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

Greetings. Welcome to the Altigen Communications Third Quarter Fiscal Year 2021 results. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Carolyn David, Vice President of Finance. Thank you. You may begin.

Thank you, Hilary. Hello, everyone, and welcome to Altigen Communications earnings call for the third quarter fiscal 2021. Joining me on the call today is Jerry Fleming, President and Chief Executive 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 June 30, 2021. This release can be found on 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 our website. As a reminder, 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 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, 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 is 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. Thanks for joining us for today's call. I want to start the call by providing a high-level overview of our quarterly results. I'll follow that with a discussion of our business strategy and expectations, Carolyn then will come back with a detailed review of the numbers. For our fiscal third quarter, we reported revenue of $2.8 million, down approximately 1% versus the same period a year ago, primarily due to the expected decrease in our legacy product revenue as we shift our focus toward a cloud-based monthly recurring revenue model. And secondly, our cloud revenue, which is roughly flat this year -- this quarter over same period last quarter due to the SMB customer churn we experienced as a result of COVID-19. However, sequentially, revenue was up by approximately 6% for both overall as well as the cloud as a result of our new cloud subscriber adds. We also reported non-GAAP EPS of $0.02, down $0.01 from the year ago period. There are 2 primary contributors to this delta. First, of course, was the year-over-year quarterly revenue decline. But second, and probably more importantly, our operating expenses increased due to our acquisition of Blue Panda with the CoreInteract platform plus the additional head count we've added as we prepare to launch our new products. Now last quarter, I went into detail on our historic evolution from a hardware provider to a software provider to a cloud services provider. Today, I'll provide an update on our progress as we continue to build out our solutions for the next step in the evolution of the company. And Phase 1 of that next step is to establish ourselves as an end-to-end provider of unified communications as a service, or UCaaS and contact center as a service, or CCaaS solutions, all built on the Microsoft technology stack. As part of this first phase, we have identified and are pursuing 3 avenues for growth. The first is based on enhancing Microsoft Teams, which has quickly become the clear leader in the unified communications and collaboration space, with about 150 million daily active users worldwide today. And because Altigen's UC solutions are built on Microsoft technologies, it is a natural fit for us to align our company with Microsoft and their industry-leading Teams platform to take advantage of its large and growing share of the market. Our objective here is to be the leading provider of complete end-to-end communication solutions and services for Microsoft Teams. As most of you know, for the better part of the last 18 months, we've been focused on building out our next-generation cloud UC solutions to extend and enhance Microsoft Teams. Now as a reminder, our current Teams solutions portfolio includes hosted Skype for Business customers, which we have been and will continue to migrate to Teams, SIP Direct Routing communication services and Call Reporting. Now admittedly, these solutions are enough to get us started, but they're certainly not enough to drive the significant revenue growth we're looking for. On the other hand, our new solutions for Teams will dramatically expand this portfolio to include a suite of applications natively integrated into Teams using Microsoft's Bot Framework and Microsoft's APIs. This approach, unfortunately, has caused some delays as we're waiting on Microsoft to deliver their APIs in order for us to be able to perform some key functions. However, this approach is also very different than anything else available in the market and will provide superior functionality and a more seamless user interface compared to the competition as soon as those APIs are available. The first of the new solutions is CoreInteract, which is our new enterprise customer engagement platform. We released this last month. Next on deck is Core Attendant, which is a Teams operator console which does what no other Teams operator console can do, and we plan to release that solution later this quarter. Now both of these solutions, for the first time in Altigen's history, will be offered on a freemium model, which will allow us to seed the market with free applications, which deliver basic but useful functionality. The free subscribers are then targeted to upgrade to a paid model for those users wanting or needing additional functionality in the paid versions. Now this is the same model employed by some of the fastest-growing and most successful SaaS companies, including companies like Zoom and Slack. We're still working on the release of our FrontStage contact center for Teams, which is the solution most impacted by the lack of critical Microsoft Graph APIs. Based on the current information we can gather from Microsoft, and it's not easy to get this information, we're still likely about 90 days out from having that solution available, which means 90 days out from having those Graph APIs available. In the meantime, we've been sharing our Teams road map and previewing releases of our new solutions with both Microsoft partners and prospective customers, and the response from both has been extremely positive. This demonstrates to us that we are on the right track and it's a matter of executing and getting the solutions out the door. From a go-to-market perspective, our Teams solutions are delivered through 2 primary channels. First is our network of certified Microsoft partners, who primarily work with mid-market companies, and our own direct sales force, who work with larger enterprise customers. Now while we're still gearing up for release of our new solutions, we are seeing growing pipelines in both of these channels. So we'll transition to -- in addition to Teams, a key strategic business opportunity is our partnership with Fiserv. This is a partnership that has historically been based on our legacy and hosted PBX solutions, our interactive voice response or Bank By Phone application, and our SIP Trunk communication services, all of which Fiserv sells to their bank and credit union customers. More recently, we've expanded our solution set with Fiserv to include caller authentication, which is a fraud prevention application, and we are further extending this capability with the addition of voice biometrics, which will add additional incremental security against unauthorized account access by verifying callers with the state-of-the-art voice print technology. In this solution, the voice print technology solution will be available later this quarter. Fiserv will also be launching our new cloud PBX and UC solution or UCaaS, which we call MaxCloud. This will be deployed in the Fiserv data centers and will be exclusively offered to Fiserv customers. The FrontStage contact center is actively being integrated with MaxCloud, which Fiserv will also be offering to their customers. And this solution, the PBX along with the contact center features unique integrations that are only available to Altigen that are sold into the Fiserv base. Now we expect these solutions, MaxCloud and FrontStage to be ready for sale by Fiserv in calendar Q4 of this year. Finally, we'll also offer our new MaxCloud platform to the SMB market through Altigen's legacy reseller partners. Until now, most of the focus of these partners has been squarely on migrating their Altigen on-premise customers to the cloud, same solution. But they've had difficulty in attracting new customers because our legacy MaxCS PBX just doesn't have unified communications capabilities. This dynamic should change with our new MaxCloud solution, which does have complete and robust UC capabilities and much more appealing to the SMB market. Now from a go-to-market perspective, we plan to initially convert Altigen's hosted 10,000-plus MaxCS PBX cloud subscribers to our new MaxCloud UC solution while also targeting the remaining MaxCS on-premise's customers to upgrade them to MaxCloud. Now MaxCloud is nearly ready to go with scheduled release for later this quarter. So at this time, I'll turn the call over to Carolyn to review the financials in more detail, after which I'll return to provide a brief summary. Carolyn?

Thanks, Jerry. Total revenue for the quarter was $2.8 million, up 6% sequentially and down 6% on a year-over-year basis. As we explained last quarter, our legacy products revenue continued to decline as we have moved away from perpetual software licenses and associated software assurance in favor of a cloud-first strategy. We expect this trend to continue until we start to ramp revenue from our new products in fiscal 2022. Gross margin decreased to 70% compared to 77.4% last year. The decrease in gross margin was primarily driven by higher amortization costs for capitalized software and acquisition-related costs and, to a lesser extent, a shift in our product mix. GAAP net income was about $1 million or $0.04 per diluted share compared to roughly $400,000 or $0.02 per diluted share last year. GAAP net income for fiscal 2021 includes a onetime noncash gain of approximately $800,000 related to the forgiveness of the company's PPP loan. On a non-GAAP basis, net income was about $500,000 or $0.02 per diluted share compared to roughly $800,000 or $0.03 per diluted share in the same quarter last year. The decrease in non-GAAP net income was primarily the result of lower revenue and higher head count-related expenses in connection with the launch of our new products. We continued to generate cash this quarter as we ended the quarter with $6.5 million in cash and cash equivalents, up 6% compared to the preceding quarter. This now concludes the financial review. I will now turn the call back to Jerry to close out the call. Jerry?

Okay. Thanks again, Carolyn. So in summary, to date, we've been relying -- almost solely relying on our core hosted PBX solution as the primary revenue driver. But we're finally at the point where we're beginning to release our new UCaaS and CCaaS solutions, each of which carries its own unique customer value proposition. Of these CVPs include having the inside track on upgrading our own PBX customers to our new UCaaS solution, we can do it better, faster and cheaper than anybody else. We're able to drive business with Fiserv into their captive customer base based on our unique integrations only available to Altigen. And finally, we can capture new Teams opportunities with our unique natively integrated approach. So we're -- we do believe that these new solutions will soon start adding new incremental revenues, although the timing of those revenues, as we discussed in past calls, is still dependent on the new product releases. However, as I mentioned, we're right there on the doorstep of these releases. Because of that, we're certainly excited about the future that these solutions hold and our revenue opportunities and business growth holds, and we certainly look forward to updating you on our progress during our fiscal year-end earnings call in December. So now I'll move to Q&A. Operator?

[Operator Instructions] Our first question is from Neil Cataldi of Blueprint Capital Management.

On previous calls, you've referenced the volume of business that can come from having FrontStage launched and on the last call, you referenced, I believe, 30 Microsoft partners and 70 new customer opportunities. I was wondering if you could refresh either of those metrics today and maybe just provide some more color on the pipeline that may be building.

Yes. Absolutely, Neil. So your question, let me just quickly dig up the -- and answer your question on the partners and the opportunities. I don't have it right at my fingertips, but I'll have it quickly. The first part of your question was dealing with just the overall revenue size of the price in terms of FrontStage?

Yes. I think it might have been Joe that talked about it on a call or 2 ago, and I'm a long-term shareholder. I think it would be interesting for people listening or people who maybe referenced this in the months to come to understand the size of the opportunity ahead of you. And maybe even just to understand a little bit about how you've gotten access to this technology.

Sure. Okay. Now FrontStage or CoreInteract or just across the board, should I just give a quick overview of the whole works here? I just want to make sure...

Yes. Sure, why not.

Yes. All right. Let me first -- since I do have the data here, let me first answer your second part of your question. So we have approximately 58 partners now, up from the last call. And those partners in the pipeline, it's something over 100 opportunities that they brought to us that we're working with them. So that's part of the growing pipeline. And some of that, obviously, is dependent on some of these new solutions. So in terms of -- we have 2, I think, 2 core products, right? We have a lot of products we're bringing to market. We've got the Direct Routing. We've got, as you mentioned, Call Reporting capabilities. We have an operator console coming out. We built the operator console ourselves. This is going to be quite interesting because Teams itself, the operator console is maybe not very exciting, right? As for the company operator answer calls and transfer those to employees, but it's needed in very large enterprises, more so the SMBs and Teams simply doesn't have that capability. And because we built our operator console on the CoreInteract technology that also uses the Microsoft framework, and apologize for getting a little technical, we can actually do stuff with the operator console that the 3 or 4 companies that have a competing solution simply can't do. And they also charge about $75 for their operator console. Ours is free. Why are we making it free? Because we want to get into as many accounts as we can to upsell them to our additional solutions. So this one really -- and actually, we give one for free per company. So there will be a revenue opportunity, but this one is really to get account access. But then with that is also CoreInteract. And right now with CoreInteract, this is the solution that we acquired from Blue Panda and we spent, geez, since we acquired them, took us and we started actually doing the 6 months. We started funding development 6 months before we acquired them. So for 15 months, we've been working on this platform to get it up to where we need it to be because Teams has its own call routing solution, which is what the base version of CoreInteract does. We happen to do it better, okay? But is that good enough? Well, my view is, you know what, I'm going to make it simple. We're going to make it free. It's better and it's free. And now it provides the foundation to get in there with voice routing and queuing to be able to upsell. We have a whole slew of other applications that sit on top of CoreInteract that -- they're anywhere from $10 to $15, but they add up to about $100 collectively per user per month that we can now sell. So we want to lower our barrier to entry with that solution and be able to upsell applications. And you say this is also -- I'm going to try to address how we can get access to this technology. We -- from the start, CoreInteract was designed using the Azure microservices fabric, using bot technology, and it's a completely multi-tenant and hyperscalable within the Microsoft Cloud. So fortunately, when we started building this product, Microsoft had their cloud available. We didn't have to worry about any of the stuff some of the other enterprise software companies have to worry about to develop this solution to make it scalable. We just leveraged Microsoft's cloud and focused on the feature set. So while it's not quite ready for prime time or it's just not ready for prime time is probably a better way to put it. Yes, we expect -- and we expect that this is going to be quite a large opportunity for us. Today, we have the voice-only out. So we're going to be seeding the market with our freemium version. Later this quarter, we expect to have other digital media channel to -- when I say, digital media channels, I'm talking about e-mail, fax, SMS, web chat, social media messaging, all the things that people do, right, but aren't available in the enterprise. So I don't know if that answers your question. I have a little bit more to say, but I've been -- I want to stop and ask if that answered your question.

No, that's great. And when you referenced voice, are you talking about the direct -- is that Direct Routing?

Yes, when I say voice, Direct Routing, I'll substitute voice for a phone call. Yes. So a phone call comes in. We're routing to that call and make sure it gets to the right person, best available person. And because of what we do, we happen to do it better than Microsoft, "happen to". If we designed it, we'd do it better than Microsoft. But the real key for us is building that foundation, and so we'll spend just 1 more minute here and I'll just give everyone an example. Just think of your cell phone, what you could do in your cell phone today, right? You can make phone calls, you can SMS, you can do a web chat. If you're on someone's website, you can send an email. You could post social media messaging. Now the companies that you might be calling if you're a customer, just so they can respond, they can take a phone call and they can take an e-mail. And that's it. There's no doubt that this market is converging, and these companies are going to move to digital customer engagement. Right now, the entire -- our entire set of competition is focused on the high-end contact center where 5% to 10% of the employees sit. No one, and I mean no one is addressing the enterprise, and that's where we're moving with our solutions. So this freemium model will open the door for us, and we will be -- I expect that we're going to have quite a nice ride once we get our other digital media out, be able to penetrate these enterprises for the users that just don't have any other technologies.

That's fair. A couple of follow-ups to that if I may.

That's a long answer to your short question, I apologize.

No, I think it's helpful. I mean hopefully, there's new people listening, and I'm sure they maybe don't have the full context that I do. Colliers covers the UC space, and in a recent note, they said that demand for Microsoft Teams' Direct Routing is robust with an estimated 80% of organizations using Teams selecting a third-party solution. I'm just wondering, you referenced 58 partners, 100 opportunities. Is that consistent with what you're seeing in the marketplace that all of these people are using Teams, but no one's really using Microsoft for the piece that you're trying to build here and then provide?

Well, I don't want to get into, let's say, a match with these Colliers, but I certainly disagree with their findings because the long and short of it is I think they do not understand the difference between Teams and Teams phone system. And I wouldn't doubt that 80% of those companies moving to Teams phone system are choosing Direct Routing instead of calling plans. I can guarantee you, 80% of the Teams customers have not moved to phone system. It's at best 20%, right? So those are our targets right now with Direct Routing. And that's great, right? When Microsoft does calling plans, there's a lot of direct routing competitors, that's a nice -- I'll call that a nice business for us. We can make some money on it. It gives us a beachhead into the account. The real money is in the additional applications we can sell to those customers. They can enhance their ability to benefit the customers.

Got it. Okay. Okay. So then are the partners today able to sell the 2 new solutions we're talking about that are live? Or is it a bit of a holding pattern as you wait for contact center?

No, they can. So they can sell Direct Routing today. And they can sell as of last month -- well, they can sell. As I just mentioned, we're doing this on a freemium model. They can start deploying CoreInteract freemium, voice piece of it now. That's ready to go. So -- but -- which is fine, because we have to build up this enterprise base so that we can then target to upsell to the additional applications. And it can be applications on top of voice that we sell or we just are releasing or it can be the other digital media channels. So -- but today, and of course, they don't have contact center because of the Graph APIs. We cannot -- no company can deliver a native Microsoft Teams contact center today. Regardless of what they say, it's not possible. So they just have workarounds and use a third-party PBX for that function. But the resellers today, it's -- they're pretty light on what they can sell because we don't have a lot of solutions. And they're onboard with what we're doing and they will be selling our solutions as we get them out the door.

Okay. And of the 100 opportunities, what -- how should we think about the range of size?

Well, as I mentioned in my commentary, most of the resellers, I'm not going to say all, most of the resellers focus on mid-market and mid-market can be anywhere from 50 at the lower end to 500 employees, something like that. Some of the resellers, call them much larger enterprise accounts, but as a rule, it's that size and those opportunities that they bring us tend to be in the $300 to $500 a month range, something like that, with our current solutions, right? But as we have additional solutions, all of our solutions tend to be for that size of customer, $300 to $500 a month. So that will grow as we continue to release products.

[Operator Instructions] Our next question is from Neil Cataldi of Blueprint Capital Management.

I guess it's just you and I today, Jerry. One more question for you. Could you maybe follow the same path with Fiserv and just update us? I think you referenced the first engagement with them a while back. How has that progressed? And maybe provide a little color on the pipeline of opportunities and time line on the Fiserv side?

Yes, absolutely. So I have to be careful I'm not disclosing anything, let's say, confidential information from Fiserv's part, but I'll try to give you a high-level answer. So yes, we did put -- and we do have a very happy customer, a bank, using the FrontStage contact center with our MaxCS PBX today and where they're pretty much using all the capabilities of both solutions. Fiserv, because of their merger with First Data, is actually migrating data center. So they have a couple of hundred servers, I think, of our PBX sitting in 1 data center that's going to another. So for the next several months, that's their primary focus is to migrate data centers. And they are dead set on moving. In fact, they're one of the drivers for our new UC platform because it is multi-tenant and geo redundant. And so multi-tenant simply means we could put a bunch of customers on the same platform, easy to administer. Geo redundant means we can deploy the same solution in multiple data centers. So if there's a problem on 1 data center, the system is not down. Everybody is still up and running. So they demanded that. And I did reference that solution will be available in early Q4, calendar Q4. And so what they're doing at the moment, yes, they're still -- they're actually still taking contracts, but they're not deploying at the moment because they're going through their own data center conversion issues.

Got it. Okay. All right. That sounds good. So that -- so the contact center on the Fiserv's side is ready to go. It's implemented. There aren't any issues with it. And in terms of extrapolating the same technology across to the Teams opportunity, is it fair to say that really, the only hurdle right now is the API and then everything else is ready to go?

Yes. Yes, because it's the exact same platform, contact center-wise, that will work with our new UC platform that Fiserv will be selling, and that we'll be selling as well. And so the only difference is the connector on the back end. One is connected to our UCaaS PBX and the other's connected to Teams. And there are a couple of functions that are critical to a contact center that Teams -- Microsoft has not made the APIs available for. And that's why -- that's the hold up. And it's just go or no-go, customers are not going to buy it without those couple of critical features.

Right. And that's not specific to you, that's specific to all of the companies? I know it's not a long list, but there's, I think, like 7 or 8 that are certified for Teams already and there's maybe another 10 or 20. So this pertains to all of the companies that are waiting for certification?

Absolutely. And they have 3 levels of certifications. So those companies that are certified right now, they have their own PBX and so they you use their own PBX to get around the limitations of Teams. And that's fine. Actually we're able to win some deals that way for some customers that don't really care. Most do, some don't. But when the native Teams solutions is available, those solutions, they're going to have a very, very difficult time to win business because they're not doing it the Microsoft way. And so yes, we're -- I'll call it taking on the chin a little bit right now, but we're doing it the Microsoft way, which will pay dividends in the long run.

So when this happens, I mean do you think that it's going to get some publicity in the space? I mean there's a lot of talk about UC and the opportunity. I don't see a lot about native right now. But it sounds like it's a bit of an event not just for you but maybe for the space as a whole.

Well, I guess so. I'd say guess so because it's a crowded space, right? They're a tremendous number. Like you said, there are approximately 20 companies right now either certified or being certified as the contact center for Teams. So customers got a lot of choices to make. And yes, we will have them in our portfolio and expect to generate good revenue off of it. I do not believe that will be our primary revenue generator. I believe CoreInteract is going to be our primary revenue generator because we're going to be playing in enterprise space with no competition. And we will -- that's where we're really focusing a lot of our energies. I need the contact center to say, yes, I've got one of my portfolio guys. I can satisfy that requirement for you, too, just like it's like to satisfy your Direct Routing requirements, but the real push is on enterprise digital customer engagement.

[Operator Instructions] There are no more questions at this time. We have reached the end of the question-and-answer session. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.

Thank you, everyone.

Thank you, everyone.