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Edited Transcript of EGAN earnings conference call or presentation 7-Feb-19 10:00pm GMT

Q2 2019 eGain Corp Earnings Call

MOUNTAIN VIEW Feb 11, 2019 (Thomson StreetEvents) -- Edited Transcript of eGain Corp earnings conference call or presentation Thursday, February 7, 2019 at 10:00:00pm 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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* 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

* Rudy Kessinger

Craig-Hallum Capital Group LLC, Research Division - Research Analyst

* Ryan Michael MacDonald

Needham & Company, LLC, Research Division - Senior Analyst

* Jim Byers

MKR Group, Inc. - SVP

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Presentation

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Operator [1]

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Good day, and welcome to the eGain Fiscal 2019 Second Quarter Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jim Byers of MKR Group. 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 Second Quarter Fiscal 2019 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 in the Securities and Exchange Commission.

eGain is making these statements as of today, February 7, 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 also discuss certain 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. And 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. In addition, a replay of this conference call will also be available on the Investor Relations section of eGain's website.

And 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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Thank you, Jim, and good afternoon, everyone. We are very pleased to report a solid second quarter with strong performance on both the top and bottom line. And our execution continues to improve as we see positive momentum in the business.

Now let me share some financial highlights from the quarter. SaaS revenue growth for the quarter on a year-over-year basis was 53%. Subscription revenue growth year-over-year was 25%. Gross margin in the quarter was 69%, up from 65% in Q2 last year. In addition, we were GAAP profitable for the quarter. Net income of $2 million compared to a net loss in Q2 last year. And finally, given our results to date and positive momentum, we will raise our guidance for the year.

So looking at the business, we are optimistic about customer activity and demand we're seeing. Q2 included a healthy mix of new levels and expansion within the install base. Our continued investment in customer success and products is paying off. We are now engaging our clients better than ever, and we are starting to guide them to operationalize their digital transformation efforts with speed and scale.

With an increased market focus in the U.S., we are now seeing a significant uptick in U.S.-based opportunities. Historically, as you may remember, we have been evenly split from a business standpoint between North America and Europe. This trend is encouraging because we intend to focus more, from a geographic standpoint, in the U.S. over the next year or 2 to help us scale quicker.

Let's now look at the quarter in terms of some notable wins. During the quarter, we closed a significant deal with H&R Block, the tax prep giant. This was for our AI-powered digital engagement solution. This capability that we implemented for H&R Block is fronted by our virtual assistant and seamlessly backed by our omnichannel desktop for agents to use chat and Cobrowse to help their customers. And all these interactions, self-service and agent-assisted consistently are powered by our Knowledge and AI capability. So to add some color to it, we designed and implemented the solution in 90 days from start to finish, partnering with our clients through the holiday season. I would suspect some of you may have seen the latest marketing campaign on TV and online. It talks about an easier and more assured experience for the customers, and we are very proud to be part of it. We now look forward to continuing to help them automate and augment their customer engagement capability. As I mentioned earlier, we are now seeing more demand for such AI-powered digital engagement in the market.

Another good win for us in the quarter was a large -- in fact, 1 of the top 10 global high-tech companies. This win is notable because in Phase 1, we will deploy in their sales operation group, where there is an outstanding need to engage digital visitors across touch points, social, online, et cetera and then develop and source these sales opportunities using AI technology to transfer what would be hot sales opportunities in real time to their digital sales teams.

As we look at the whole customer engagement space, customer engagement for sales is starting to emerge as an area of interest for our clients, much like this win that we talked about. It turns out that some principles are timeless. So good service is still the foundation for sustainable sales.

Turning to our customer base. We are seeing increased interest in trying out new capabilities in our suite, specifically things like virtual assistant, messaging and social. Clients tend to engage us after they have played around with point solutions, and they begin to realize the challenge of connecting these point capabilities themselves. Our claim and message of optimizing the agent experience, business experience and customer experience to deliver a good overall digital experience is resonating well with our clients because we deliver it now with richness and speed.

In the quarter, we saw some noteworthy expansions in our customer base. One was from a large financial services client. They rolled out our advisor desktop to all their financial advisers in their global asset management business. Another client of ours, a very large communication provider in the U.S., expanded the use of eGain for a new ground, and also deployed SMS-based messaging on our platform. Within 12 months, they expect their messaging channel to more than double in volume.

As I said before, we offer a platform with rich application capabilities connected across all these touch points. So our clients do not have to stitch together these point capabilities, typically coming from multiple vendors. We really pride ourselves in anticipating these capabilities for clients and then delivering them in a connected easy way.

Across our customer base, our retention rate is now hovering in the low-90s. We continue to work with our legacy on-premise customers, as we have mentioned before, to help them migrate to our cloud platform, and we expect that we should be substantially done with migrating our remaining legacy customers to the cloud by the end of calendar 2020. So that's a good synopsis of our customer engagement.

Moving to the partner front. We saw healthy OEM bookings in the quarter through Cisco. Working with Cisco and the 2 teams, we have continued to enhance our OEM chat and e-mail solution, which is embedded in Cisco's enterprise contact center platform. With the latest iteration that we launched together late last year, it included some compelling features that we added to the OEM chat and e-mail solution. Based on that, the market seems to be responding well to the Cisco broad contact center offering. We are very pleased with the growing customer traction and the ecosystem pool with this partnership, and we continue to invest accordingly.

Beyond Cisco, our relatively new partnerships with Avaya and Amazon Connect are making progress. We are continuing to generate interest and build pipeline. As I've mentioned before, we expect some of these partnerships to become business relevant towards the end of this fiscal year.

Turning to the increased market awareness and interest. Our annual customer event in the U.S., we call it DX18, was held in Chicago in November. Some of you were there, too. So thank you for attending. It was very exciting to hear clients share their eGain success stories. Mark Kinsey, SVP of Customer Service at Paylocity, talked about how eGain helped them deliver remarkable agent experience after 2 prior attempts at sales knowledge management implementations. He especially called out our Try+ Buy program for giving them confidence in the eGain solution in the context of their use-case and operation.

Another client, Asurion, they are the large insurance services provider, as many of you may know. They discussed how they rely on eGain's analytics to efficiently run and manage their sophisticated customer service platform across different time zones and thousands of agents. For them, eGain is vital to their continued efficiency and agility. And finally, [Vicky] from Across the Pond shared their expanding journey with eGain, especially their innovative implementation to transform their service organization, saving them literally hundreds of millions of dollars annually while improving NPS scores and ensuring [closest time provision]. All in all, it was a very successful and inspiring event for our customers, partners and us.

In summary, we see a growing market need for our AI-powered customer engagement solution. And thanks to market dynamics and our focused effort, we see growing demand in the U.S. and we are capitalizing on it. We are also focused on customer success of our custom -- installed base to retain, migrate and expand the use of eGain with exciting capabilities that we continue to add to our cloud platform.

With that, I'll ask Eric Smit, our Chief Financial Officer, to add more color around financial operations. Eric?

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

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

I would also like to remind everyone that, in conjunction with the adoption of this accounting standard, we made a change in the way we classify our revenue. Through June 30, 2018, eGain's revenue was classified in 3 categories on our income statement: recurring, legacy license and professional services.

With that said, transition completes, we changed our revenue classification to better align with our go-forward business. We now classify our revenue in 2 categories: subscription and professional services, with a further breakdown of subscription revenue into SaaS revenue and legacy support revenue. SaaS revenue being the key metric we are using internally to measure our growth. As our legacy license revenue is no longer material and accounted for less than 1% of revenue in fiscal year 2018, we are no longer breaking it out and instead include it as part of our subscription revenue.

Now turning to our financials. As Ashu noted, we are pleased with our overall performance this quarter. New bookings and customer renewals were in line with internal expectations, and we benefited from some strong seasonal SaaS business that helped drive top and bottom line performance in Q2, well above consensus estimates.

Total revenue in Q2 was $17.7 million, up 15% year-over-year. Subscription revenue was $15.8 million or 25% year-over-year and accounted for 89% of total revenue in Q2, up from 82% in the year-ago quarter. Breaking up the revenue components, SaaS revenue was $11.9 million, up 53% year-over-year and 22% sequentially. I would like to point out that the strong sequential growth was due in part to approximately $900,000 in seasonal SaaS revenue that we do not expect to repeat in the third quarter.

Legacy support revenue was $3.9 million, down 19% from the year-ago quarter. This reduction was, again, primarily driven by on-premise customers migrating to our cloud. Professional services revenue was $1.9 million or 11% of total revenue, which is down 32% from $2.8 million or 18% of total revenue from the year-ago quarter. The progress towards our goal of PS revenue that ranges from the low teens to the high single digits as a percentage of total revenue has been faster than we originally projected. And based upon this progress, we expect the 30% decline in PS revenue for the first half of the year to continue for the remainder of fiscal 2019.

Now looking at our non-GAAP gross profits and gross margins. Gross profit for the second quarter was $12.3 million or a gross margin of 69% compared to gross profit of $10 million or a gross margin of 65% a year ago. The year-over-year increase in the overall gross margin reflects a combination of the benefits we are starting to see on the scale and efficiency around our cloud operations and the growth in our high-margin SaaS revenue, while our loan margin PS revenue declines as a total of revenue. To further illustrate this point, if you look at the breakout of gross margin by revenue type in Q2, our subscription revenue gross margin was 77%, up from 75% in the year-ago quarter, and the professional services gross margin was 5% compared to 19% a year ago.

Now turning to operations. Non-GAAP operating costs for the quarter came in at $9.8 million, up 6% from the year-ago quarter. The increased investments we are making to grow our top line and maintain our product advantage was partially offset by approximately 2% reduction due to the 605-606 transition. Overall, this resulted in non-GAAP operating income in the quarter of $2.5 million or an operating margin of 14% compared to $843,000 or a margin of 5% in the year-ago quarter.

Looking at net income. Non-GAAP net income for the second quarter was $2.4 million or $0.09 per share on a basic and $0.08 per share on a diluted basis. This compares to non-GAAP net income of $451,000 or $0.02 per share on a basic and diluted basis in the year-ago quarter. GAAP net income in the second quarter was $2 million or $0.07 per share compared to a GAAP net loss of $788,000 or $0.03 in the year-ago quarter.

Now turning to our balance sheet and cash flows. We are pleased with the continued improvement in our balance sheet. We generated cash flow from operations of $863,000 or an operating margin of 5% in the quarter, and took advantage of this to continue to pay down our debt, and ended the quarter with a net cash position of $6.2 million, up from a net cash position of $3.5 million at December 31, 2017.

Now turning to our guidance. Given the continued positive momentum of our business and our solid results to date, we are raising our previously provided expectations for fiscal 2019. We now expect to report SaaS revenue growth for the year between 30% to 35%, up from 25% to 30%; and subscription revenue growth for the year of between 13% and 16%, up from 10% and 15%. Whilst we are making increased investments to grow the business, we continue to expect to be cash flow positive from operations for the full fiscal year.

Finally, on the Investor Relations front, eGain will be participating in the 13th (sic) [31st] Annual ROTH Conference taking place next month in Orange County, California. We hope to see some of you there.

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 go ahead and take our first question from Ryan MacDonald with Needham & Company.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [2]

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I guess just sort of doubling down into what you saw from the success in the quarter. Obviously, it sounds like there was a nice mix between both net new logos and expansion opportunities. But I guess, as you look at across the spectrum and size of customer, can you talk about maybe the contribution from enterprise versus mid-market, given the enhanced focus there this year?

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

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Sure thing. First of all, thanks. So in terms of actual dollar bookings, the enterprise is still much larger. I would say that mid-market is still not -- it's under 10% of our bookings at this point. But we continue to see new logo acquisitions being quite interesting there, and some of the implementations that we're doing now, the opportunity to expand in those mid-market accounts at -- quite quickly is very exciting. So I think that both of those are -- the enterprise continues to be the dominant booking source for us, but the mid-market is starting to acquire some new logos, even though the dollar amounts may not be very large in the beginning. But I think that as we build that base, we start to see expansion opportunities, which will become significant.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [4]

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Got it. And just a follow-up to that and around the demand you're seeing in the environment, clearly that's increasing. Can you talk about what -- how you're able to service that demand? I think you've talked about some incremental investments that you're planning to make. Is any of that around sales capacity to be able to keep up with demand?

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

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Yes. So sales capacity is something that's -- it is a function of where -- what end of sales are we investing in right now. So right now, our incremental investment is, first, going into creating more demand, which is marketing. The second is in more customer success, so that we get the word of mouth going better. And then the third we're doing is just adding more expertise in the sales process, so that we can convey our proposition more effectively to enable our salespeople to win more. So that's kind of our focus. And then in parallel, we're starting to kind of add up some of the sales feet on the street, which is the last element of the 4-pillar model that I mentioned, and that's something that we're starting to engage in now.

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Ryan Michael MacDonald, Needham & Company, LLC, Research Division - Senior Analyst [6]

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Got it. And just one last one quick for Eric. You mentioned about $900,000 onetime benefit or seasonal benefits on the SaaS revenue, can you just provide a little bit more clarity on what that was, and why we won't see that benefit moving forward?

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Eric N. Smit, eGain Corporation - CFO [7]

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Sure. So I think -- I mean this is something, we actually saw it last year as well, that with the type of businesses that we sell to, in particular on the retail side, there's this need for them to increase their volume around the holiday period. And so, as a result of that, we've adjusted the way some of the pricing works that would benefit the -- this type of customer. So obviously, as that holiday period subsides, we would see that number go back down. But obviously, we're very happy to see that level of uptick in the quarter.

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Operator [8]

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We'll take our next question 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, just a question for you. In your prepared remarks, you noted that you're starting to see customers try out some of your new capabilities in your suite. And I didn't catch exactly what those capabilities were besides messaging. I was wondering if you could just review those comments one more time.

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

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Sure thing. Yes. So virtual assistant, I would say, is the #1 right now. So the whole chatbot, and as we have talked before, our virtual assistant is completely connected with the rest of our applications and the platform. So a lot of our customers who have, for instance, the chat application today are looking to add virtual assistant in front of it. So that's the first one. The second was messaging, and then the third I mentioned was social.

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

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Great. And then real quick here, Eric. How much debt did you guys pay down in the quarter?

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Eric N. Smit, eGain Corporation - CFO [12]

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That was, I think, around another $1 million or so in the quarter.

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Operator [13]

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We'll take our next question from Richard Baldry of Roth Capital Partners.

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Richard Kenneth Baldry, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [14]

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It looks like the legacy support side actually grew sequentially, which is well against trend. Is there anything unusual in there? Do you have an expansion from an existing customer? Something we can just think about? Or is there something in that trend that's changing?

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Eric N. Smit, eGain Corporation - CFO [15]

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So on the sequential number, nothing unusual there. I think there may have been a little bit of catch-up from a customer that had decided to renew, but certainly not from any new business that's been sold.

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

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Yes, that's exactly what it was, Richard. There were -- actually, there was one of note that have stopped paying support for some time that I know of, and they reengaged and started -- they kind of caught up on that.

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Richard Kenneth Baldry, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [17]

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Okay. And the overall profitability was far ahead of what we would have thought. So in the expense side, I think that would have expected the sales and marketing to be a bit above. Was there any events move from 1 quarter to the next quarter? Or do you feel like maybe some of that hiring pushed out into the second half that maybe we would have thought could have been in the first half or in the second quarter? And do we think that's going to probably be a faster level of spending on a material basis in the second half?

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

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Yes, I would say so. I think so. Yes, you're correct. So the things we thought we could do by December are very likely going to be more in this half, the second half.

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Eric N. Smit, eGain Corporation - CFO [19]

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And then I think a follow-up to that, the general commentary, which is just within North America, of course, there's the FICO reset. So you see sort of the natural uptick across all cost categories with that increased tax, Social Security expense that comes in.

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Richard Kenneth Baldry, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [20]

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Right. And then can we maybe think about how you're feeling about the breadth of sales through your direct sales headcount in the first half of this year, I think it's been concentrated. Are you seeing sort of a good quota hitting or how are your quota attainments sort of across your base?

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

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Sure. The team right now is quite small, as you know. We haven't added significantly to the sales team. We have rotated some people, but not added incremental headcount in a big way. We have made some changes on the organizational structure under Todd. Todd has made some changes. So I feel like the efficiency, meaning the performance on average for our sales team should get better as a result of the reorg that he has done and the improvements he has put in place. That's my sense right now.

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Operator [22]

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We'll take our next question from Jeff Van Rhee of Craig-Hallum Capital.

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Rudy Kessinger, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [23]

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This is Rudy on for Jeff. A couple quick ones from me. First, with the legacy with the on-prem revenue, I know you guys have talked about time line of that migration being completed by 2020. Over the last several quarters, looking at the sequential declines, it would imply that time line would be a little longer. With as much color as you could give, do you see that on-prem declining much more heavily weighted in 2020 than over the next couple of quarters? How do you see that on-prem transferring over to the cloud?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [24]

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I mean, we are working with several of these large customers. As you know, there is a concentration in terms of size of these customers. So my sense is that, by the end of this calendar year, we would -- yes, we would probably have half of that revenue base moved into the cloud. Yes.

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Eric N. Smit, eGain Corporation - CFO [25]

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I think it will continue to be probably in a somewhat of a step function. I think, to Ashu's point, there's quite a concentrated group of -- a small number of customers. So whenever any one of those moves, it would result in that decline, so...

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Rudy Kessinger, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [26]

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Okay. Got it. Got it, that's really helpful. Okay. And then just with new customers that you guys had been engaging and bringing on, but didn't last 90 days or so, I know you've talked on virtual assistant, AI, chat, messaging, all being products of interest from the installed base. But in regards to new customers, what -- when they started engaging, what's the initial pain point that they're coming to you with?

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

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So I would say the most excitement we are seeing from people talking to us right now is twofold: one is virtual assistant, there's a lot of interest in that; and the second is AI. Those are the 2 areas we see people coming to us the most for. And I'm talking about new logos, I'm not talking about existing customers. Existing customers, we can talk about other things with them as well. But in terms of people coming to us, those are the top 2.

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Rudy Kessinger, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [28]

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Okay. And then just another one. Any particular strength -- strengths or weaknesses that you guys have seen? I noticed that U.S. has been -- demand here has been particularly higher. Any verticals, any financial services or communications, any verticals you're seeing, particular strengths or surprises in demand in?

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [29]

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Financial services is definitely continuing to be strong for us, no question. And the other area that we are seeing a lot of pipeline buildup in is health care. And then the third is government. I would say in the U.S., those are the top 3 that has delta function in them and positive delta function.

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Operator [30]

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At this time, I will turn the call back to management for closing remarks.

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Ashutosh Roy, eGain Corporation - Co-Founder, Executive Chairman, CEO & President [31]

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Thanks, everybody, for taking the time to listen. We look forward to updating you as we work through our Q3 results. Thank you.

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Operator [32]

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Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.