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eGain Corporation (NASDAQ:EGAN)
Q4 2019 Earnings Call
Sep 3, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the eGain Fiscal 2019 Fourth Quarter and Full-Year Financial Results Conference. [Operator Instructions]

At this time I'd like to turn the conference over to Jim Byers of MKR Investor Relations. Please go ahead, sir.

Jim Byers -- Senior Vice President

Thank you, operator, and good afternoon, everyone. Welcome to eGain's fiscal 2019 fourth quarter and full-year 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 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. And 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 is detailed in the Company's reports filed with the Securities and Exchange Commission. eGain is making these statements as of today, September 3, 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 discuss certain non-GAAP financial measures, 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. 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. And lastly, a replay of this conference call will also be available in the Investor Relations section of eGain's website.

And now with that said, I'd like to turn the call over to eGain's CEO, Ashu Roy.

Ashutosh Roy -- Chairman and Chief Executive Officer

Thank you, Jim and good afternoon, everyone. At the top level we execute quite well in fiscal 2019. Our full year revenue came in ahead of our guidance and Street consensus. We also generated strong cash flow and profits for the year. And finally, we completed a successful capital rate with those funds we paid down our debt and now we are investing in growth.

Let me share some financial highlights from the full year. We grew our SaaS revenue 37% over the prior year to almost $45 million. Our subscription revenue grew 17% year-over-year to $60 million and comprised 89% of our total revenue. We were GAAP profitable, with net income of $4.2 million compared to a net loss for the prior year and our non-GAAP net income increased to $6.2 million or $0.21 per diluted share from $1.7 million or $0.06 per diluted share a year ago. We also had strong cash flow from operations of $7 million for the year.

Looking at the business highlights, we continue to see strong demand for AI powered customer engagement capability, particularly in our partner ecosystem. So we are ramping our investment in those partner engagement and the channels that we are able to reach, both through product integrations as well as channel enablement. We have several new customer-wins in fiscal 2019. So let me walk you through some notable ones and their experience with eGain. I'll start with the U.S. based path services provider who we helped develop a solution for automated service and sales, for their DIY packs offering in 2019. Using rich capabilities in the eGain platform for virtual assistant, chat and cobrowse, we rolled out in three months a new solution for their website and mobile properties. The solution delivered over 50% automated service resolution rates and improved NPS, in their latest tax season in 2019. Since then, this clients has rolled out two more virtual assistants on the eGain platform, one for enterprise-facing IP and another for human resources, each time improving their compact deflection rates. So much so -- that now the client is standardizing on the eGain platform across its entire business. All this was delivered at scale in less than nine months.

Just to put it in perspective, when they approached us last year, this line had already spent over a year, according to them, working with multiple vendors, one for virtual assistant, one for chat, one for cobrowse and they had very little to show for all that. This difference in client experience is what sets us apart. We are able to easily deliver to scale the kind of connected digital engagement journeys that typically are gathering dust on drawing boards with other providers. We'll keep hammering point capabilities. The next one I'm going to talk about is a new customer we won in partnership with Cisco, they're one of the top apparels in home retailer in the U.S. They have been grappling with multiple point tools again, for chat, for email, for knowledge, and they wanted to kind of sweep all that out and develop an omnichannel capability that would be connected and scalable.

Working with Cisco, we went live with a competitive production replacement off the chat capability in six weeks, which by the way happened to be LivePerson, integrating the clients Cisco contact center capability with [Indecipherable]. Now this client is migrating their customer email handling for the eGain platform. Away from another point tool they had been using. So what you see here is that our capabilities in terms of comprehensive, rich solutions integrated when needed with folks like Cisco and the contact center, help us deliver this sort of easy, valuable and differentiated experience. The third client I want to talk about are the global payment processing provider in the U.S., we acquired them last quarter. This client, when they approached us, was using Salesforce for Contact Center Knowledge Management. But they were struggling with poor user adoption and business value. Once we won the opportunity, we got going and we are now in the month of September going to be rolling out our knowledge solution integrated with their Salesforce desktop and using our certified eGain connected to Salesforce. Another client we recently won is a leading building products manufacturer in the U.S. Dozens of brands, they wanted to deliver a personalized experience for each brand all from a Central Platform.

Again, in a matter of couple of months, we'll be delivering this common knowledge base across the website virtual assistance and contact centers, and that's just the first of many brands that could be coming up in the next few months. Other couple of names, I want to talk about are examples, one is a global high-tech company we won, this was late in 2019. They had Salesforce or Salesforce automation, and a look lot for marketing automation. They needed a solution for omnichannel customer engagement. We have now rolled-out virtual assistants, chats, email and social handling, all connected on a common platform in a matter of months. For this client we have already displaced three point tool providers and activated virtual assistance as a new capability.

The last one from Fiscal '19, I want to bring out is a European manufacturer of globally marketed consumer products, we won them in partnership with Cisco. This client is driving their digital transformation agenda on the eGain plus Cisco platform. And now we're working to implement their solution for improving their customer experience. Even in fiscal '20, we have been accelerating some new logo wins. Only in this quarter, which we are in now, we've been off to a good start. We had an exciting new client win in partnership with Amazon. Together with Amazon, we are delivering an omnichannel solution to a large state agency in California, with Accenture as the system integrator. This is a 2,000 plus seat compact center that's moving from legacy to the cloud, and they have selected Amazon and eGain as their go forward solution.

And a final one I wanted to mention again in Q1 which is this current quarter, but a very nice win for us is a large, health insurance client from the U.S. In partnership with Deloitte, we won this knowledge management opportunity in July. And this engagement is going to be the foundation for the digital transformation program, that this client is driving around service automation. The win with Deloitte in this case is now feeding the potential partnership for us with them, and they have already brought us into another opportunity early days though, at another client potentially in the U.S. So what you see here is the new client wins we are getting are all serving a need which we see as a yawning gap in the market, where point solution providers are unable to meet the omnichannel requirements in a digital engagement transformation that customers are looking to drive.

On the partner front, we continue to invest in the three technology platforms we have integrated with. Last year, we strengthened our partnership with Cisco, our OEM capability that is bundled in the Cisco enterprise platform and used to be activated and used by more and more of their installed base of enterprise clients. This solution now provides a great foundation for clients who are looking to use value added solutions for knowledge, AI and messaging. We are now partnering with Cisco to market these value added solutions through the Cisco solution plus catalog that we have been using successfully, on top of the OEM technology.

As you all know, Cisco is and continues to be our number one partner. And we believe that this partnership will strengthen in the coming year. Turning to Avaya, we have made good progress with them in the last six months, that we are accelerating. We are now executing a joint go to market plan with them, both in the U.S. and in Europe to deliver eGain capabilities and digital NAIs [Phonetic] integrated with the elite platform. Our joint pipeline is building nicely, and I believe that we will see bookings through this channel in the second half of fiscal 2020, just given the pipeline and the sales cycles associated with these enterprise clients. So we have active funnel that we have started to develop and grow now with joint sales execution. Very exciting.

And then finally, Amazon Connect, as I mentioned, we signed our first customer through them and with them, in the first quarter -- this quarter. And what we're doing with them is really working the marketing, joint marketing to spread the word of the success and then building some innovative new experiences in their cloud, combining our digital and AI capability and Amazon's machine learning to combine voice and digital experiences for cloud contacts and for clients.

With and along with these three partners, now we're reaching an installed base of over 4 million enterprise contact centers seats worldwide, to combine Cisco and Avaya installed basis that is. Combined that with our Amazon Connect partnership, which is targeting really the pure cloud opportunities. You can see that we are in a good position to drive more growth through these channels, strengthen that business, we have recently hired additional channel sales and support staff.

I believe that these investments now in place, will help us drive new local acquisition in fiscal 2020 and beyond. Looking at existing customers and success, that has been a focus for us, as you know, in over the last two years, and what that has helped us do is continue to migrate more and more of our legacy support customers to the SaaS platform and drive healthy customer retention and expansion. So our net SaaS retention rates now exceed 100% for the year. The trend we continue to see with customers is the demand for an omnichannel solution, a connected solution, not point solutions and something that is written out of the box, not something that they have to develop from scratch, building on toolkits on a platform.

To us, that need is the primary driver that we see for eGain market growth and leadership. On the product side, we continue to enhance our solution. Interestingly, in the Gartner 2019 magic quadrant of our customer engagement centers, we were the only ones explicitly called out for delivering "value for money". Based on client interviews and commentary. This statement from Gartner underscores our solution and as the difference in the market and our enthusiasm to serve our clients even better with that solution.

Moving forward, we intend to increase our product investment, deepen and broaden our contact center, partner integrations, as well as enhancement of our platform, particularly in AI and messaging. This will enable us to accelerate growth over the next few years, both through new logo wins through these partnerships that we talked about as well as creating stickier and deeper engagement with our clients. Our intent is to be the enterprise wide omnichannel platform for customer engagement. No matter where we start that journey in terms of the first pin-point we address.

Looking ahead to fiscal 2020, with our strong cash flow and strengthened balance sheets from fiscal 2019, we are increasing our growth investment. We expect to see growth both from new logo acquisition as well as installed base expansion. And on the new logo front we're investing specifically to support our key partnerships, Cisco, Avaya and Amazon connect. As I mentioned, we're seeing significant demand and some early success with people like Amazon Connect. Now as we increase these investments, we believe that we'll be able to accelerate our growth rate on a top line basis over the next several years. In summary, we are off to a good start.

And before I turn it over to Eric for more color on the operational and finance performance, I want to mention our upcoming customer event, which we are calling the Experience 360 this time, it's going to be held in Chicago on October 15th and 16th. We will have a separate track for analysts and investors who may be interested in joining us, and we hope you will be able to come join us at this event. To be an exciting event we'll have speakers, customer speakers from comcast from a large consumer bank, and then analysts views from Forrester. And of course, we'll be announcing exciting new products and capabilities as well.

So with that let me hand over to Eric for more commentary. Eric?

Eric Smit -- Chief Financial Officer

Thanks, Ashu. Before I review our financial results, I'd like to remind everyone that we adopted the revenue recognition accounting standard known as ASC 606, effective July 1, 2018 as part of our fiscal 2019. This otherwise noted the results I'll discuss today are presented in compliance with the ASC 606, revenue recognition standard. To reconciliation of the AFC 606 to 605 results is included in our press release we issued today that is available on our website.

Now turning to our financials. As Ashu noted, we are pleased with our performance in fiscal 2019. Our top line results exceeded our revenue guidance for fiscal 2019 and we're ahead of Street consensus. To achieve these positive top line results while improving our cash flow and operating profits for the year.

Let's quickly review our financial results for the fiscal year. Total revenue was $67.2 million, up 10% year-over-year, with 4% in constant currency. SaaS revenue was $44.8 million or 37% year-over-year and 39% in constant currency. Subscription revenue, which includes SaaS and legacy revenue, was $60 million, up 17% year-over-year, over 19% in constant currency. And subscription revenue now accounted for 89% of total revenue for fiscal 2019, up from 83% in fiscal 2018. And professional services revenue, was $7.2 million or 11% of total revenue compared to $10 million [Phonetic] or 16% of total revenue a year ago.

Before I move on, I'd like to call out two key revenue topics and provide some additional color on how they impacted our performance for the year and our expectations for them in the coming fiscal year. These topics include the transition of our legacy on premise customers to our cloud offering, and a goal for our professional services revenue going forward.

Starting with the SaaS revenue transition, as we stated before, while transitioning through a 100% SaaS business, the key metric that we believe is useful to measure our forward looking business is our SaaS revenue growth. At the beginning of the year, we targeted that growth to be 25% to 30%, we raised it in Q2 to 30% to 35%, so pleased to report that we exceeded that, the 37% growth. And if I look back over the last three years, we've been able to achieve a compounded annual growth rate now in excess of 25%. Now, looking forward to again, as we've mentioned on previous calls, driving the transition of our on premise customers to our SaaS offering, has been an important focus for us, and the successful transition has helped boost our SaaS growth rates in both fiscal 2018 and 2019.

Now looking forward, as we see the legacy business decline and the targets, as we had stated on previous calls, that we'd like to see our legacy business account for, down to approximately 10% of revenue by the end of calendar 2020. What that means, as Ashut alluded to, is that we are planning to increase investments in sales and marketing in R&D, in fiscal 2020 to drive that growth rate going forward in fiscal 2021 and beyond. The second point I wanted to raise or provide some additional color is around our professional services revenue. At the beginning of fiscal 2019, we set a goal for our PS revenue to be in the range of low-teens to high single digits as a percentage of total revenue. And this is something that we achieved during this fiscal year.

As we look forward, we believe the increased investments we planned to make in product developments will further improve the ease of our product deployments and require less implementation services. And therefore for fiscal '20, we see the PS revenue now in the high single digit range as a percentage of total revenue, reflecting this further improvement in the products and the need for less PS engagements, going forward.

Now, moving on to our non-GAAP gross profit. For fiscal 2019, gross profit was $46 million or a gross margin of 68% compared to a gross profit of $39.6 million or a gross margin of 65% for the prior fiscal year. Our subscription revenue gross margin improved to 76% compared to 75% from the prior fiscal year. The professional services gross margin was 9% compared to 11% a year ago.

Earnings operations, non-GAAP operating costs for fiscal 2019 came in at $38.4 million, a 4% from the prior year. And non-GAAP operating income improved significantly to $7.6 million or an operating margin of 11% compared to $2.7 million for a margin of 4% in the prior fiscal year. Looking at our bottom line, non-GAAP net income was $6.2 million or $0.22 per share on a basic basis and $0.21 on a diluted basis. This represented the improvement of $4.5 million or 262% year-over-year and compared to the non-GAAP net income for fiscal 2018.

Adjusted EBITDA margin for the year was 12%, up from 5% in fiscal 2018. Now, looking at our financial results for Q4, total revenue in Q4 was $16.8 million, up 8% year-over-year and subscription revenue was $15.1 million up 4% year-over-year and accounted for 90% of total revenue in Q4, up from 87% of revenue a year ago. Breaking out the revenue components, SaaS revenue was up 24% year-over-year and legacy revenue was $3.6 million, down 15% from the year ago quarter. Professional services revenue was $17 million or 10% of total revenue, which is down 18% from $2.1 million or 13% of total revenue in the year ago quarter.

Before getting into the costs and expenses and corresponding margins for the quarter, I would like to point out that our annual company wide compensation adjustments were effective at the beginning of Q4. This along with the starts of our additional investments, are primary drivers for this sequential increase in costs and expenses in Q4.

Now looking at non-GAAP gross and gross margins -- gross profit for the fourth quarter was $11.2 million or a gross margin of 67%, up from a gross profit of $9.8 million or gross margin of 63% a year ago. Year-over-year increase in the overall gross margin reflects a combination of the benefits you're seeing from the scale and efficiencies in our SaaS operations and the growth in our higher margin SaaS revenue, while a lower margin PS revenue declines. If you look at the breakout of gross margin by revenue type in Q4, our subscription revenue gross margin was 72% compared to our professional services revenue margin of 15%. We saw a sequential decline in our subscription margin due to the increased investments in our cloud infrastructure and the increased personnel costs. However, our expectation is to see an improvements to this margin in future quarters and to be in line with our subscription margins we achieved in fiscal 2019.

Now, turning to operations. Non-GAAP operating costs for the fourth quarter came in at $9.9 million compared to $9.8 million in the year ago quarter. Overall, this resulted in non-GAAP operating of [Phonetic] $1.3 million for an operating margin of 8% compared to $54,000 for a zero margin in the year ago quarter.

Looking at net income, non-GAAP net income for the fourth quarter was $659,000, with $0.02 per share on a basic and diluted basis. This compares to non-GAAP net income of $300,000 or $0.01 per share in the year ago quarter. Included in the Q4 results was an $800,000 annual tax adjustment for one of our foreign subsidiaries. Approximately $700,000 -- for $0.02 per share of this, was a non-cash charge as its creditors against the existing deferred tax assets on our balance sheets. GAAP net income for the fourth quarter was $166,000 or $0.01 per share compared to GAAP net loss of $536,000 or $0.02 per share in the year ago quarter. And the adjusted EBITDA margin for the quarter was 8%, up from 2% in the year ago quarter.

Now, turning to our balance sheets and cash flows. Total cash and cash equivalents as of June 30, 2019 was $31.9 million compared to $11.5 million of June 30, 2018. We ended the year with no debt and improved our net cash position of $29.6 million. During the year, we generated cash flow from operations of $7 million, a 4% increase from $6.6 million in fiscal 2018.

Looking at our remaining performance obligations or RPO as of June 30th, 2019, the RPO balance, the total RPO balance was $61.9 million of which short term RPO was $42.4 million. This is a new metric that was introduced with the adoption of ASC 606. I'd like to find some insights, we have learnt about this metric in the first year of tracking it for fiscal '19. First, since this -- since we adopted ASC 606 on a modified retrospective basis, we did not adjust our prior year balances and therefore prior year comparisons we do not believe are meaningful. Second with the adoption of the ASC 606 portion of the OEM business that we used to recognize ratably is recognized upfront. This change resulted in most of the $3.1 million reduction in our opening deferred revenue balance with the adoption of ASC 606 at the beginning of fiscal 2019.

And then for the treatment of this OEM business during fiscal '19, as this is recognized upfront, there was no addition to the half-year balance from this business throughout 2019. The other factor that impacted our half-year balance in fiscal '19 was the timing of renewals. Approximately [Technical Issues] made a concerted effort to increase the contracted term for both new contracts and upcoming renewals. We pushed from what used to be one year contracts to three year contracts. For the first two years since we've made this change internally, we saw sequential increases in our backlog, now the off year balance. But then declining over fiscal '19, partly due to less contracts coming up for renewal as we've gone now through the three year cycle.

Now that we're seeing some of the three year contracts come up for renewal. Looking forward, we would expect the off year balance now to begin to grow again, subject to timing of larger deals and larger renewals. And to evidence that, if I look at our short-term RPO, or let's call it for the fourth quarter -- we saw a sequential increase of 5% when compared to the balance as of March 31, 2019. So as we move forward, we'll continue to provide updates on this, but hopefully that's an additional insight, that would be -- was helpful.

Now, turning to our guidance for fiscal 2020. For the fiscal year ending June 30, 2020, eGain expect SaaS revenue of $53.8 million to $55.4 million on a constant currency basis, which would represent growth between 20% and 24% year-over-year. And then for total revenue of $72 million or $73.6 million on a constant currency basis, which would represent growth between 7% and 10% year-over-year. As stated earlier, with our product improvement, we expect less professional services revenue required for deployments. And as a result, we expect our peers revenue for fiscal 2020 to be in the high single digit range as a percentage of total revenue.

We expect to generate non-GAAP net income of breakeven to $2 million or $0.00 per share to $0.06 per diluted share. And we expect, assume a diluted share count of $32.6 million for the fiscal year. For the fiscal '20 first quarter, we expect SaaS revenue of $11.8 million to $4.1 million on a constant currency basis, which would represent growth between 23% and 26% year-over-year. And for the quarter, total revenue of $16.8 million to $17.2 million on a constant currency basis, which would represent growth between 7% and 10% year-over-year. We expect to generate non-GAAP net income of $500,000 to $1 million or $0.02 to $0.03 per diluted share. And we assume our diluted share count of 30.6 million for the first fiscal quarter.

Looking ahead, our customer base, we believe is healthy. We see a strong market demands in particular with our partner ecosystem, then in this large and growing markets. And with our strength -- strengthened balance sheet, we are beginning to increase that investment in sales, marketing and product development, which we believe will allow us to capture market share in fiscal 2020 and beyond.

Lastly, on the investor relations front, eGain will be participating in two investor conferences this week. We'll be presenting tomorrow at the 8th Annual Gateway Investor Conference taking place in San Francisco. And the following day, Thursday, we'll be participating in the Dougherty & Company Institutional Investor Conference taking place in Minneapolis. We hope to see some of you there.

This concludes our prepared remarks, operator, and we'll now open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] We'll hear first today from Richard Baldry with Roth Capital.

Richard Baldry -- Roth Capital Partners -- Analyst

Thanks. Wondering if you can go a little bit deeper into the COGS line on the recurring side. You said there was some infrastructure investment, so that sort of one time orients [Phonetic], a little more than we've seen in the past, sort of disproportionately hit. Is that something that plays through -- throughout the rest of 2020 or fiscal '20? Are there any -- can it reverse in some parts, if it was more onetime oriented? Thanks.

Ashutosh Roy -- Chairman and Chief Executive Officer

This is Ashu here. So what I -- what we are doing right now is we are investing and continuing to scale and also making investments on geography and compliance. For instance, we are close to -- we haven't got the certification to be close to getting certified for HiTrust, which is one of the really next generations, the security certification on the cloud. So those are investments that do increase the COGS line for us on the cloud side. I think that that's something that will probably be true for fiscal 2020. But after that, I believe that as a percentage, the COGS line would start to go down again.

Richard Baldry -- Roth Capital Partners -- Analyst

Then, when we look at the SaaS revenues in 2019, they grew about a little over $12 million. Your guide now argues that they would grow less than that, somewhere between $9 million to 10.5 million range. Was there anything onetime skewing in 2019, we should be sort of remembering in the back of our minds or do we just sort of wrap that up to conservatism, because you are spending more on sales and marketing. You're arguably getting more momentum with partners and things that would typically argue that your year-over-year growth in dollar terms should expand, not contract. Thanks.

Eric Smit -- Chief Financial Officer

So a couple of points. I think that it's a little bit of the conservatism in that number. However, I also think that the migration of existing legacy customers to SaaS which we have transparency, we mentioned as something that benefits our SaaS revenue growth over the last year or so, and even the year before is something that is starting to taper-off. So we want to make our investments that we are making in sales and marketing are going to drive -- new SaaS revenue growth. And that's an area where we feel the investments we are making are timely, but these investments might take a little time in terms of showing up as revenue. That also speaks to the decrease potentially of absolute tax revenue growth for fiscal 2020.

Richard Baldry -- Roth Capital Partners -- Analyst

And last one would be, could you talk about the sales headcount additions you've been making or planned to make kiosks [Phonetic] you're sort of ahead unfolds? Had that -- net number of seats been increasing, has been any turnover there, we should be thinking about in the back of our minds? Are there any other issues around that sort of capacity of your direct sales force in fiscal '20 versus '19? Thanks.

Ashutosh Roy -- Chairman and Chief Executive Officer

So on the sales side, as we have mentioned in the past, we have an overlay model for the enterprise sales team, where we have order carrying enterprise salespeople who are supported by overlay of channel sales. So the investments we are making at this time are mostly in two areas, on the sales side. One is channel sales overlay, where we think that there is an opportunity to drive more pipeline growth through these channel sales investments. So that's one area we are investing in, and we've got three new people in those roles in the U.S. One for Cisco, one for Avaya and one for Amazon Connect, they are dedicated to those channels.

In addition, we are also spinning up an inside sales team, again to assist the enterprise sales folks in driving the early pipeline opportunities through the funnel. And that's something that we have -- we intend to have about half a dozen people in that group in the in the U.S. primarily. Most of our increased sales investment at this point will be in the U.S. We expect Europe to be fairly constant in terms of business and given the market environment.

Richard Baldry -- Roth Capital Partners -- Analyst

Thanks.

Operator

We'll hear next from Mark Schappel with Benchmark.

Mark W. Schappel -- Benchmark Company -- Analyst

Hi. Thank you for taking my question. Ash, starting with you, in your prepared remarks, you called out several partner wins and also several competitors placements. Are you seeing increasing competitors placements or was it just a function of this call where you decided to call out a few more of them?

Ashutosh Roy -- Chairman and Chief Executive Officer

We are seeing more competitive point product replacement, yes. I would say that we are meeting more and more in the enterprise with the vendor ecosystem where there are lots of point [Phonetic] products in place already. Not for recapability, but quite a few. And the client's desire to rationalize that with a platform is something that we are seeing more of.

Mark W. Schappel -- Benchmark Company -- Analyst

Okay, great. Thank you. And then margins are expected -- with the investments margins are expected to come down next year. I was wondering, if you give us a sense of when we could expect to see a return to some sort of margin expansion?

Ashutosh Roy -- Chairman and Chief Executive Officer

So on the gross margin side, along the lines of what I mentioned earlier to Richard's question, I believe that fiscal 2020 is going to be a time of investment, but fiscal '21, we should see improvement on the gross margin line. On the operating line, I think it's a function of our investment, the two areas where we are planning to increase our investment is sales and marketing and product development. I believe that product development will start to marginally reduce beyond 2020 in percentage terms. I do think that sales and marketing will probably continue to go up and not down as we get more and more sales traction through their channel investments we're making.

Mark W. Schappel -- Benchmark Company -- Analyst

Okay. Great. Thank you.

Ashutosh Roy -- Chairman and Chief Executive Officer

So that's kind of the two year outlook.

Mark W. Schappel -- Benchmark Company -- Analyst

Thank you.

Operator

Next to Jeff Van Rhee with Craig-Hallum.

Jeff Van Rhee -- Craig-Hallum Capital Group LLC -- Analyst

Great, thanks. Just a couple for you Ashu. I just wanted to circle back to your very last answer, you said R&D will reduce marginally in 20 in percentage terms, but S&M will go up beyond that. You are talking in percentage terms or dollars?

Ashutosh Roy -- Chairman and Chief Executive Officer

Both.

Jeff Van Rhee -- Craig-Hallum Capital Group LLC -- Analyst

Both, OK good. Got it. So if I look at this past fiscal year, what -- in terms of the ARR signed in the year, what percent was from new versus existing?

Eric Smit -- Chief Financial Officer

So roughly 60%, a little over 60% was existing and 40% -- a little less than 40% was new.

Jeff Van Rhee -- Craig-Hallum Capital Group LLC -- Analyst

Okay. And how did that trend through the year?

Ashutosh Roy -- Chairman and Chief Executive Officer

So what we have seen now, and this is a trend that we have seen over the last year, is that the new logos we acquire are increasingly doing what we think is the right thing by them, which is that they want to start small, even though they intend to grow big. And so you're seeing a phasing of people's investments, not because they are leery of spending a lot of money upfront, but they want to prove out the case with some of these larger programs. So we are fine with that, because we get when we do a good job, which we do most of the time. We get more value and more realization monetization on the backend effect. So that's a trend we are seeing now and we see that happens in the second half of 2019. We saw a little more of fiscal. And we are now seeing the advantage of that in fiscal '20 with some of these early bookings which have some of the more new wins, but also some of those are expansion wins from new logos that we had acquired earlier in fiscal '19.

Jeff Van Rhee -- Craig-Hallum Capital Group LLC -- Analyst

Okay. And for fiscal '19, what was gross churned?

Ashutosh Roy -- Chairman and Chief Executive Officer

The gross churn basis, it was around -- for the SaaS customers it was around 6%.

Mark W. Schappel -- Benchmark Company -- Analyst

Okay. And what about with respect to the maintenance base, trying to get a sense of what percent of them in the process decided to just not make the migration?

Eric Smit -- Chief Financial Officer

So that number wasn't as good as the SaaS number but I think it wasn't, it was maybe closed in 90%.

Ashutosh Roy -- Chairman and Chief Executive Officer

You mean 10%?

Eric Smit -- Chief Financial Officer

Sorry, 10%, yeah. 10%. It was more -- it was closer to a 90% retention.

Jeff Van Rhee -- Craig-Hallum Capital Group LLC -- Analyst

Yeah. Very helpful. Thank you. And then last one for me. Just I guess two questions together, if I could. On the new deals that you're winning, talk to me about the competitive landscape, just kind of the top two or three folks that you're seeing and how that might be changing? And then also, I'm interested in the drivers from a product standpoint. I hear a lot of knowledge management across the Board here, a little chat here, a little messaging there, but a lot of knowledge management. So I guess the question is the mix of drivers with respect to product and how the competitive landscape is changing?

Ashutosh Roy -- Chairman and Chief Executive Officer

Sure, so two things. One, I would say the top two drivers right now are, one is still omni-channel digital capabilities, is still a big driver and the second driver is knowledge. Those are the top two drivers. Knowledge in dollar side tends to be larger but the digital opportunities, there are more of. And as the two are converging, we are happy to jump onto digital opportunities as well because that gives us a foot into the door, so then develop the larger scale opportunities as well.

Looking at the competitive landscape on the two, on the digital side, the primary competitor that we seem to see is LivePerson on chat. On the other, there is really no strong competitor, to be honest, on the other channels. And then on the knowledge side, the primary competitor in the enterprise today is Salesforce, and that sounds a little odd, because they really don't focus in the market, but because they have the full solutions and customers are looking at them as an alternative. Those are the top two, I would say.

Jeff Van Rhee -- Craig-Hallum Capital Group LLC -- Analyst

Okay, great. Thank you.

Operator

And from Needham & Company, we'll hear from Ryan McDonald.

Alex Narum -- Needham & Company -- Analyst

Hi, thank you. This is Alex Narum on for Ryan. And I was just hoping to get a little color on the guidance for 2020, and how we should be thinking about the mix of revenue growth from new and existing customers going forward?

Ashutosh Roy -- Chairman and Chief Executive Officer

I think that our intent is to take that number more toward a 50:50 ratio, with 50% coming from new logos and 50% from expansion.

Alex Narum -- Needham & Company -- Analyst

And then could you give an update, or could you give a little bit more color being on the progress being made with Avaya? And then also has there been any impact from the M&A rumors surrounding the business?

Ashutosh Roy -- Chairman and Chief Executive Officer

So, so far we have not seen any impact from our perspective surrounding the M&A rumors for Avaya. We do see a lot of orchestrated and sort of strong interest from their side, and we're working closely with their field team and product teams. Like I mentioned, we are doing some pre-packaged integration, which in the past we've had that we are kind of enhancing that with the -- specifically for the Avaya Elite platform. And we are jointly executing the go-to-market with them that will kind of surface in the next month or two as we roll it out.

Alex Narum -- Needham & Company -- Analyst

Okay. Great. Thank you.

Operator

And at this time, I'd like to turn things back to management for any closing remarks.

Jim Byers -- Senior Vice President

Great. Well, thanks, everybody. Look forward to hopefully seeing some of you at some of the upcoming investor conferences. And certainly, at our -- we will be holding the Analyst Day at the Customer 360 event in Chicago. So please reach out to me if you want to get an invitation or want more details around that. And otherwise we'll look forward to giving you an update on our Q1 results. Thank you.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Jim Byers -- Senior Vice President

Ashutosh Roy -- Chairman and Chief Executive Officer

Eric Smit -- Chief Financial Officer

Richard Baldry -- Roth Capital Partners -- Analyst

Mark W. Schappel -- Benchmark Company -- Analyst

Jeff Van Rhee -- Craig-Hallum Capital Group LLC -- Analyst

Alex Narum -- Needham & Company -- Analyst

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