Participants

Ashutosh Roy; Chairman of the Board, President, Chief Executive Officer; eGain Corp

Eric Smit; Chief Financial Officer; eGain Corp

Presentation

Operator

Hello and welcome to the eGain fiscal 2025, 2nd quarter financial results call. (Operator Instructions)
As a reminder, this conference is being recorded.
I would now like to hand the call to Jim Byers PondelWilkinson, Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to E Gaines fiscal 2025 2nd quarter financial results conference call. On the call today are eGain's Chief Executive Officer, Ashutosh Roy, and Chief Financial Officer, Eric Smith.
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 1,995.
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 report filed with the Securities and Exchange Commission. Ian is making these statements as of today, February 13, 2025, 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 such as non-GAAP operating income. The tables included with the earnings press release include reconciliation of the historical non-gap financial measures. To the most directly comparable GAAP financial measures, eGain's earnings press release can be found by clicking the press releases link on the investor relations page of eGain's website at egaine.com. And lastly, a phone replay of this conference call will be available for one week.
And now with that said, I'd like to turn the call over to eGaine's CEO, Ashutosh Roy.

Ashutosh Roy

Thank you, Jim, and good afternoon, everyone. In the 2nd quarter, we closed some exciting new enterprise logos for our AI knowledge hub offering. Let me share three examples. First, we signed up a major US airline, one of the largest in the world. They wanted to modernize their knowledge platform to improve customer experience and reduce service costs using AI automation.
And we are the selected provider for that. Second, we signed up a leading interactive entertainment company, one that has $800 million player accounts worldwide.
This company has a vision of putting knowledge in the game for their players, but they were struggling with the existing knowledge platform they had because it could not provide the necessary APIs and functionality to implement the vision. After a successful innovation and 30 days pilot with us, they selected our solution.
The last one, a global money transfer company with 150 million customers across 200 countries. They, incidentally, had successfully or unsuccessfully tried to implement a customer knowledge platform 2 times before they ended up selecting us.
Looking at trends and our overall business, the first trend which continues is knowledge centralization and enterprises. This trend is attracting even greater focus due to its foundational relevance to AI projects. As enterprises push to operationalize meaningful AI use cases, particularly in customer service, they are struggling with content silos and fragmented knowledge.
Which makes it hard to ensure that AI systems relying on these silos for input can generate correct, consistent, and compliant answers. As a result, having a single source of truth in a knowledge central hub across the business is becoming critical.
The other trend we see emerging is that knowledge management projects starting out with a mandate of automating customer service are incrementally adding enterprise facing use cases for employee service or partner service during the sales process. As a result, we see larger knowledge opportunities in our pipeline. In the last 6 months, for example, we have seen the number of 7-figure deals in our pipeline more than double. This is exciting. At the same time though, the side effect of this trend is more scrutiny on these projects, and the vetting process now includes groups like the AI office.
So, these bigger deals are taking some more time to close. On balance, we see this as a very good thing for us. We have the ability and patience to nurture these deals to close. Turning to our customers and products. At the end of October last year, we had a very successful eGain Solve 24 event in Chicago. This is our main US customer event.
Many of our clients shared success stories about getting real value from AI capabilities in our platform. One client presentation in particular comes to mind. The head of knowledge management at Specialized Bikes, which is a name brand, bike manufacturer of a high-end surface. She was on stage talking about their experience with eGain AI Knowledge Hub, and she said, I quote, eGain is like having an army of interns on Red Bull.
Our content team was really freaking happy, end quote. At the event, we also announced eGain and AI agent, a new omnichannel conversational product that guides and resolves customer and agent questions using documents, websites, and our knowledge base. Customer interest in AI agent is very strong. We see the pressure in enterprises all the way up or coming down from the board and the CEO to show real business value with AI this year.
Most of our clients are actively looking for full stack AI solutions to quickly move the needle in customer service both in cost and experience. And we are on track to launch our eGain AI agent in the current quarter as planned. To conclude Our AI knowledge hub solution is driving growth in our pipeline.
We are actively investing in leading and shaping the AI knowledge hub market to automate business operations starting with customer service.
An eGain AI agent, our omnichannel conversational solution. That we announced at our sole event. Will be available this quarter. With that, I'll ask Eric Smith, our Chief Financial Officer, who had more colour around our financial operations. Eric.

Eric Smit

Thanks, Ashu, and thanks everyone for joining us today. As Ashu mentioned, we won several new enterprise logos in the quarter that resulted in a 17% increase in AI knowledge hub AR year over year. Let me share more details about our financial results for Q2 before discussing our outlook and guidance for Q3 and fiscal 2025.
Looking at our revenue, total revenue for the second quarter was $22.4 million, which was within our guidance, but down 6% year over year. As discussed on previous calls, the year over year decline was primarily due to the impact of two large client losses last year. One, a conversation hub customer and the other an analytics customer.
Looking at the revenue in more detail, assess revenue in the quarter was ahead of our internal expectations and accounted for 93% of total revenue. This was offset by our peer revenue coming in lower than expectations. With the recent product improvements, we are seeing the PS attached rate for revenue on new implementations go down as designed.
This improvement results in faster deployment and quicker time to value for our clients. But based on this, we are lowering our peer revenue targets for fiscal 2025 by approximately $2 million. This will be reflected in our updated guidance, which I will cover later on in the call. Looking at the non-GAAP gross profits and gross margins, SA's gross margin for the quarter was 78%, unchanged from a year ago.
Total gross margin for the quarter was 71% compared to 72% a year ago. Now turning to our operations, non-gap operating costs for the second quarter came in at $14.7 million, up from 9% from $13.5 million in the year ago quarter. R&D was up 21% year over year as we invest in product innovation to capitalize on the significant AI knowledge market opportunity.
Looking at our bottom line, non-GAAP net income was$ 1.3 million or $0.05 per share on a basic basis and $0.04 per share on a diluted basis compared to non-gap net income of $3.4 million or $0.11 per share on a basic and diluted basis in the quarter. Adjusted our margin for the quarter was 7% compared to 16% in the EUR quarter. Turning to our balance sheet in cash flows, for the second quarter, we generated $6.4 million in cash flow from operations, or a 29% operating cash flow margin, as compared to $7.7 million generated in a year ago quarter.
During the quarter under our share repurchase program, we repurchased approximately 421,000 shares at an average price of $5.73 per share, totalling $2.4 million. Of the $40 million authorized, $10 million remain available under the program at the end of the quarter. Our balance sheet remains very strong, total cash and cash equivalent at the end of the quarter was $70.5 million.
Now turning to our customer metrics. To highlight the momentum, we are seeing in our knowledge business, I've broken out the AI knowledge metrics. From the total metrics. First, looking at ARR. The SaaS ARR for our AI knowledge customers increased 17% year over year. While total SaaS ARR for all customers decreased 3% year over year was up 2% sequentially. Looking at ARR for our AI knowledge customers, this accounted for 55% of our total sales ARR at the end of the quarter, and up 46% from a year ago.
Turning to our net retention rates, LTM dollar-based net retention for our AI knowledge customers was 99%, while net retention for our all customers was 89%. Now turning to our net expansion rates, our LTM dollar-based net expansion rate was 104% for all for our AI knowledge customers and 105% for all our customers. Looking at our remaining performance obligations, total RPO decreased 5% year over year. It was up 5% sequentially, and our short term RPO of $51 million was down 9% year over year. The year over year decline declines were primarily due to the two large customers losses previously mentioned.
Looking at our outlook for the remainder of fiscal 25, 2 factors are driving the updates to our guidance. First, the change to our PS implementations, as I discussed earlier, are reducing our peer revenue target by $2 million for fiscal year '25.
Second, as I mentioned, our AI knowledge hub is becoming a more strategic offering for global 1,000 enterprises focusing on customer service automation. As a result, we are seeing A growing number of seven-figure AR deals in our sales pipeline. However, with the strategic importance comes increased review cycles and extended timelines for final decisions and implementation. As such, we want to give ourselves more cushion in the revenue guidance for fiscal '25 to factor in the additional time that may be needed to close these large strategic deals.
Now turning to our guidance for fiscal 2025 full year ending June 30, 2025, based on the points I just outlined, we are updating our guidance as follows We are lowering our total revenue guidance range to $88.5 million to $90 million, down from our original guidance of 92million to 93 million. Our revised expectations. It is for SaaS revenue to equal approximately 93% of total revenue for the year. Turning to the bottom line, we are lowering our non-gap net income guidance range to 4.1% to $4.7 million, or $0.14 to $0.16 per share, down from our original guidance range of $5 million to 6 million or $0.17 to $0.20 per share.
And we are raising our GAAP net income guidance range to $1.1 million to $1.7 million, or $0.04 to $0.06 per share up from our original guidance range of breakeven to $1 million or 0 to $0.03 per share. We now estimate share-based compensation expense of approximately $3 million for the year. And depreciation and limitation expense of approximately 350,000.
Looking at weighted average shares outstanding, we expect approximately $28.5 million for the third quarter and $28.6 million for the full fiscal year. Turning to our guidance for the 3rd quarter of fiscal 2025. We expect total revenue of between $21 million to$ 21.5 million. As a reminder, the fewer number of days in Q3 has an approximate 330,000 negative impacts on the revenue for the quarter. In addition, in our Q2 revenue included approximately 600,000 of usage-based revenue which we do not expect to recur in Q3.
Turning to the bottom line for Q3, we expect GAAP net loss of $300,000 to $800,000 or $0.01 to $0.03 per share, which includes stock-based compensation expense of approximately 800,000 and depreciation and amortization expense of approximately 80,000. We expect non-gap net income of breakeven to 500,000 or 0 to $0.02 per share.
In summary, we want several new enterprise logos in the 2nd quarter that drove our AI ARR up 17% year over year. We see our AI knowledge becoming more strategic, resulting in a growing number of 7 figure AR deals in our sales pipeline. The strategic importance of these opportunities is extending the sales cycle, but we believe it sets us up well for continued acceleration in the growth of our AI knowledge business going forward.
Lastly, on the investor relations calendar, he again will be meeting with investors at the annual Roth conference on March 17th. We'll provide more details as we get closer to that date and hope to see some of you there in person. This concludes our prepared remarks, operator, we will now open the call for questions.

Question and Answer Session

Operator

Thank you very much. We will now begin the question-and-answer session. (Operator Instructions)
Today's question comes from Jeff Van Ree with Craig Hallam. Please go ahead.

Oh great, thanks for taking my questions guys. Couple, just, obviously professional services, as you described the bulk of the reduction to the guide, you just talk about the evolution of what's gone on there. I have yet a couple million Q1,[152]. And a 2 million cut for two quarters remaining is pretty substantial given the scope of that organization. So, talk about just kind of what's played out there seems pretty rapid, whatever's playing out there. And then along with that question, obviously if the revenue base is that substantially reduced, any staffing adjustments you need to make there, or you expect that to come back at some point?

Ashutosh Roy

Right, I guess here. So yeah, let's start with the driver for the reduction. So as Eric mentioned, it's, two things. The primary one is what Eric said, which is we keep trying to add more and more connectors and rebuilt capabilities in the product so that. The effort required for custom integration goes down, so that's something which we are driving more and more also on the front end we're building out more and more templates that are out of the box so that people can consume the knowledge faster without having to build custom interfaces to use it.
So that's the primary driver, but the second one, which is also I think important is that we're also developing some partnerships and that's still. Something we want more and more of to try to create third party capabilities to implement our solutions. So, the combination of those two is creating that big reduction that.
Like I said, outside of the estimation, adjustment, and this is a desirable thing for us.

Eric Smit

I think from the side, they'll certainly look to look at those spends appropriately, right? We'll see if those resources can be reallocated or reduced to align with the with the revised numbers.

Okay. All right, helpful. And then the US airline, sounds like a pretty compelling, obviously large customer, large potential customer. Talk about the operating environment. What were they using on the knowledge management side? What did you displace?
What what was the competitive landscape in winning that deal?

Ashutosh Roy

Yeah, so a couple of points. One, they had multiple knowledge systems. I didn't get into the detail in the prepared remarks, but they had multiple knowledge systems. They had a legacy solution, which was a stand-alone solution. They also had a CRM platform, in this case.
Microsoft, where they had the knowledge capability added to that as part of that as well. They had lots of SharePoint also because of, as you can imagine, a large organization. So this was as much a replacement as it was a consolidation play for them.

Okay, got it. I, I'll leave it there.
Thank you.

Operator

Thank you. (Operator Instruction)
At this time, we are showing no further questions. I would like to turn the call back over to management for closing remarks.

Eric Smit

Thanks, operator, and thanks everyone for listening to the call, and we look forward to providing you an update, on the next, conference call and hopefully see some of you at the Roth event, in March.
Thank you.

Operator

The conference has now concluded.
Thank you for attending today's presentation. You may now disconnect your lines.