which we see as a yawning gap in the market, where point solution providers are unable to meet the omnichannel requirements in a digital engagement transformation that customers are looking to drive. On the partner front, we continue to invest in the 3 technology platforms we have integrated with. Last year, we strengthened our partnership with Cisco. Our OEM capability that is bundled in the Cisco enterprise platform, continues to be activated and used by more and more of their installed base of enterprise clients. This solution now provides a great foundation of clients who are looking to use value-added solutions for knowledge, AI and messaging. We are now partnering with Cisco to market these value-added solutions through the solution -- Cisco SolutionsPlus catalog that we have been using successfully, on top of the OEM technology. As you all know, Cisco is and continues to be our #1 partner, and we believe that this partnership will strengthen in the coming year.

Turning to Avaya, we have made good progress with them in the last 6 months, in fact, we are accelerating. We are now executing a joint go-to-market plan with them, both in the U.S. and in Europe, to deliver eGain capabilities in digital and AI, integrated with the Avaya Elite platform. Our joint pipeline is building nicely. And I believe that we will see bookings through this channel in the second half of fiscal 2020. Just given the pipeline and the sales cycles associated with these enterprise clients. So we have an active funnel that we have started to develop and grow now with joint sales execution, very exciting. And then finally, Amazon Connect, as I mentioned, we signed our first customer through them and with them in the first quarter, this quarter. And what we're doing with them is really working the marketing -- joint marketing to spread the word of the success and then building some innovative new experiences in their cloud, combining our digital and AI capability and Amazon's machine learning, to combine voice and digital experiences for cloud contacts and for clients. With and along with these 3 partners, now, we are reaching an installed base of over 4 million enterprise contact center suites worldwide, to combine the Cisco and Avaya install base's status. Combined that with our Amazon Connect partnership, which is targeting really the pure cloud opportunities, you can see that we are in a good position to drive more growth through these channels. To strengthen that business we have recently hired additional channel sales and support staff. And I believe that these investments now in place will help us drive new logo acquisition in fiscal 2020 and beyond. Looking at existing customers and success that has been a focus for us, as you know, in -- over the last 2 years. And what that has helped us do is continue to migrate more and more of our legacy support customers to the SaaS platform, and drive healthy customer retention and expansion. So our net SaaS retention rates now exceed 100% for the year. The trend we continue to see with customers is the demand for an omnichannel solution, a connected solution, not point solutions and something that is rich and out of the box, not something that they have to develop from scratch, building on tool kits on a platform. To us, that need is the primary driver that we see for eGain market growth and leadership.

On the product side, we continue to enhance our solution. Interestingly, in the Gartner 2019 magic quadrant for customer engagement centers, we were the only ones explicitly called out for delivering "value for money", based on client interviews and commentary. This statement from Gartner underscores our solution and its difference in the market and our enthusiasm to serve our clients even better in that solution. Moving forward, we intend to increase our product investment to deepen and broaden our contact center or partner integrations as well as enhancement of our platform, particularly in AI and messaging. This will enable us to accelerate growth over the next few years, both through new logo wins in these partnerships that we talked about as well as getting stickier and deeper engagement with our clients. Our intent is to be the enterprise-wide omnichannel platform for customer engagement, no matter where we start that journey in terms of the first pain point we address.

Looking ahead to fiscal 2020, with our strong cash flow and strengthened balance sheet from fiscal 2019, we are increasing our growth investment. We expect to see growth both from new logo acquisition as well as install base expansion. And on the new logo front, we are investing specifically to support our key partnerships, Cisco, Avaya and Amazon Connect. As I mentioned, we're seeing significant demand and some early success with people like Amazon Connect. And as we increase these investments, we believe that we'll be able to accelerate our growth rate on a top line basis over the next several years.

In summary, we are off to a good start. And before I turn it over to Eric for more color on the operational and finance performance, I want to mention our upcoming customer event, which we are calling the Experience 360, this time, it's going to be held in Chicago on October 15 and 16. We will have a separate track for analysts and investors who may be interested in joining us. And we hope you will be able to come join us at this event, it will be an exciting event. We'll have speakers -- customer speakers from Comcast, from a large consumer bank and then analyst views from Forrester, and of course, we will be announcing exciting new products and capabilities as well. So with that, let me hand over to Eric for more commentary. Eric?

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Eric N. Smit, eGain Corporation - CFO [4]

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Thanks, Ashu. Before I review our financial results, I'd like to remind everyone that we adopted the revenue recognition accounting standard known as ASC 606 effective July 1, 2018, the start of our fiscal 2019. Unless otherwise noted, the results I will discuss today are presented in compliance with the ASC 606, the new recognition standard. A reconciliation of the ASC 606 to 605 results is included in our press release issued today that is available on our website.

Now turning to our financials. As Ashu mentioned, we're pleased with our performance in fiscal 2019. Our topline results exceeded our revenue guidance for fiscal 2019, and we're ahead of Street consensus. We achieved these positive topline results while improving our cash flow and operating profits for the year.

So let's quickly review our financial results for the fiscal year. Total revenue was $67.2 million, up 10% year-over-year or 12% in constant currency. SaaS revenue was $44.8 million or 37% year-over-year, and 39% in constant currency. Subscription revenue, which includes SaaS and legacy revenue was $60 million, up 17% year-over-year or 19% in constant currency. And subscription revenue now accounted for 89% of total revenue for fiscal 2019, up from 83% in fiscal 2018. And professional services revenue was $7.2 million or 11% of total revenue compared to $10 million or 16% of total revenue a year ago. Before I move on, I'd like to call out 2 key revenue topics and provide some additional color on how they impacted our performance for the year and our expectations for them in the coming fiscal year. These topics include the transition of our legacy on-premise customers to our cloud offering and our goal for our professional services revenue going forward.

Starting with the SaaS revenue transition. As we stated before, while transition to a 100% SaaS business is a key metric that we believe is useful to measure our forward-looking business is our SaaS revenue growth. At the beginning of the year, we targeted that growth to be 25% to 30%. We raised it in Q2 to 30% to 35%, so pleased to report that we exceeded that with the 37% growth. And if I look back over the last 3 years, we've been able to achieve a compounded annual growth rate now in excess of 25%.

Now looking forward, again, as we've mentioned on previous calls, driving the transition of our on-premise customers to our SaaS offering has been an important focus for us. And this successful transition has helped boost our SaaS growth rates in both fiscal 2018 and 2019.

Now looking forward, as we see the legacy business decline and the target as we've stated on previous calls that we'd like to see our legacy business account for down to approximately 10% of revenue by the end of calendar 2020. What that means, as Ashu alluded to, is that we are planning to increase investments in sales and marketing and R&D in fiscal 2020 to drive that growth rates going forward in fiscal 2021 and beyond.

The second point I wanted to raise or to provide some additional color is around our professional services revenue. At the beginning of fiscal 2019, we set a goal for our PS revenue to be in the range of low teens to high single digits as a percentage of total revenue, and this is something that we achieved during this fiscal year. As we look forward, we believe the increased investments we plan to make in product development will further improve the ease of our product deployments and require less implementation services. And therefore, for fiscal '20, we should see the PS revenue now in the high single-digit range as a percentage of total revenue, reflecting this further improvement in the products and the need for less PS engagements going forward.

Now moving on to our non-GAAP gross profit. For fiscal 2019, gross profit was $46 million or a gross margin of 68% compared to a gross profit of $39.6 million or a gross margin of 65% for the prior fiscal year. Our subscription revenue gross margin improved to 76% compared to 75% for the prior fiscal year, and professional services gross margin was 9% compared to 11% a year ago.

Turning to operations. Non-GAAP operating cost for fiscal 2019 came in at $38.4 million, up 4% from the prior year. And non-GAAP operating income improved significantly to $7.6 million or an operating margin of 11%, compared to $2.7 million for a margin of 4% in the prior fiscal year.

Looking at our bottom line. Non-GAAP net income was $6.2 million or $0.22 per share on a basic basis and $0.21 on a diluted basis. This represented improvement of $4.5 million or 262% year-over-year when compared to the non-GAAP net income for fiscal 2018. Adjusted EBITDA margin for the year was 12%, up from 5% in fiscal 2018.

Now looking at our financial results for Q4. Total revenue in Q4 was $16.8 million, up 8% year-over-year. And subscription revenue was $15.1 million, up 4% year-over-year and accounted for 90% of total revenue in Q4, up from 87% of revenue a year ago. Breaking up the revenue components, SaaS revenue was up 24% year-over-year, and legacy revenue was $3.6 million, down 15% from the year ago quarter. Professional services revenue was $17 million or 10% of total revenue, which is down 18% from $2.1 million or 13% of total revenue in the year ago quarter.

Before getting into the cost and expenses and corresponding margins for the quarter, I would like to point out that our annual company-wide compensation adjustments were effective at the beginning of Q4. This, along with the start of our additional investments, were the primary drivers for the sequential increase in cost expenses in Q4.

Now looking at non-GAAP gross profits and gross margins. Gross profit for the fourth quarter was $11.2 million or a gross margin of 67%, up from a gross profit of $9.8 million or a gross margin of 63% a year ago. The year-over-year increase in the overall gross margin reflects a combination of the benefits we're seeing from the scale and efficiencies in our SaaS operations and the growth in our higher-margin SaaS revenue while our lower-margin PS revenue declines.

If you look at the breakout of gross margin by revenue type in Q4, our subscription revenue gross margin was 72% compared to our professional services revenue margin of 15%. We saw a sequential decline in our subscription margin due to the increased investments in our cloud infrastructure and the increased personnel costs. However, our expectation is to see an improvement in this margin in future quarters to be in line with the subscription margins we achieved in fiscal 2019.

Now turning to operations. Non-GAAP operating cost for the fourth quarter came in at $9.9 million compared to $9.8 million in the year-ago quarter. Overall, this resulted in non-GAAP operating income in the fourth quarter of $1.3 million or an operating margin of 8%, compared to $54,000 or 0 margin in the year-ago quarter.

Looking at net income. Non-GAAP net income for the fourth quarter was $659,000 or $0.02 per share on a basic and diluted basis. This compares to non-GAAP net income of $300,000 or $0.01 per share in the year-ago quarter. Included in the Q4 results was an $800,000 annual tax adjustment for one of our foreign subsidiaries. Approximately $700,000 or an equivalent of $0.02 per share of this was the noncash charges attributed against an existing deferred tax asset on our balance sheet. GAAP net income for the fourth quarter was $166,000 or $0.01 per share compared to GAAP net loss of $536,000 or $0.02 per share in the year-ago quarter. And the adjusted EBITDA margin for the quarter was 8%, up from 2% in the year-ago quarter.

Now turning to our balance sheet and cash flows. Total cash and cash equivalents as of June 30, 2019, was $31.9 million compared to $11.5 million at June 30, 2018. We ended the year with no debt and improved our net cash position of $29.6 million. And during the year, we generated cash flow from operations of $7 million, a 4% increase from $6.6 million in fiscal 2018.

Looking at our remaining performance obligation balance or RPO as of June 30, 2019. The RPO balance -- the total RPO balance was $61.9 million, of which short-term RPO was $42.4 million. As this is a new metric that was introduced with the adoption of ASC 606, I'd like to provide some insights we have learned about this metric in the first year of tracking it for fiscal '19.

First, since this was -- since we adopted ASC 606 on a modified retrospective basis, we did not adjust our prior year balances. And therefore, prior year comparisons we do not believe are meaningful. Second, with the adoption of the ASC 606, a portion of the OEM business that we used to recognize ratably is recognized upfront. This change resulted in most of the $3.1 million reduction in our opening deferred revenue balance with the adoption of ASC 606 at the beginning of fiscal 2019. And then for the treatment of this OEM business during fiscal '19 as this is recognized upfront, there was no addition to the RPO balance from this business throughout 2019.

The other factor that impacted our RPO balance in fiscal '19 was the timing of renewals. Approximately 3 years ago, we made a concerted effort to increase the contracted term for both new contracts and upcoming renewals. We pushed from what used to be 1-year contracts to 3-year contracts. For the first 2 years since we've made this change internally, we saw sequential increases in our backlog, now the RPO balance, but then declining over fiscal '19 partly due to less contracts coming up for renewal as we've gone now through the 3-year cycle.

Now that we're seeing some of the 3-year contracts come up for renewal, looking forward, we would expect the RPO balance now to begin to grow again, subject to timing of larger deals and larger renewals. And to evidence that, if I look at our short-term RPO for fiscal -- for the fourth quarter, we saw a sequential increase of 5% when compared to the balance as of March 31, 2019. So as we move forward, we'll continue to provide updates on this. But hopefully, that additional insight would be as helpful.

Now turning to our guidance for fiscal 2020. For the fiscal year ending June 30, 2020, eGain expects SaaS revenue of $53.8 million to $55.4 million on a constant currency basis, which will represent growth between 20% and 24% year-over-year; and then for total revenue of $72 million or $73.6 million on a constant currency basis, which will represent growth between 7% and 10% year-over-year. As stated earlier, with our product improvement, we expect less professional services revenue required for deployments. And as a result, we expect our PS revenue for fiscal 2020 to be in the high single-digit range as a percentage of total revenue. We expect to generate non-GAAP net income of breakeven to $2 million or $0.00 per share to $0.06 per diluted share. And we expect -- assume a diluted share count of 32.6 million for the fiscal year.

For the fiscal -- for the first quarter, we expect SaaS revenue of $11.8 million to $12.1 million on a constant currency basis, which would represent growth between 23% and 26% year-over-year; and for the quarter total revenue of $16.8 million to $17.2 million on a constant currency basis, which would represent growth between 7% and 10% year-over-year. We expect to generate non-GAAP net income of $500,000 to $1 million or $0.02 to $0.03 per diluted share. And we assume a diluted share count of 30.6 million for the first fiscal quarter.

Looking ahead, our customer base, we believe, is healthy. We see a strong market demand in particular with our partner ecosystem in this large and growing market. And with our strength in balance sheet, we are beginning to increase our investment in sales, marketing and product development, which we believe will allow us to capture market share in fiscal 2020 and beyond.

Lastly, on the Investor Relations front, eGain will be participating in 2 investor conferences this week. We'll be presenting tomorrow at the 8th Annual Gateway Investor Conference taking place in San Francisco. And the following day, Thursday, we'll be participating in the Dougherty & Company Institutional Investor Conference taking place in Minneapolis. We hope to see some of you there.

This concludes our prepared remarks, operator, and we'll 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 hear first today 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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I'm wondering if you can go a little bit deeper into the COGS line on the recurring side. I know you said there were some infrastructure investments. So is that sort of onetime oriented? It's a little more than we've seen in the past, sort of disproportionally hit. Is that something that plays through throughout the rest of 2020 or fiscal '20? Or are there any -- can it reverse in some parts if it was more onetime-oriented?

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

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This is Ashu here. So what I -- what we are doing right now is we are investing in continuing to scale out, so making investments on security and compliance. For instance, we are close to -- we haven't yet got the certification, but we're close to getting certified for HITRUST, which is one of the really next generations with security certification on the cloud. So those are investments that do increase the COGS line for us on the cloud side. I think that that's something that will probably be true for fiscal 2020. But after that, I believe that as a percentage, the COGS line will start to go down again.

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

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And when we look at the SaaS revenues in 2019, they grew about a little over $12 million. Your guide argues that they would grow less than that, somewhere between $9 million to $10.5 million range. Was there anything onetime skewing in 2019 we should be sort of remembering in the back of our minds? Or do we just sort of wrap that up to conservatism? Because you are spending more on sales and marketing, so arguably getting more momentum with partners and things that would typically argue that your year-over-year growth in dollar terms should expand, not contract.

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

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So a couple of points. I think that is a little bit of the conservatism in that number. However, I also think that the migration of existing legacy customers to SaaS, which we have transparency, we mentioned as something that benefits our SaaS revenue growth over the last year or so and even the year before, is something that is starting to taper off. So we want to make our investments that we are making in sales and marketing are going to drive new SaaS revenue growth. And that's an area where we feel the investments we are making our timely, but these investments might take a little time in terms of showing up as revenue. And that also speaks to the decrease potentially of absolute SaaS revenue growth for fiscal 2020.

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Richard Kenneth Baldry, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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And last one would be can you talk about the sales head count additions you've been making or plan to make. Obviously, you're sort of ahead unfold. Have that net number of seats been increasing? Has there been any turnover there we should be thinking about on the back of our minds or any other issues around that sort of capacity of your direct sales force in fiscal '20 versus '19?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [7]

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So on the sales side, as we have mentioned in the past, we have an overlay model for the enterprise sales team, where we have quota-carrying enterprise salespeople who are supported by overlay of channel sales. And so the investments we are making at this time are mostly in 2 areas on the sales side.

One is the channel sales overlay, where we think that there is an opportunity to drive more pipeline growth through these channel sales investments. So that's one area we are investing in. And we have got 3 new people in those roles in the U.S., one for Cisco, one for Avaya and one for Amazon Connect. They are dedicated to those channels.

In addition, we're also spinning up an inside sales team, again, to assist the enterprise sales folks in driving the early pipeline opportunities through the funnel. And that's something that we have -- we intend to have half a dozen people in that group, in the U.S. primarily. Most of our increased sales investment at this point will be in the U.S. We expect Europe to be fairly constant in terms of business and given the market environment.

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Operator [8]

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We'll hear next from Mark Schappel with Benchmark.

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Mark William Schappel, The Benchmark Company, LLC, Research Division - Director of Research & Supervisory Analyst [9]

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Ashu, starting with you. In your prepared remarks, you called out several partner wins and also several competitor displacements. Are you seeing increasing competitor displacements? Or was it just a function of this call where you decided to call out a few more of them?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [10]

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We are seeing more competitive point product replacement, yes. I would say that we are meeting more and more in the enterprise with the vendor ecosystem where there are lots of point products in play already, not for every capability but quite a few. And the clients' desire to rationalize that with the platform is something that we are seeing more of.

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Mark William Schappel, The Benchmark Company, LLC, Research Division - Director of Research & Supervisory Analyst [11]

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Okay. Great. And then margins are expected -- with the investments, margins are expected to come down next year. I was wondering if you could give us a sense of when we can expect to see a return to some sort of margin expansion.

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [12]

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So on the gross margin side, along the lines of what I mentioned earlier to Richard's question, I believe that fiscal 2020 is going to be a time of investment. But fiscal '21, we should see improvement on the gross margin line. The -- on the operating line, I think it's a function of our investment. The 2 areas where we are planning to increase our investment is sales and marketing and product development. I believe that product development will start to marginally reduce beyond 2020 in percentage terms. I do think that sales and marketing will probably continue to go up and not down as we get more and more sales traction through the channel investments we are making. So that's kind of the 2-year outlook.

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Operator [13]

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

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [14]

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Just a couple for me. Ashu, I just want to circle back to your very last answer. You said R&D will reduce marginally in '20 in percentage terms but S&M will go up beyond that. You are talking in percentage terms or dollars?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [15]

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Both.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [16]

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Both. Okay. Good. Got it. So if I look at this past fiscal year, what -- in terms of the ARRs signed in the year, what percent was from new versus existing?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [17]

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So roughly 60%, a little over 60% was existing and 40% -- a little less than 40% was new.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [18]

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Okay. And how did that turn through the year?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [19]

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So what we have seen now, and this is a trend we have seen over the last year, is that the new logos we acquire are increasingly doing what we think is the right thing by them, which is that they want to start small even though they tend to grow big. And so you're seeing a phasing of people's investments not because they are nearly leery of spending a lot of money upfront but they want to prove out the case with some of these larger programs. And we are fine with that because we get -- when we do, do a good job, which we do most of the time, we get more value and more realization, monetization on the back end of it. So that's a trend we are seeing now, and we see that happened in them. Second half of 2019, we saw a little more of, fiscal. And we are now seeing the advantage of that in fiscal '20 with some of these early bookings, which have -- some of them are new wins but also some of those are expansion wins from new logos that we had acquired earlier in fiscal '19.

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Jeffrey Lee Van Rhee, Craig-Hallum Capital Group LLC, Research Division - Partner & Senior Research Analyst [20]

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Okay. And for fiscal '19, what was gross churn?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [21]

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On the gross churn basis, it was around -- for the SaaS customers, it was around 6%.

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

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Okay. And what about with respect to the maintenance base? Trying to get a sense of what percent of them in the process decided to just not make the migration.

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

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So that number wasn't as good as the SaaS number, but I think it wasn't -- it was maybe closer to 90%.

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Eric N. Smit, eGain Corporation - CFO [24]

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You mean 10%.

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [25]

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Sorry, 10%, yes. It was closer to a 90-10 percentage.

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

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Yes. Very helpful. And then last one from me. Just I guess 2 questions together if I could. On the new deals that you're winning, talk to me about the competitive landscape, just kind of the top 2 or 3 folks that you're seeing and how that might be changing. And then also, I'm interested in the drivers from a product standpoint. I hear a lot of knowledge management across the board here, a little chat here, a little messaging there, but a lot of knowledge management. So I guess the question is, the mix of drivers with respect to product and how the competitive landscape's changing.

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

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Sure. So 2 things. One, I would say the top 2 drivers right now, one is still omnichannel digital capability. That's still a big driver. And the second driver is knowledge. Those are the top 2 drivers, right? Knowledge in dollar size tends to be larger, but the digital opportunity, there are more of. And as the 2 are converging, we are happy to jump on to digital opportunities as well because that gives us a foot into the door to then develop the larger-scale opportunities as well.

Now, looking at the competitive landscape on the 2, on the digital side, the primary competitor that we seem to see is LivePerson on chat. On the other, there is really no strong competitor, to be honest, on the other channels. And then on the knowledge side, the primary competitor in the enterprise today is Salesforce. And that sounds a little odd because they really don't focus in the market, but because they have the full solution, customers are looking at them as an alternative. Those are the top 2, I would say.

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Operator [28]

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And from Needham & Company, we'll hear from Ryan MacDonald.

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Alex Narum, Needham & Company, LLC, Research Division - Associate [29]

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This is Alex Narum on for Ryan. And I was just hoping to get a little color on the guidance for 2020 and how we should be thinking about the mix of revenue growth from new and existing customers going forward.

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

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I think that our intent is to take that number more toward a 50-50 ratio, with 50% coming from new logos and 50% from expansion.

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Alex Narum, Needham & Company, LLC, Research Division - Associate [31]

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And then could you give an update -- or could you give a little bit more color on the progress being made with Avaya? And then also, has there been any impact from the M&A rumors surrounding the business?

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

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So far, we have not seen any impact from our perspective surrounding the M&A rumors for Avaya. We do see a lot of orchestrated and sort of strong interest from their side, and we're working closely with the field team and product teams. Like I mentioned, we are doing some prepackaged integration, which in the past we've had, but we are kind of enhancing that with the -- specifically for the Avaya Elite platform. And we are jointly executing the go-to-market with them that will kind of surface in the next month or 2 as we roll it out.

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Operator [33]

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And at this time, I'd like to turn things back to management for any closing remarks.

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

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Great. Well, thanks, everybody. Look forward to hopefully seeing some of you at some of the upcoming investor conferences and certainly at -- we'll be holding the Analyst Day at the Customer 360 event in Chicago. So please reach out to me if you want to get an invitation or want more details around that. Otherwise, we'll look forward to giving an update on our Q1 results. Thank you.

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Operator [35]

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That will conclude today's conference. Again, thank you, everyone, for joining us.