EGAN - Despite A Refilling Pipeline eGain's Outlook Remains Muted

2023-10-25 16:45:51 ET

Summary

• eGain Corporation provides customer engagement and success software for medium and large enterprises.
• The global market for customer engagement solutions is expected to reach $33.11 billion by 2028.
• Despite an improving pipeline, management's forward guidance is tepid.
• I remain Neutral [Hold] on eGain Corporation in the near term.

A Quick Take On eGain Corporation

eGain Corporation ( EGAN ) provides medium and large enterprises with customer engagement and success software.

I previously wrote about eGain with a Hold rating.

Despite firming pipeline activity for generative AI technologies, eGain Corporation management has produced tepid forward guidance.

The stock appears fully valued at its present level, so my outlook remains Neutral [Hold].

eGain Overview And Market

California-based eGain was founded to assist businesses in improving their customer-facing results via its suite of integrated offerings.

The company is led by co-founder, Chairman and CEO Ashu Roy, who was previously co-founder of WhoWhere and of Parsec Technologies.

eGain’s primary offerings include:

• Collaboration

• Insight

• Knowledge + AI

• Services

• Integrations.

The firm seeks new customers via its direct sales and marketing team as well as through channel partners and its marketplace.

According to a 2023 market research report by Mordor Intelligence, the global market for customer engagement solutions is an estimated $19.73 billion in 2022 and is forecast to reach $33.11 billion by 2028.

This represents a forecast CAGR of 10.91% from 2023 to 2028.

The primary reasons for this expected growth are improving technology solutions to enhance the customer journey via any device they use to connect with businesses.

Also, organizations have a growing desire to reduce customer churn rate, which results in improved business financials and growing valuation.

Below is a chart showing the expected variation in customer demand by region:

Major competitive or other industry participants include:

• IBM (IBM)

• Microsoft (MSFT)

• Nuance

• Oracle (ORCL)

• Salesforce (CRM)

• Avaya

• Calabrio

• Aspect Software

• Genesys

• Verint Systems

• Nice Ltd.

• OpenText

• Pegasystems

• EngageSmart.

eGain’s Recent Financial Trends

Total revenue by quarter has resumed growth; Operating income by quarter has turned positive in the most recent quarter:

Gross profit margin by quarter has turned up recently; Selling and G&A expenses as a percentage of total revenue by quarter have trended lower, a positive signal indicating increasing efficiencies in this regard.

Earnings per share (Diluted) have moved sharply higher in the most recent quarter:

(All data in the above charts is GAAP.)

In the past 12 months, EGAN’s stock price has fallen 17.71% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) rise of 30.93%:

For balance sheet results, the firm ended the quarter with $73.2 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash flow was $4.3 million, during which capital expenditures were $0.3 million. The company paid $6.2 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For eGain

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Based on the DCF, the firm’s shares would be valued at approximately $5.23 versus the current price of $6.15, indicating they are potentially currently overvalued.

EGAN’s most recent unadjusted Rule of 40 calculation was 16.3% as of FQ4 2023’s results, so the firm has made some improvement in this regard, per the table below:

(Source - Seeking Alpha.)

Sentiment Analysis

The chart below shows the frequency of various keywords in management’s most recent earnings conference call with analysts:

The chart shows numerous mentions of negative keywords, indicating the company is under material stress as macroeconomic challenges create uncertainties for the firm and its clients.

Analysts asked leadership about the effect of AI-related demand on its sales, its approach to capital allocation/M&A and the outlook for key partnerships.

Management said that almost all RFPs have a generative AI requirement now, and the company will look to leverage others’ core generative technologies but will optimize and fine-tune its offerings.

On capital allocation, the team is looking more closely at M&A deals but will continue with share buybacks at present or greater rates.

Key partners such as Cisco will likely produce flat to modest upside potential, but systems integrator partners are currently challenged but beginning to reemerge in certain industries such as financial services.

Commentary On eGain

In its last earnings call (Source - Seeking Alpha ), covering FQ4 2023’s results, management’s prepared remarks highlighted top-line and bottom line results that were above previous guidance.

As a result of business interest in AI technologies, the company is seeing increasing RFP (Request For Proposal) and pilot activity, as it sees "generative AI is elevating the importance of and rejuvenating the demand for knowledge hubs."

The firm is seeing improved pipeline activity, including from previously stalled deal opportunities.

Total revenue for FQ4 2023 rose only 4.7% year-over-year, and gross profit margin increased by 0.9%

The company's net dollar retention rate fell to 100% from 105% last year, with EMEA-region customers producing most of the performance drop.

Selling and G&A expenses as a percentage of revenue dropped by 15.3% year-over-year, a strong increase in efficiency.

Operating income rose to $2.4 million from a loss YoY.

The company's financial position is reasonably sound, with ample liquidity, no debt, but weak positive free cash flow, which was more than offset by its stock-based compensation in the past four quarters.

EGAN’s Rule of 40 performance has improved but remains well shy of good performance.

Looking ahead, full-year fiscal 2024 topline revenue is expected by management to contract by 1.0%.

If so, this would represent a decline in revenue growth rate versus fiscal 2023’s growth rate of 6.52% over fiscal 2022.

In the past twelve months, the firm's EV/Sales valuation multiple has fallen approximately 36%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include large deal closings, but management believes these remain uncertain due to macroeconomic factors.

As a result, management has limited visibility in a number of respects, so it has been more conservative in its forward guidance.

Given the stock’s apparent full valuation and leadership’s tepid forward guidance despite a firming pipeline, my outlook on eGain Corporation is Neutral [Hold].

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