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EGAN March Quarter Earnings Call: Quotes & Notes

(quotes from the call are in normal text; commentary & notes are in bold italics)

Gartner’s Magic Quadrant has clearly been a boon for EGAN. However, digging beneath the surface of the headline revenue and EPS numbers, we found plenty of weakness in this quarter’s results. Deferred revenue, accounts receivable, and deferred compensation expenses were all weaker than the headline numbers would imply.

The company still has a large number of relatively new sales people who should now be starting to contribute to growth, but this quarter’s numbers, combined with feedback from employees, suggest hat execution is a “wait-and-see” for EGAN. Lots of potential here, but this quarter was a let down. We’ll keep monitoring this one for its potential to triple, but for now, the risk/reward is high and we don’t even see a double in its immediate future.

Total revenue of the quarter was up 34% over the prior year, cloud subscription revenue for the quarter was up 89% over the prior year. With our continued strength and bookings, we ended the quarter with a backlog of $40.8 million up 100% from a year-ago quarter.

Now on to some color on what happened during the third quarter. In February, Gartner published its Magic Quadrant for CRM Web Customer Service applications where eGain was clearly the leader in both innovation and execution. As many of you know for the past four years, we have been consistently rated a leader in this quadrant. While we were always rated the best on innovation axis, this the first time we’ve been rated the best on both the innovation and the execution axes.

In other words, we used to be one of the best. This year, we are the best. No doubt about it. This month is going to be the result of relentless innovation and execution by our eGain team and I’m proud of that tenacity and commitment to make eGain number one.

We jointly presented at the Gartner CRM 360 Show in San Diego last week…100 plus business and technology execs attended our session.

So based on this early success or promise we are seeing in the North America market, we have now expanded the premier account program in Europe, this we did in early April. On the partner front, we are working very closely with Cisco to launch the eGain for Cisco Solutions Plus in this quarter which is the current quarter of Q4.

In April we conducted joint sales road shows with Cisco to educate the sales force and partners in the US and a little bit in Europe. The Cisco feel a little excited about selling eGain’s top rated platform to their enterprise plants. Cisco’s sales management assessment is that roughly three out of four of all RFPs they see in the US require robust multi-channel capability.

Moreover the Cisco guys see eGain as a competitive weapon against Avaya and a strategic proposition to help them reach across to client’s business leaderships beyond where they operate now which is mostly in the IT part of the house.

To begin with we are focusing our go-to-market effort in the Solutions Plus launch in the US aligning mostly with Cisco’s market presence and the early demand patents. It’s important to note that unlike our OEM relationship with Cisco which by the way is holding along, in the Solutions Plus case, eGain’s sales will be working very closely with Cisco sales and partners to sell this eGain for Solutions Plus.

To begin with eGain will implement and support the solutions, however in the near future, we will begin training and certifying Cisco partners to implement and support the solutions.

It’s a lot of work going on and we are very encouraged by it. It’s obviously our leaders and the products will be available for sale through the Cisco channel in by the middle of May. That’s the current plan. And we do think that both the usual sale cycle, we should start seeing the benefits from this investment in the second half of this calendar year.

Beyond Cisco, we have expanded our partner development team to establish new meaningful routes to market for our top rated solutions. Over the last couple of quarters, we have seen renewed interest from larger BPOs to partner with us. In the third quarter for instance, we sold significant new clients through 2 BPO partners, CFC and Capita [ph].

Furthermore, our pipeline includes other large BPO partners bringing up into new opportunities. It seems it may be the case that finally the front office BPO business is tipping over from the commoditized, achieved some fixed model to a more value-based technology leverage, knowledge assisted proposition.

For recurring revenue from subscription and support for the quarter was $8.3 million, an increase of 44% on a year-over-year basis. Looking at the recurring revenue in more detail, cloud subscription revenue was up 89% and support revenue was up 4% on a year-over-year basis.

One thing to note for the fourth quarter, as I should mention earlier, we are in the process of building out a new data center that we expect to be online in Q1 of fiscal 2014. In our backlog, we estimate we have approximately $500,000 to $600,000 of quarterly cloud revenue that we will begin recognizing once this data center is operational.

We took a breather through March roughly in terms of expanding the sales force and we are kind of resume that process this quarter, which is the Q4 quarter.

License revenue was driven by new customers in verticals that aren’t yet comfortable with Cloud deployment.

Our CapEx was less than 600,000, I think we probably see that going up to north of $1 million in this quarter, and probably three quarters of million of that may be driven from this expanded facility.

There is a possibility that we could get a cloud model joined with Cisco Solutions Plus. However, that is not in phase one, so that’s something that prevent discussion and we’re looking at sort of the demand side of things. And so that’s the first part.

We will end up roughly doubling our sales force in the next 18 months.

We have a nine-month sales cycle plus ramp up, so mostly you expect to see salespeople become truly productive in the second year of their performance or in the company.

Jon Hickman – Ladenburg Thalmann

Your guidance (at the midpoint) for the rest of the year assumes slightly down quarter for the last quarter of the year. Is that how you want us to think about the remainder of the year, Eric?

Eric Smit

Sure, Jon. I think that’s appropriate. I think, for us, we are still very much focused on the cloud first initiative. So from the standpoint of the license business, there are obviously opportunities that could close, that would sort of impact it on the positive upside, but I think that’s sort of the – just given our current focus, that’s the way we’re looking at it.

By: Mark Gomes, CEO

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