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EGAN > SEC Filings for EGAN > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for EGAIN CORP

Form 10-Q for EGAIN CORP


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements that involve risks and uncertainties. These statements may be identified by the use of the words such as "anticipates," "believes," "continue," "could," "would," "estimates," "expects," "intends," "may," "might," "plans," "potential," "should," or "will" and similar expressions or the negative of those terms. The forward-looking statements include, but are not limited to, risks stemming from: our hybrid revenue model may impact our operating results; our failure to compete successfully in the markets in which we do business; the adequacy of our capital resources and need for additional financing; the development and expansion of our strategic and third party distribution partnership and relationships with systems integrators; our ability to improve our current products; our ability to innovate and respond to rapid technological change and competitive challenges; legal liability and/or negative publicity for the services provided to consumers via our technology platforms; legal and regulatory uncertainties and other risks related to protection of our intellectual property assets; our ability to anticipate our competitors; the operational integrity and maintenance of our systems; an unauthorized access is obtained to a customer's data or our data or our IT systems; the uncertainty of demand for our products; the anticipated customer benefits from our products; the actual mix in new business between cloud and license transactions when compared with management's projections; the ability to continue increasing investment in sales and marketing; our ability to hire additional personnel and retain key personnel; our ability to manage our expenditures and estimate future expenses, revenue, and operational requirements; our ability to manage our business plans, strategies and outlooks and any business-related forecasts or projections; risks from our substantial international operations; our inability to successfully detect weaknesses or errors in our internal controls; our ability to manage future growth; the trading price of our common stock; and geographical and currency fluctuations and other risks discussed in "Risk Factors" in this report and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012. Our actual results could differ materially from those discussed in statements relating to our future plans, product releases, objectives, expectations and intentions, and other assumptions underlying or relating to any of these statements. These forward-looking statements represent our estimates and assumptions and speak only as of the date hereof. We expressly disclaim any obligation or understanding to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based unless required by law.

All references to "eGain", the "Company", "our", "we" or "us" mean eGain Corporation and its subsidiaries, except where it is clear from the context that such terms mean only this parent company and excludes subsidiaries.

Overview

eGain Corporation is one of the premier providers of cloud (or hosting) and on-premise customer interaction software for sales and service. For over a decade, eGain solutions have helped improve customer experience, grow sales, and optimize service processes across the web, social, and phone channels. Hundreds of global enterprises rely on eGain to transform fragmented sales engagement and customer service operations into unified Customer Interaction Hubs. The company has operations in the United States, United Kingdom, Netherlands, Ireland, Italy, Germany, South Africa and India.

Unbilled Deferred Revenue

Unbilled deferred revenue represents business that is contracted but not yet invoiced or collected and off-balance-sheet and, accordingly, is not recorded in deferred revenue. As such, the deferred revenue balance on our consolidated balance sheet does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. As of September 30, 2012, unbilled deferred revenue increased to $21.8 million, up from approximately $20.7 million as of June 30, 2012.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations discuss our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an on-going basis, our management evaluates its estimates and judgments, including those related to revenue recognition, valuation allowance and accrued liabilities, long-lived assets and stock-based compensation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes to these estimates for the periods presented in this Quarterly Report on Form 10-Q. For a detailed explanation of the judgments made in these areas, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" within our Annual Report on Form 10-K for the year ended June 30, 2012, which we filed with the Securities and Exchange Commission on September 25, 2012.


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We have reassessed the critical accounting policies as disclosed in our Annual Report on Form 10-K filed with the SEC on September 25, 2012 and determined that there were no significant changes to our critical accounting policies in the three months ended September 30, 2012 except for recently adopted accounting guidance as discussed in Note 1, "New Accounting Pronouncements" to our unaudited condensed consolidated financial statements and change in accounting policy as noted below.

Voluntary Change in Accounting Policy

Effective this quarter, we made a voluntary change to our accounting policy for sales commissions related to new cloud (hosting) contracts with our customers, from recording an expense when incurred to deferral and amortization of the sales commission in proportion to the revenue recognized over the term of the contract. We believe this method is preferable because commission charges (that are direct and incremental) are so closely related to the revenue from the non-cancelable contracts that they should be deferred and charged to expense over the same period that the related revenue is recognized. Furthermore, based upon internal research and feedback from external research analysts it is our belief that most industry peers have adopted a similar commission expense policy. This change should improve the comparability of the Company's consolidated financial statements to its industry peers and provide better matching of revenues and expenses.

Revenue Recognition

We derive revenue from three sources: license fees, recurring revenue, and professional services. Recurring revenue include cloud services and software maintenance and support. Maintenance and support consists of technical support and software upgrades and enhancements. Professional services primarily consist of consulting implementation services and training. Significant management judgments and estimates are made and used to determine the revenue recognized in any accounting period. Material differences may result in changes to the amount and timing of our revenue for any period if different conditions were to prevail. We present revenue net of taxes collected from customers and remitted to governmental authorities.

License revenue is recognized when persuasive evidence of an arrangement exists, the product has been delivered, no significant obligations remain, the fee is fixed or determinable, and collection of the resulting receivable is probable. In software arrangements that include rights to multiple software products and/or services, we use the residual method under which revenue is allocated to the undelivered elements based on vendor-specific objective evidence of the fair value of such undelivered elements. The residual amount of revenue is allocated to the delivered elements and recognized as revenue, assuming all other criteria for revenue recognition have been met. Such undelivered elements in these arrangements typically consist of software maintenance and support, implementation and consulting services and in some cases hosting services.

Cloud services revenue is recognized ratably over the period of the applicable agreement as services are provided. Cloud agreements typically have an initial term of one or two years and automatically renew unless either party cancels the agreement. The majority of the cloud services customers purchase a combination of our cloud service and professional services. In some cases the customer may also acquire a license for our software.

Maintenance and support revenue is recognized ratably over the term of the maintenance contract, which is typically one year. We use vendor-specific objective evidence of fair value for maintenance and support to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Maintenance and support is renewable by the customer on an annual basis. Maintenance and support rates, including subsequent renewal rates, are typically established based upon a specified percentage of net license fees as set forth in the arrangement.

Professional services revenue is revenue derived from system implementation, consulting and training. For license transactions, the majority of our consulting and implementation services qualify for separate accounting. We use vendor-specific objective evidence of fair value for the services to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Our consulting and implementation service contracts are bid either on a fixed-fee basis or on a time-and-materials basis. Substantially all of our contracts are on a time-and-materials basis. For time-and-materials contracts, where the services are not essential to the functionality, we recognize revenue as services are performed. If the services are essential to functionality, then both the product license revenue and the service revenue are recognized under the percentage of completion method. For a fixed-fee contract we recognize revenue based upon the costs and efforts to complete the services in accordance with the percentage of completion method, provided we are able to estimate such cost and efforts.


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We evaluate whether each of the elements in these arrangements represents a separate unit of accounting, as defined by ASC 605, using all applicable facts and circumstances, including whether (i) we sell or could readily sell the element unaccompanied by the other elements, (ii) the element has stand-alone value to the customer, and (iii) there is a general right of return. We use vendor specific objective evidence, of fair value for each of those units, when available. For revenue recognition with multiple-deliverable elements, in certain limited circumstances when vendor specific objective evidence of fair value does not exist, we apply the selling price hierarchy. We consider the applicability of ASC 985-605, on a contract-by-contract basis. In hosted term-based agreements, where the customer does not have the contractual right to take possession of the software, the revenue is recognized on a monthly basis over the term of the contract. Invoiced amounts are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. For professional services that we determine do not have stand-alone value to the customer, we recognize the services revenue ratably over the longer of the remaining contractual period or the average estimated life of the customer hosting relationship, once hosting has gone live or system ready. We currently estimate the life of the cloud customer relationship to be approximately 30 months, based on the average life of all cloud customer relationships.

For cloud services, consulting, and implementation services that do not qualify for separate accounting, we recognize the services revenue ratably over the estimated life of the cloud customer relationship.

Training revenue that meets the criteria to be accounted for separately is recognized when training is provided or, in the case of cloud services, when the customer also has access to the cloud services.

Deferred Revenue

Deferred revenue primarily consists of payments received in advance of revenue recognition from cloud and support services described above. Deferred revenue is recognized as the revenue recognition criteria are met. The Company generally invoices customers in annual or quarterly installments. The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable cloud or support agreements. Deferred revenue is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing and new business linearity within the quarter.

Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent. In September 30, 2012, deferred revenue increased to $11.2 million, compared to $8.1 million at June 30, 2012.

Deferred Commissions

Deferred commissions are the direct and incremental costs directly associated with cloud contracts with customers and consist of sales commissions to the Company's direct sales force.

The commissions are deferred and amortized over the terms of the related customer contracts, which are typically one or two years. The commission payments are paid based on contract terms in the month following the quarter in which the commissions are earned. The deferred commission amounts are recognized as selling expense in the consolidated statement of operations over the terms of the related customer contracts, in proportion to the recognition of the associated revenue.

Results of Operations

The following table sets forth certain items reflected in our condensed
consolidated statements of operations expressed as a percent of total revenue
for the periods indicated:



                                                 Three Months Ended
                                                    September 30,
                                                 2012            2011
              Revenue:
              License                                 7 %           28 %
              Recurring revenue                      67 %           56 %
              Professional services                  26 %           16 %

              Total revenue                         100 %          100 %
              Cost of license                         1 %            0 %
              Cost of recurring revenue              13 %           12 %
              Cost of professional services          27 %           15 %

              Total cost of revenue                  41 %           27 %

              Gross margin                           59 %           73 %

              Operating expenses:
              Research and development               18 %           14 %
              Sales and marketing                    52 %           39 %
              General and administrative             14 %           11 %

              Total operating expenses               84 %           64 %

              Income /(loss) from operations        (24 )%           9 %


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Revenue



                                                Three Months Ended
                                                   September 30,
           (in thousands)            2012         2011        Change         %

           License                 $    713     $  2,886     $ (2,173 )      (75 )%
           Recurring revenue          7,174        5,781        1,393         24 %
           Professional services      2,836        1,717        1,119         65 %

           Total revenue           $ 10,723     $ 10,384     $    339          3 %

Total revenue increased 3% to $10.7 million in the quarter ended September 30, 2012 from $10.4 million in the comparable year-ago quarter. License revenue decreased 75% to $713,000 in the quarter ended September 30, 2012 from $2.9 million in the comparable year-ago quarter. The decrease in license revenue was primarily due to the booking mix shift from the on-premise delivery model to cloud services. Recurring revenue, which is comprised of cloud and software maintenance and support revenue increased 24% to $7.2 million in the quarter ended September 30, 2012 from $5.8 million in the comparable year-ago quarter. The increase in recurring revenue was primarily due to the expansion within our current customer base and new cloud contracts. Professional services revenue increased 65% to $2.8 million in the quarter ended September 30, 2012 from $1.7 million in the comparable year-ago quarter. The increase in professional services revenue was driven by a number of large customer deployments.

Revenue in Europe and Asia Pacific increased 17% to $4.4 million in the quarter ended September 30, 2012 from $3.8 million in the comparable year-ago quarter. The increase in revenue outside of the Americas demonstrates increased acceptance of our product world-wide. The impact of the foreign exchange fluctuation between the U.S. Dollar and the Euro and British Pound resulted in a net decrease of $58,000 in total revenue for the three months ended September 30, 2012 as compared to the comparable year-ago quarter. To measure the impact of foreign exchange rate fluctuation, we recalculate current period results using the comparable prior period exchange rate.

Cost of Revenue



                                                    Three Months Ended
                                                      September 30,
          (in thousands)                 2012         2011        Change       %
          License                       $    45      $   (10 )    $    55       NM
          Recurring revenue               1,396        1,266          130       10 %
          Professional services           2,903        1,549        1,354       87 %

          Cost of revenue               $ 4,344      $ 2,805      $ 1,539       55 %

          Percentage of total revenue        41 %         27 %
          Gross margin                       59 %         73 %

NM= not meaningful

Total cost of revenue increased 55% to $4.3 million in the quarter ended September 30, 2012 from $2.8 million in the comparable year-ago quarter. Total cost of revenue represented 41% and 27% of total revenue in the quarter ended September 30, 2012 and 2011, respectively. The increase was primarily due to increases of (i) $1.3 million in personnel and personnel-related expenses;
(ii) $159,000 of cloud related expenses such as hosted network and lease costs paid to remote co-location centers; (iii) $110,000 in outside consulting offset by $74,000 from the foreign exchange fluctuation between the U.S. Dollar, the Euro, British Pound and India Rupee. Gross margin for the quarter ended September 30, 2012 was 59% compared to 73% in the comparable year-ago quarter. The decrease in gross margin was primarily due to (i) the decrease in the gross profit of professional services resulting from our increased investment in professional services personnel; and (ii) the decrease in license revenue resulting from the booking mix shift to cloud from on-premise delivery model.


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Operating Expenses

Research and Development



                                                    Three Months Ended
                                                       September 30,
          (in thousands)                 2012         2011         Change       %
          Research and development      $ 1,950      $ 1,430      $    520       36 %
          Percentage of total revenue        18 %         14 %

Research and development expense primarily consists of compensation and benefits for our engineering, product management and development, and quality assurance personnel, fees for outside consultants and, to a lesser extent, occupancy costs and related overhead. Total costs for research and development for the three months ended September 30, 2012 increased 36% to $1.9 million, compared to $1.4 million for the comparable year-ago quarter. The increase was primarily due to
(i) an increase of $531,000 in personnel and personnel-related expenses and
(ii) $62,000 in outside consulting services; offset by a decrease of $73,000 from the foreign exchange fluctuation between the U.S. Dollar, the Euro, British Pound and India Rupee. Total research and development revenue as a percentage of total revenue was 18% and 14% for the quarters ended September 30, 2012 and 2011, respectively.

Sales and Marketing



                                                    Three Months Ended
                                                      September 30,
          (in thousands)                 2012         2011        Change       %
          Sales and marketing           $ 5,549      $ 4,104      $ 1,445       35 %
          Percentage of total revenue        52 %         39 %

Sales and marketing expense primarily consist of compensation and benefits for our sales, marketing and business development personnel, lead generation activities, advertising, trade show and other promotional costs and, to a lesser extent, occupancy costs and related overhead. Sales and marketing expense increased 35% to $5.5 million in the quarter ended September 30, 2012 from $4.1 million in the comparable year-ago quarter. The increase was primarily due to increases of (i) $1.5 million in personnel and personnel-related expenses which includes a one-time decrease in sales commission of $544,000 from the voluntary change to our accounting policy for sales commissions and one-time personnel payments made to employees of $340,000 as a result of the organization changes made in the quarter and (ii) $69,000 in third party partner fees; offset by a decreases of (i) $79,000 from the foreign exchange fluctuation between the U.S. Dollar, the Euro, British Pound and India Rupee; and (ii) $32,000 in marketing programs and public relations. Total sales and marketing expense as a percentage of total revenue was 52% in the quarter ended September 30, 2012 compared to 39% in the comparable year-ago quarter.

General and Administrative



                                                    Three Months Ended
                                                       September 30,
          (in thousands)                 2012         2011         Change       %
          General and administrative    $ 1,507      $ 1,113      $    394       35 %
          Percentage of total revenue        14 %         11 %

General and administrative expense primarily consist of compensation and benefits for our finance, human resources, administrative and legal services personnel, fees for outside professional services, provision for doubtful accounts and, to a lesser extent, occupancy costs and related overhead. Total general and administrative expense increased 35% to $1.5 million in the quarter ended September 30, 2012 from $1.1 million in the comparable year-ago quarter. The increase was primarily due to (i) $170,000 in personnel and personnel-related expense; (ii) an increase of $157,000 accounting and other outside consulting related expenses; (iii) $86,000 in bad debt expense offset by $19,000 from the foreign exchange fluctuation between the U.S. Dollar, the Euro, British Pound and India Rupee. Total general and administrative expense as a percentage of total revenue was 14% and 11% for the quarters ended September 30, 2012 and 2011, respectively.


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Income/ (loss) from Operations



                                                     Three Months Ended
                                                       September 30,
      (in thousands)                     2012         2011        Change         %
      Income /(loss) from operations   $ (2,627 )     $ 932      $ (3,559 )      (382 )%
      Operating margin                      (24 )%        9 %

Loss from operations in the quarter ended September 30, 2012 was $2.6 million which included $304,000 of stock-based expenses compared to an operating income of $932,000 which included $130,000 of stock-based expenses in the comparable year-ago quarter. We recorded a 24% negative operating margin in the quarter ended September 30, 2012, compared to a 9% operating margin in the comparable year-ago quarter.

Interest Expense, Net

Interest expense consists of interest on our related party notes payable and bank borrowings. Interest expense, net was $141,000 in the quarter ended September 30, 2012 compared to $175,000 in the comparable year-ago quarter.

Other Expense, Net

Other expense primary consists of exchange rate gain/loss on foreign currency transactions. Other expense, net was $43,000 for the quarter ended September 30, 2012 compared to $210,000 for the comparable year-ago quarter.

Income Tax Provision

We recorded an income tax expense of $73,000 for the quarter ended September 30, 2012 compared to $31,000 for the comparable year-ago quarter. The income tax expenses recorded for the three months ended September 30, 2012 was primarily related to foreign and state income tax expense.

Liquidity and Capital Resources

Overview

As of September 30, 2012 our cash and cash equivalents were $10.3 million and our negative working capital was $5.8 million compared to cash and cash equivalents of $9.9 million and our working capital of $2.8 million (as adjusted) as of June 30, 2012. As of September 30, 2012, our deferred revenue was $11.2 million compared to $8.1 million on June 30, 2012.

Based upon our fiscal year 2013 plan, we believe that existing capital resources will enable us to maintain current and planned operations for at least the next 12 months. From time to time, however, we may consider opportunities for raising additional capital and/or exchanging all or a portion of our existing debt for . . .

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