Altigen Communications, Inc. (ATGN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to your Altigen Communications First Quarter Fiscal Year 2020 Results Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to Carolyn David. Ma'am, the floor is yours.

Thank you, Casey. Good afternoon, everyone, and welcome to Altigen Communications Earnings Call for the First Quarter of Fiscal 2020. With me on the call today is Jerry Fleming, President and Chief Executive Officer; and I'm Carolyn David, Vice President of Finance. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations section of the company's website at www.altigen.com. We have also arranged a replay of this call, which may be accessed by phone. This replay will be available approximately 1 hour after the call's completion and remain in effect for 90 days. The call can also be accessed from the Investor Relations section of Altigen's website. As usual, before I commence the review, I would remind all participants that today's call may contain forward-looking information regarding future events and future financial performance of the company. We wish to caution you that such statements are just predictions, and actual results may differ materially due to certain risks and uncertainties that may pertain to our business. We refer you to the financial disclosures filed periodically by the company with the OTCQB over-the-counter market. Specifically, the company's audited annual report for the fiscal year ended September 30, 2019, as well as the safe harbor statement in the press release the company issued today. These documents contain important risk factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. Altigen assumes no obligation to revise any forward-looking information contained in today's call. During this call, we will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to or a replacement for the comparable GAAP measures, but we believe these measures help investors gain a more complete understanding of results. A reconciliation of GAAP to non-GAAP measures and additional disclosures regarding these measures are included in today's press release. Now it's my pleasure to turn the call over to Jerry Fleming, President and CEO of Altigen, for opening remarks. Jerry?

Thanks, Carolyn, and good afternoon, everyone. Thank you for joining us for today's call. As Carolyn mentioned, earlier this afternoon, we reported our fiscal 2020 first quarter results. Revenue for the first quarter was $2.84 million compared to $2.66 million in the preceding quarter and $2.78 million in the same period a year ago. Net income was $502,000 in the first quarter versus $290,000 last quarter and $612,000 in our fiscal 2019 first quarter. For our usual discussion, I'll also provide details regarding our revenues for the 4 revenue categories we track, which include: onetime product revenue, annual recurring revenue, services revenue and monthly recurring revenue. Onetime product revenue represents license revenue we receive from software licenses from customers who purchase licenses from us for their legacy on-premises Altigen PBX systems. That revenue stream continues on a downward trend as a result of our shift to a cloud-based monthly recurring revenue model. In the first quarter, onetime product revenue of $205,000 declined 23% from the previous quarter and 55% compared to the same period a year ago. This is clearly a drag on our overall growth rate, but it is an inevitable byproduct of moving to a monthly recurring model. The second category, annual recurring revenue, includes revenues from our annual software maintenance agreements, which on-premises customers must pay to receive product support, bug fixes and software upgrades. Because annual recurring revenue is tied to onetime product revenue, it will experience a slow decline over time as a result of migrating our on-premises customers to the Altigen cloud. In the first quarter, annual recurring revenue of $722,000 actually showed a small 1.5% increase versus the fourth quarter of FY '19 and a 7% decline compared to the prior year quarter. Services revenue, the third category includes revenue from cloud deployments, technical support and product customizations. While we expect services revenue to demonstrate an upward trend over time, in a given quarter, maybe up or down from the previous quarter based on the lumpiness of those transactions. For the first quarter, our services revenue was $214,000 which was a 145% increase over the previous quarter and a 139% increase over the prior year quarter. The final and most important category is monthly recurring revenue, which is comprised of our hosted software plus SIP Trunk service. In the first quarter, we recorded just over $1.7 million in monthly recurring revenue, which increased by 7% compared to the preceding quarter and 17% on a year-over-year basis. Approximately 90% of our cloud revenue was attributable to our hosted MaxCS PBX. Skype for Business and Teams accounted for the remaining 10% of those revenues. We are beginning to see some traction with Microsoft Teams phone system with approximately 10 customers now in production as of the end of December and dozens more in our sales pipeline. We also successfully migrated the WorkSpace customers we acquired in August onto our hosted Skype for Business platform during the first quarter. However, due to deployment times and billing cycles, we recorded only about $15,000 in associated cloud revenue during the first quarter from that transaction. Regarding the status of our FrontStage Omni-Channel Contact Center solution, we're continuing to work with our business partner, Atlantis Telecom, to integrate FrontStage to our MaxCS PBX and Skype for Business. And when the Microsoft Teams APIs are finally available, we'll be integrating with Teams as well. We're currently looking to launch FrontStage as a managed cloud service in calendar Q2. At this time, I'll turn the call back to Carolyn to review the financials in more detail. Carolyn?

Great. Thank you, Jerry. Total revenue for the first quarter was $8 million -- $2.8 million, up 7% from $2.7 million in the previous quarter. Compared to the prior year period, total revenue was the same. Cloud revenue for the first quarter was $1.7 million, up 7% from $1.6 million in the preceding quarter and up 17% from $1.5 million in the same period a year ago. For the current quarter, we recorded approximately $204,000 in perpetual software license revenue compared with $265,000 in the previous quarter and compared with $450,000 in the prior year quarter, representing a decrease of approximately 23% and 55%, respectively. Software Assurance revenue for the first quarter 2020 increased slightly to $722,000 compared with $712,000 in the previous quarter. Compared to the same period a year ago, Software Assurance revenue decreased approximately 7% from $778,000. Professional services and other revenue was approximately $214,000 for the current quarter compared with $87,000 and $89,000 in the preceding quarter as well as the prior year quarter, representing an increase of 145% and 139%, respectively. Turning to the margins. First quarter margin was 77.6% versus 80.3% in the preceding quarter and 82.9% in the comparable period last year. The decrease in gross margin was primarily driven by the impact of higher amortization of capitalized software and acquisition-related costs. GAAP operating expenses for the quarter totaled $1.7 million, a slight increase of $130,000 or 8% from $1.6 million in the previous quarter. Compared with the prior year quarter, GAAP operating expenses were the same. GAAP net income was $502,000 or $0.02 per diluted share compared to $290,000 or $0.01 per diluted share in the preceding quarter, and $612,000 or $0.02 per diluted share in the same period a year ago. As discussed on our previous call, our fourth quarter fiscal 2019 financial results include a noncash tax expense of approximately $285,000. The tax expense differs from the federal statutory rate of 21%, primarily due to an increase in the amount of net operating losses expected to be utilized before exploration. On a non-GAAP basis, net income for the quarter was approximately $621,000 or $0.02 per diluted share compared with $635,000 or $0.02 per diluted share in the previous quarter and $736,000 or $0.03 per diluted share in the same quarter last year, representing a slight decrease of 2% and 16%, respectively. Moving to the balance sheet. We ended the quarter with $4.4 million in cash and cash equivalents, the same as the preceding quarter. Working capital was $3.4 million compared to $3.3 million at the end of the preceding quarter. This concludes the financial review. I will now turn the call over to Jerry.

Thanks again, Carolyn. To summarize my comments, we are continuing to focus on growing our cloud revenues, while keeping a close eye on expenses. And in fact, I should point out that this quarter represented our best cloud quarter ever in terms of revenues and, in fact, was our best overall revenue quarter in more than 5 years. So I think we're on the right track. And we're certainly encouraged by the momentum we're seeing with our first Microsoft Teams offering, which is our direct routing SIP Trunk service. We also have plans to extend that offering with additional services, which I'll discuss more on our next call. And most importantly, we're excited about the potential with FrontStage Omni-Channel Contact Center, and we're seeing quite a bit of interest from both current and prospective customers for a Microsoft Teams integrated contact center solution, and I'll certainly keep you posted on our progress here. But now in order to address any questions, I'll turn the call back to the operator.

[Operator Instructions] And our first question comes from Edward Gilmore with Little Grapevine.

Jerry, congrats on the solid progress in the cloud revenue. I just had a question on the Atlantis Telecom partnership. Can you give any additional color on what impact you expect that to have to the top line in fiscal year 2020?

Yes, I'll try, Ed. As you know, we're not providing forward-looking projections. But as I mentioned in my commentary that we're looking to launch that in -- that solution in calendar Q2, which is fiscal Q3 for us, so we do expect some revenue contribution in this fiscal year. But I think we'll see the lion's share of that starting to materialize and actually become a material component of our revenue in FY '21.

Okay. Great. And just a couple more questions. For professional services, is that -- how much of that is attributed to revenue that ultimately is kind of cloud revenue? And I guess a follow-up to that would be, do you expect that to be lumpy quarter-to-quarter? Or is it something that you see kind of keeping pace with the cloud growth?

Yes. Good questions. So Carolyn, you may have to jump in and say exactly how much revenue was cloud based. I will tell you what -- my response would be it's a good chunk of that services revenue. So there are -- as I mentioned, there are 3 components. A big chunk of that is the deployment services. And it is somewhat lumpy, one of the customers, just as an example, that we turned up live this current quarter. It was $30,000 in professional services to set up their team's direct routing system. And so that's why it's a little bit lumpy. Some other customers might be $3,000 or $4,000. Customers could be larger than that. Another transaction was -- that's cloud based, having to do with our SIP Trunk services. And that's the extended offering, that was 60 -- that I'll discuss next quarter, it was $60,000 in revenue. So we'll get those. And again, that's why we get a little bit lumpy because there could be a few thousand up to tens of thousands. But the lion's share is certainly related to our cloud solutions.

Okay. Great. And then just last question. On the Teams' API, I know that's not available yet, but do you -- have they communicated to any of the partners more of a concrete time line? And do you have a sense yet, I guess, of how long that would take your team to ultimately integrate and then start to be able to offer it to the marketplace?

Yes. Microsoft has publicly stated that it will be first quarter of 2020, which is this current quarter, and we have had communications, and we are in -- and just to clarify, we're in the Microsoft TAP program, which is -- that stands for Technology Adoption Partner. So we get early information on -- and there's only, let's say, a handful, maybe a large handful, but a handful of companies that are in this technology adoption program that get access to Microsoft code early. And -- but the latest word is March 31. So yes, that's technically -- that is technically first quarter, but we expect that will probably be more of a beta version. And it will be Q2 before -- calendar Q2 before we really see production versions. I do want to point out, I don't expect this to be the floodgates opening once this API is available, but the significance is that it opens up a brand-new opportunity that we're going to be all over, and we do -- because we get the early code, we'll be ready to go when Microsoft is ready to go. And we'll have a unique positioning to be able to sell our contact center solution and other solutions into Teams customers that, let's say, some of the -- maybe more well-known competitors just aren't going to be able to do.

[Operator Instructions] Our next question comes from Ian Cassel with MicroCapClub.

Jerry, I just have one question. I was wondering if you could provide any color on the Fiserv relationship and how that's progressing?

Yes, Ian, yes, I -- well, I can disclose what I guess is as much as possible since we're under NDA with Fiserv. I'll just say this is progressing very well. And the FrontStage is a critical component of that relationship. And a lot of the work we're doing, I had mentioned, we're doing integration to our MaxCS PBX with the FrontStage platform. Although as I've mostly been talking about, we're going to be selling this with Teams. And the reason we're doing the MaxCS integration, which is the Altigen PBX, is because that's what Fiserv sells as their core PBX platform. So that may give you some idea that we're heading down the path with Fiserv. And I think, I can't -- this is a big ship, more than a $10 billion company, so it takes a little time to get the oars in the water, but once it takes off and -- it's quite large, and it's certainly moving in the right direction.

And our next question comes from Maj Soueidan with Geoinvesting.

Jerry, a quick question. It's been 3 months now since RingCentral and Avaya announced their partnership. And I'm wondering what you're seeing right now in terms of the industry, what's going on? How it's reacting -- how customers are reacting maybe that who are on Avaya's platform, maybe the on-premise platform? And I guess, Avaya gave up trying to develop their own cloud platform, and that's why they did this thing, RingCentral. So maybe you can describe and talk about how that's looking through in the industry? And maybe are you seeing any fallout -- positive fallout from some of these customers actually out there without a solution right now?

Well, that's a good question. I probably don't have a real clear answer for you, and it's no better than what I have been able to give you a little while ago. I've heard completely different views of how successful this is going to be. On one hand, we hear from RingCentral, they're going to get access to all the Avaya customers. On the other hand, I hear from Avaya, let's say, from Avaya-related people, not from Avaya themselves, let me clarify that, that they're just -- they're viewing this as simply a -- a simple way to sell SMB solutions without incurring the cost on their side. But with those diverging views, my view is this. Giving RingCentral access to the Avaya customers is going to create a situation in the marketplace where the customers that may have been longtime Avaya customers, now they're going to say, "I have to switch platforms, I'm going to go take a look." And to me, that's a really good thing for Altigen, when they go take a look, because a lot of those customers, many customers are Office 365 customers and Microsoft is make it ease -- making it easier and easier for a 365 customer to move to Teams. So I view that as just a positive move, generally speaking, for Altigen going forward.

Okay. Are you seeing any of that kind of communication with some of the -- those customers?

We've seen some. I can't really say that it's like a major breakthrough that all of a sudden customers are revolting and bolting. But -- yes, so I can't say that, because we have a number of Avaya customers that switch over to our platform and the Teams platform. So I can't say that's because of the RingCentral arrangement or not. But any time that you're going to force a customer to change, you're going to create opportunities for more than just that matter involved that's looking -- that's forcing that customer to change.

[Operator Instructions] And it appears we have no further questions from the telephone lines, so I'll turn the call back over to management for any closing remarks.

Okay. Thank you, operator, and thank you, everyone, for joining our call, and thanks for the questions, guys. We certainly appreciate you joining and look forward to updating you on our next call in April. Thanks again.

Thank you, everyone.

And that does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.