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

Greetings, and welcome to the Altigen Communications First Quarter Fiscal Year 2021 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Carolyn David, Vice President of Finance. Please go ahead.

Thank you, Hector. Hello, everyone, and welcome to Altigen Communications earnings call for the first quarter of fiscal 2021. Joining me on the call today is Jerry Fleming, President and Chief Executive Officer; Joe Hamblin, Altigen's Chief Operating Officer; and I'm Carolyn David, Vice President of Finance. Earlier this afternoon, we issued an earnings release reporting financial results for the period ended December 31, 2020. This release can be found from our IR website at www.altigen.com. We have also arranged a taped 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 a reminder, today's call may contain forward-looking information regarding 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 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 annual audited report for the fiscal year ended September 30, 2020, 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?

Thank you, Carolyn. And good afternoon, everyone, and thanks for joining us for today's call. Earlier this afternoon, we reported our first quarter results for fiscal 2021. Revenue for our fiscal 2021 first quarter was $2.66 million, a decrease of 6% compared to the same period a year ago. This was largely due to the impact of COVID-19 as customers either reduced or canceled their Altigen service due to business slowdowns or, in some cases, actually going out of business. As we discussed on prior calls, much of the negative COVID-19 impact we experienced had previously been offset by increases in license sales and SIP Trunk usage by ongoing customers as they shifted to support a work-at-home workforce. Now that these companies have the technology in place to support their work-at-home employees, the need for additional licenses and/or SIP Trunk usage has somewhat abated. Prior to discussing the potential longer-term impact on Altigen, I'm first going to discuss our fiscal 2021 breakdown of revenues by category. I'll follow that with a discussion updating you on the state of our overall business as well as our progress in rolling out our various new solutions. So I'll begin with onetime product revenue, which represents software license revenue purchased by customers for their legacy on-premises Altigen systems. For the first quarter of 2021, our onetime product revenue of $116,000 compares to $204,000 in the same period a year ago. As in past earnings calls, this is in line with our expectations. In order to migrate our customers to the cloud or to add new cloud customers, we must shift our onetime product revenue to monthly recurring revenue and eventually eliminate onetime product sales. Consequently, onetime product revenue will continue to decline as we continue to push forward with our cloud-first strategy. As we've discussed in past calls, our annual recurring revenue represents annual software maintenance agreements, which are purchased by customers who license our products on-premise on a onetime revenue basis. Since annual recurring revenue is tied to onetime product revenue, we also expect this to decrease over time. However, because customers need their phone systems to be supported even if they're not buying new licenses, annual recurring revenue is expected to decline at a much slower pace compared to onetime product revenue. This quarter, annual recurring revenue was $633,000 compared to $722,000 in the first quarter last year. Moving on to services revenue. This category includes revenue received for cloud deployments, technical support and custom product development. As we continue to grow our number of cloud customers, particularly as that relates to our contact center and Microsoft Teams solutions, we do expect that our services revenue will trend upward. For any given quarter, however, services revenue may increase or decrease based on the completion of a particular customer deployment and/or customization project. Our Q1 services revenue was $71,000 for the current quarter compared to $214,000 in the same quarter last year. The final category is monthly recurring revenue, which consists of Altigen's various cloud-based software-as-a-service offerings as well as our SIP Trunk communication service. Monthly recurring revenue for the first quarter of 2021 was $1.8 million compared to the FY 2020 first quarter of $1.7 million, an increase of roughly 8%. I should point out that the quarter-over-quarter revenue gap that we've seen, and I'm talking about overall revenue gap now that we've seen from Q4 2020 to Q1 2021, is the direct result of a required accounting change, and I'll explain that. Previously, all SIP Trunk additional use surcharges for the last month of the quarter were recognized in the first month of the next quarter since this is when those surcharges were invoiced. In our fiscal 2020 fourth quarter, our accounting firm advised us to begin accruing for such surcharges in the quarter in which they were incurred instead of the quarter in which they were invoiced as we have historically done. So this change resulted in the recognition of $126,000 in additional SIP Trunk revenue in Q4 FY '20 instead of being recognized in Q1 FY '21. Instead, in FY QY (sic) [ Q1 ] '21, we recognized $105,000 based on January SIP Trunk surcharges, which represents a reduction of $21,000 from what we would have recognized under the now former accounting policy. This $21,000 reduction, when added to the $126,000, which we had to move and recognize in now the prior quarter, created a delta of $147,000 when you compare total Q4 revenue in FY '20 to Q1 revenue in FY '21, which is quite a delta. Without that accounting change, there still would have been a negative COVID-related impact on our Q1 FY '21 numbers, but that impact would have been $92,000 instead of the $239,000 delta that we're showing. And I'll certainly be happy to answer questions at the conclusion of our talk here on that topic. This was a onetime event and the numbers will be normalized going forward. Now with that accounting discussion, behind us, I'll focus on our cloud business strategy. Starting with our MaxCS hosted PBX, which is targeted at small to midsized business customers, I'll first recap what I said on our last call since we are now seeing this play out. In the last call, I discussed the fact that COVID-19 has had a significant impact on our MaxCS customers. As everyone is aware, was aware at the time, the onset of COVID-19 forced companies to support a largely work-at-home workforce, which initially resulted in increased MaxCS-related revenues due to additional licensing required for those customers to support their new home-based workforce. On the other hand, as I discussed on our last call, over the past 6 months, COVID-19 has also caused a significant negative impact on our small business customers, many of which downsized or, in some cases, have been out of business. I like -- want to discuss that while we have seen slowing growth for our MaxCS cloud platform, we are working on the rollout of a next-generation cloud unified communications platform. I'll transition to that because this -- we are going to be rolling out a new UC platform. The reason that we're doing this is we found that despite the rapid growth in Microsoft Teams or, in addition, I should say, to the rapid growth of Microsoft Teams, we're still seeing a lot of opportunities in the PBX and unified communications space for well-positioned solutions. And what I mean by that is that many small businesses, what we found, find Teams to be somewhat complex for their small business requirements and actually would prefer a more simple UC solution. We're also seeing other customers that don't want to pay the uplift for Microsoft Office 365 licenses that include Teams and therefore would prefer a standalone UC solution, which is probably why we're seeing some of those stand-alone vendors successfully sell their products. But for us, we have another angle because there are a number of larger enterprises that are moving or will move to Teams, as we've seen, over 115 million subscribers today, but they also have a significant number of employees in many cases, which do not have the need for Office 365 licenses. These customers are interested in integrating a standalone UC solution at a lower price point with their Teams solution so that they can actually deliver a cost-effective enterprise communications solution. The reason I went through this -- and again, we can -- happy to answer any questions -- is that with the new UC platform that we'll be rolling out, we will be in a position to deliver a solution on 1 platform for all 3 of those customer use cases, thus opening up a much broader market opportunity. Not giving up on Teams. Still full bore on Teams, but we're going to create another revenue opportunity with the integrated PBX solution. And as I mentioned on our last call, we are still on track to launch this new UC platform in our upcoming fiscal third quarter. I'll now provide an update on our progress with Fiserv. Now that the integration of our MaxCS PBX with the FrontStage Contact Center solution has been completed, we are actively engaged in a number of customer pilots with Fiserv. The first customer actually went live today, and it's going quite well. But in addition to being the first customer to deploy the FrontStage Contact Center solution, this particular customer is also rolling out our TRUSTID-based fraud prevention solution, which works in conjunction with our SIP Trunk service and our interactive voice response platform that is exclusively sold by Fiserv. So clearly, our plan with Fiserv, which is leverage the success -- and this is Fiserv's plan with us as well, leverage the success of this current deployment to drive the same solution set, contact center, SIP Trunks, interactive voice response, TRUSTID, caller verification throughout their community bank and credit union customer bases. Now how quickly this happens will be up to Fiserv as they have the customers and they're the ones driving the strategy. But I would like to note that, from a revenue perspective, Fiserv is nearly 1,500x bigger than Altigen, so having them in the driver's seat is a very good thing for our long-term success. Finally, turning to Microsoft Teams. Our currently available solutions include our direct routing SIP Trunk service for Teams; Hosted Skype for Business; our MaxACD, our sort of former call center solution and now our Teams call and activity reporting solutions. For those solutions, we recorded $236,000 in revenue in the current quarter or -- pardon me, in fiscal 2021 first quarter compared to $124,000 in the same period a year ago. So we're continuing to grow that business nicely. Now while we are pleased to see the continued growth in this business segment, we do expect the real growth to kick in once we release and deploy our new Teams solutions which are FrontStage and CoreInteract. Regarding FrontStage, this quarter, we expect the long-awaited integration to be finally completed for Microsoft Teams. To clarify, this integration with Microsoft Teams is completely separate than the effort that we've been working with FrontStage on to integrate to our MaxCS PBX system, so both will have been completed in this current quarter. Once the Teams integration has been completed, we can finally commence with customer pilots that are deploying -- customers deploying Teams and Teams phone system. And if all goes well, we will be in a position to start initial customer billings in fiscal Q3. And as previously reported, we acquired the CoreInteract platform from Blue Panda Communications this past September. As a reminder, CoreInteract is the first solution to deliver a comprehensive customer engagement platform for Microsoft Teams. The uniqueness of CoreInteract is that it targets enterprise Teams users whose primary responsibility is interacting with their company's current and prospective customers. As such, CoreInteract greatly facilitates an organization's ability to service their customers, while, at the same time, increasing the productivity of the employees using CoreInteract. We are planning to release our first customer preview version of CoreInteract in mid-February. Based on the feedback and requests for additional capabilities we've seen so far, we expect CoreInteract to be generally available for customer consumption in our third fiscal quarter. At this time, I'll turn the call over to Carolyn David to review the financials in more detail, after which I'll provide a brief summary. Carolyn?

Great. Thank you, Jerry. Total revenue for the first quarter was $2.66 million, down 11% from $2.98 million in the preceding quarter and down 6% from $2.84 million in the prior year quarter. Our cloud revenue was $1.8 million in Q1, down 12% from $2.1 million reported in Q4 FY '20 and up 8% from $1.7 million reported in Q1 FY '20. Excluding the accrual in both Q1 FY '21 and Q4 FY '20, as Jerry pointed out, cloud revenue declined 5% or $92,000 over the preceding quarter. For the current quarter, we recorded approximately $116,000 in perpetual software license revenue compared with $135,000 in the previous quarter and compared with $204,000 in the prior year quarter, representing a decrease of 14% and 44%, respectively. Our software assurance revenue declined 2% and 12%, respectively, in Q1 FY '21 to $633,000 in comparison with $647,000 in the preceding quarter and $722,000 in the same period a year ago. Professional services and other revenues was approximately $71,000 for the current quarter, down 38% from $115,000 quarter-over-quarter and down 67% from $214,000 in the comparable period last year. Now let's turn to margins. First quarter gross margin was 74% versus 77.2% in the preceding quarter and 77.6% 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 $1.91 million, an increase of 15% from $1.67 million reported in the previous quarter and an increase of 12% from $1.71 million reported in the prior year quarter, primarily driven by an increase in headcount-related expenses and reduced capitalization of certain software development costs. On a non-GAAP basis, operating expenses totaled $1.85 million for Q1 FY '21 compared to $1.54 million for the previous quarter and compared to $1.68 million at the prior year Q1. The increase in non-GAAP operating expenses was primarily the result of the aforementioned headcount-related expenses and the amount of product revenue -- product development costs, excuse me, included in operating expenses. For the first quarter 2021, GAAP net income totaled $56,000 or $0.00 per diluted share compared to $20,000 or $0.00 per diluted share in the preceding quarter and $502,000 or $0.02 per diluted share in the same quarter last year. The decline in the GAAP net income in comparison to the prior year quarter reflects a combination of lower net revenue, lower blended gross profit margin as a percentage of net revenue and an increase in operating expenses. Non-GAAP net income for the current quarter was $235,000 or $0.01 per diluted share compared to the preceding quarter of $873,000 or $0.03 per diluted share and compared to $621,000 or $0.02 per diluted share over Q1 FY '20. The decrease was primarily the result of the aforementioned. Turning to the balance sheet. We ended the quarter with $6.2 million in cash and cash equivalents compared to $6.6 million at the end of the preceding quarter. And working capital was $4.3 million, consistent with the prior quarter. This concludes the financial review. I will now turn the call over to Jerry. Jerry?

Thanks again, Carolyn. So what we'd like to do now is to bring in Joe Hamblin, Altigen's Chief Operating Officer, to provide a brief summary of our plans going forward. Joe?

Thanks, Jerry. Good afternoon, everyone. Following up on Jerry's earlier comments, I want to provide you with a high-level overview of where Altigen is headed. Starting with our hosted PBX business. As Jerry stated, we will be rolling out a massively scalable multi-tenant unified communications solution here in the very near future, actually in the third quarter of this year. With the platform, we will be able to better serve our current MaxCS customers with a more robust solution. At the same time, the new platform will enable us to address many more new customers opportunities, both on a stand-alone basis and as an extension to Microsoft Teams. As an added benefit, this platform will also help us reduce our operating expenses over the next year or so due to the efficiencies it provides us. Turning to Fiserv business. We clearly have big plans within, particularly as it relates to our FrontStage Contact Center. As Jerry stated, we cut over our first one today very successfully. In addition, we'll be rolling out our TRUSTID caller verification solution in conjunction with our IVR, and we are actively working on adding AI-based voice print technology to the platform later this year. This will virtually eliminate fraudulent caller access to the Fiserv banks and credit union customers. For this solution alone, the market opportunity is more than 10x our current business volume with Fiserv. Turning to our Teams solution. Our first order of business is get FrontStage and CoreInteract released, as Jerry had mentioned earlier. While our pipeline for these solutions continues to grow, we can't start recognizing the revenue until we begin shipping the product. In anticipation for these product releases, we've been working on our organizational readiness plans. There's no question that, based on the volume that we are seeing as the business increases with the new solution, we're going to need more resources. In this regard, Altigen's Board of Directors has approved management's propose to hire a merger and acquisition firm. We're starting now to put together a book that will allow us to explain our business and be kicking off to identify and evaluate candidates for this acquisition. The ideal candidate will be a Microsoft partner with sales and technical expertise in Microsoft Teams and Azure Cloud. We'll keep you posted with our progress. And with that, I will turn the call back over to Jerry.

Thanks, Joe. Appreciate the update. So at this time, we'll call back the operator and open up the call for any questions. Operator?

[Operator Instructions] Your first question comes from the line of Ian Cassel with MicroCapClub.

Sure. My question is about the full Teams integration that you expect to be completed by the end of the quarter. I think it was in your opening remarks. You talked about you expect the real growth to kick in once you have that full integration. I'm just curious like what gives you confidence in sort of that growth kicking in. Are you -- is that the feedback you're getting from resellers or from your sales force talking to potential customers?

Yes, Ian. It's really both the pipeline that's building as well as the resellers, and we've been signing quite a few new Microsoft partners as resellers for us with the solutions that we're bringing to the market. But the other component is that the FrontStage solution itself is -- the average revenue per customer for that solution is 10 to 15x what we currently see with our MaxCS PBX. And so the combination of those factors, the pipeline, the partners we're bringing onboard, the customer interest and the opportunities, along with the fact that it's such a large revenue opportunity, yes, that's where -- that's how we calculated what I'll call real growth.

[Operator Instructions] Your next question comes from the line of Mark Biwojno with Gigperfect.

Can you hear me? Can you hear me?

Yes, we can hear you, Mark. Yes.

Okay. Sorry about that. I asked this question a couple of quarters ago. I was just wondering if you could update us on any potential plans for a NASDAQ uplisting or increasing shareholder visibility of the company, such as perhaps presenting at investor conferences or things of that nature to broaden the shareholder space to tell the story of what progress Altigen is making on these different fronts and market opportunities it's seeing?

Yes, sure. And my answer is probably the same as it was a couple of quarters ago. So we do plan to uplist to NASDAQ providing that we're qualified to do so. I do expect -- I don't have a -- I can't make a firm commitment to you, but I do expect to initiate that process in 2021, so this calendar year. And so we'll see how that goes as far as market conditions, et cetera, but that is the game plan. Yes, we do. We're certainly happy to participate in investor conferences. The -- honestly, the virtual conferences aren't nearly the same as the in-person conferences. So I think we're certainly more interested in, once we can get things freed up here, to participate in the in-person conferences, which we think are a lot more productive.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to management for any closing remarks.

Okay. Well, thank you, operator. So we'll go ahead and conclude this call. We certainly look forward to talking to you on our next call, which will occur in late April and update you guys on our progress. Thank you very much.

Thank you, everyone.

Thank you, everyone. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.