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

Good afternoon, ladies and gentlemen, and welcome to Altigen Communications First Quarter Fiscal Year 2022 Results. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Carolyn David. Ma'am, the floor is yours.

Thank you, operator. Hello, everyone, and welcome to Altigen Communications Earnings Call for the First Quarter Fiscal 2022. 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 December 31, 2021. This release can be found on our IR website at www.altigen.com. Please note that we have added some supplementary tables with new revenue breakouts and metrics. We believe this will help improve transparency into our business and we will continue to evaluate additional metrics as our new products begin to contribute to our results. 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. This 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, 2021, as well as the safe harbor statement released in today's press release that the company issued. 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 that 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 hello, everyone. Thanks for joining us for today's call, and this beautiful day on Wall Street. So I'm going to begin my commentary by providing a brief summary of the numbers as they relate to our key performance indicators. Carolyn will then come back on and review the financials in detail following my commentary. For our first quarter fiscal 2022 results, we reported revenue of $2.73 million compared to $2.66 million for the same period a year ago. We were just over breakeven in the first quarter of fiscal '22 versus a $56,000 net income number in the same period a year ago. Our total cloud services revenue for the first fiscal quarter was $1.91 million compared to $1.84 million in our fiscal 2021 first quarter. Okay. So on the surface, most people might conclude that Altigen is treading water. It's probably a reasonable conclusion, strictly based on our recent quarterly revenue performance. However, taking into consideration our overall business strategy and the progress we've made toward delivering on that strategy, treading water is most definitely not the case. So let me go ahead and provide some color on that topic. Clearly, as our existing investors are aware, revenues have flattened out over the past several quarters, but that does not translate to standing still. The simple fact is that we did not release our new products in the time frames we anticipated. And as we discussed in the last call, we were simply too optimistic in our release dates, given the vast number of new products we've been developing. That issue is largely behind us now. In the coming weeks, we will be announcing a series of new products that we expect will put us on a growth trajectory. The first of these will be CoreInteract, which is an operator console application for Microsoft Teams, which is used by company operators, receptionists and departmental assistants to quickly answer and transfer calls to the appropriate individual or department. Teams doesn't have any such capability. CoreInteract -- pardon me, Core Attendant provides Altigen with 2 distinct and important advantages in the market. First, Core Attendant is the only operator council in the market able to transfer calls to departments such as sales, service, support, et cetera, because we use CoreInteract under the hood, all other products due to limitations in Teams can only transfer to individuals, not departments. Second, Core Attendant is being offered on a freemium model, which will be limited to 1 free version per company. The reason we're doing this is that the single biggest sales challenge we have is identifying which companies are using Teams Phone system. A lot of companies use Teams, but there are no published list of those using Teams Phone system. The free version of Core Attendant will -- which will be downloadable from the Teams app store will give us access to many more companies which use Teams Phone system because -- simply because those users and those people downloading the application only need the Teams operator console if they have Teams Phone system. So interestingly, this will provide us a very nice beachhead into those accounts in order for us to drive more sales, not only of Core Attendant, but also for our full suite of Teams applications. Following the release of Core Attendant, we'll also very soon be releasing our new service delivery platform, which is web portal for ordering, billing and managing all of Altigen's applications, Teams and non-Teams, our new MaxCloud UC, which is a scalable geo-redundant UCaaS platform, which replaces our legacy MaxCS PBX platform. Core Engage, which is a truly exciting end-user desktop productivity application built on CoreInteract. And finally, our new Work Group Insights, which is a real-time reporting application also built on CoreInteract, which displays key work group and individual KPIs for departmental managers and supervisors. So the release of these Phase 1 products, as we discussed in our last call, will officially mark the launch of what I'm calling the new Altigen. What I mean by that is that we initially transformed Altigen from a provider of hardware-based phone systems to software-based solutions. That strategy allowed Altigen to become a hosted PBX provider, and as a result, helped us drive new monthly recurring revenues and record -- along with that record profitability. This evolutionary strategy served us well during that phase of the company's life cycle. For the past 18 months or so, given the evolving market requirements, we've been in the process of a revolutionary transformation of the company. We're replacing our hosted PBX MaxCS solution with our next-generation geo-redundant MaxCloud UCaaS platform. We're replacing our voice-only call center product with a complete scalable omnichannel contact center solution, which integrates with both MaxCloud and Microsoft Teams. And we've also introduced and are continuing to enhance the first digital customer engagement platform for Microsoft Teams, which is CoreInteract. Collectively, our suite of Phase 1 solutions represent an unprecedented number of new products introductions for Altigen. All told, we've invested nearly 5,000 man days in the development of our new products, all of which are now on the cusp of release. I also want to point out that these solutions are being developed in support of our objective to deliver a complete suite of best-in-class integrated communication solutions, leveraging Microsoft technologies. These solutions will enable Altigen to uniquely address the 3 major communication market opportunities, which are UCaaS, CCaaS and Customer Experience as a Service. So I'll break that down a little bit. For the SMB market, which includes Altigen's legacy customer base, the primary solution they're interested is UCaaS, Unified Communications as a Service, which gives customers the ability to manage phone calls, SMS's, web chats and conduct web conferences on either their desktop or mobile device. For the first time, we'll have that with our new MaxCloud platform. For mid-market and enterprise customers, which includes Fiserv's customer base, integrated Contact Center or CCaaS, Contact Center as a Service is also an important requirement. We'll have that with FrontStage. For the mid-market enterprise customers using Teams we'll also soon be able to address their Contact Center as a Service requirements with FrontStage. In addition, since Teams is both a UCaaS and collaboration platform, there's a new emerging high-growth opportunity for an integrated digital customer engagement solution. There's nothing available today. That's where CoreInteract comes in, which allows companies to enable any employee to communicate with any customer using that customer's preferred communications channels. Anyone with a cell phone would know that means phone calls, SMS, web chats, e-mails, even video conferencing, all delivered in our customers' native Teams environment. We have that now with CoreInteract. So collectively, our new solutions enable our customers to optimize their communications capabilities in order to maximize their customers' experiences, enabling us to uniquely address the overall communications market specifically Customer Experience as a Service. Now as part of our company transformation, we have turned over more than a dozen people whose skill sets did not necessarily align with the new Altigen. On the other hand, we also added 19 new employees across all areas of the company. The net result is that 32% of our employees have joined the company in the past 16 months, all of whom are focused on the new Altigen, and this creates a lot of energy in the company. In addition, the personnel changes we've made up to this point, we are continuing to add to our development staff so that we can continue to innovate, enhance our Phase 1 products and bring exciting new products to the market. Following up on commentary from Mark Allen on our last call, we are now engaged with a very well-respected Microsoft technology consulting firm by the name of Redapt. Mark Allen and myself are very impressed with Redapt's depth and breadth of knowledge. We're about halfway through our project with them, and they've already provided us with invaluable insights and recommendations to improve our processes, delivery and global architecture design. And this will serve us well into the future. In addition, we have initiated a search for a Director of Development, who will report to our CTO, Mark Allen, and who will be responsible for managing our development team on a day-to-day basis, while Mark continues to dream up new and exciting solutions. Finally, while we've been revolutionizing the company, the past 18 months, adding new employees and developing a plethora of new products, we've done this in a fiscally responsible fashion. When I say fiscally responsible, I'm talking about cash management. Our cash position at the end of the first quarter in 2022 stood at $6.8 million, which is nearly $600,000 more than we had at the end of the same quarter a year ago. So when we look at the big picture, I think, and I hope it's clear, that we have not been treading water. Instead, what we have been doing is working hard to reinvent the company and positioning ourselves to take advantage of the tremendous market opportunities in front of us. And by the way, we've accomplished all this despite the setbacks, particularly in our SMB customer base caused by COVID. I want to change gears just a bit and discuss our business relationship with Fiserv. The first point that I want to make and I need to make is that we've had a longtime master distribution agreement in place with Fiserv, which many of you know. That agreement calls for Fiserv to license software from Altigen which includes our IVR, our Bank by Phone application, historically, our PBX and our call center solutions and then resell those solutions to Fiserv customers, and this is the critical piece, as Fiserv products. When Fiserv sells Altigen solutions to their customers, it is sold by Fiserv and is viewed by the customer as a Fiserv product. By the way, the contractual relationship is also between Fiserv and the customer. So I'm talking about all this, bringing this up because there's no surprise that Fiserv wants to control the narrative when announcing those customer wins. Now to keep our shareholders informed, we've been pushing the envelope as much as we can talking about Fiserv customer wins, but this does create some potential issues for us based on the confidentiality sections in our agreement. I just need to be very careful in how I'm communicating the Altigen wins via Fiserv. And the reason for my concern and not that we can't talk about it, but the primary reason for my concern is that the strategic nature of Altigen's partnership with Fiserv is growing. And I don't want to create a trust issue with Fiserv by announcing their customer wins. That being said, to the extent we have Fiserv's permission, we can discuss specific customer wins. If we don't, we'll just need to more generally refer to wins under the umbrella of new financial services customers. Now as I mentioned, our relationship with Fiserv is becoming increasingly more strategic. We're enhancing our IVR, our Bank by Phone application by adding both caller validation and voice biometrics to verify the identity of callers as a fraud prevention mechanism for both banks and credit unions. I've mentioned this before that the Trust ID caller validation has now been rolled out and is currently being used by a handful of Fiserv bank and credit union customers. A more exciting piece is the voice biometrics, which adds a voiceprint technology to caller validation for maximum secure access. The first customer for the voice biometric solution will be deployed next month. Now this happens to be -- this customer happens to be the credit union arm of one of the largest -- the world's largest consumer appliance companies, very visible. And this is just the beginning. Today, Fiserv has 13 different core processing platforms, these are the platforms that run the business of the bank or credit union, as a result of their historical acquisition strategy. Our solution will be integrated with all 13 platforms during the course of the year. We're starting with the largest platforms and working our way down to the smallest. Now the full solution, in addition to what I just described, consists of Altigen's SIP Trunk service, our IVR application, our UC or UCaaS platform and the contact center solution all integrated with Fiserv's bank and credit union core processing platforms. We're also very close to rolling out the new UC and contact center solutions which as a reminder, will be hosted and managed by Fiserv in their data centers. As a result, we are very close to having the most complete end-to-end secure access communications solution on the market, and it's only available from Fiserv, and it's all based on Altigen solutions. So at this time, I'll hand the call back to Carolyn to review the financials in more detail. Carolyn?

Thank you, Jerry. Total revenue for the current quarter was $2.7 million, down 2% sequentially and up 3% on a year-over-year basis. As we have discussed on our previous calls, our legacy products revenue continued to decline as we have moved away from perpetual software licenses and associated software assurance revenue in favor of a cloud-first strategy. We expect this trend to continue until we start to ramp up revenue from our new products in the coming quarters. First quarter gross margin decreased 72% compared to 74% in Q1 last year. The decrease in gross margin was again primarily driven by higher amortization costs of capitalized software and, to a lesser extent, a shift in our product mix. GAAP net income for the current quarter was breakeven compared to $56,000 or $0.00 per diluted share in the prior year quarter. On a non-GAAP basis, net income was about $300,000 or $0.01 per diluted share compared to roughly $240,000 or $0.01 per diluted share in the same quarter last year. Let's now turn to the balance sheet. We ended the quarter with $6.8 million in cash and cash equivalents, roughly flat in comparison to the preceding quarter. Working capital for the current quarter was $5.8 million, up 4% compared to the prior quarter. This concludes the financial summary. I'm now going to turn the call back to Jerry. Jerry?

Okay. Thanks, Carolyn. Now before I deliver closing comments, I do want to spend a few minutes updating you on our acquisition plans as there does appear to be some confusion regarding why we're targeting a Microsoft partner. First and foremost, the term Microsoft partner does not mean Microsoft reseller. In fact, there are many types of Microsoft partners, including independent software vendor, which is what Altigen is. Other designations include consulting partner, systems integration partner, licensing partner, training partner, service provider partner and, of course, reseller partner, this is just to name a few. So please don't jump to the conclusion or assume that Altigen is either acquiring or becoming a Microsoft reseller partner, neither is going to happen. Instead, our acquisition strategy has targeted 3 types of Microsoft partners. Number one, Microsoft ISV partners. These are companies that may have interesting technology solutions that can enhance or extend Altigen's solution set. Number two is consulting partners, organizations that understand business processes and how Microsoft technologies can be applied to improve those processes. And number three, system integration partners who can both build and integrate Microsoft applications with Altigen solutions and enterprise business systems. Based on our current and planned product portfolio, along with our focus on mid-market and enterprise customers for those solutions, we determined that the consulting and/or systems integration partner is a top priority. The delivery of enterprise software must be accompanied by enterprise services. And I'm talking about consulting services, deployment services and integration services with that enterprise's internal business systems. Every successful enterprise software company, bar none, has a services team responsible for delivering not just software but a complete business solution. Microsoft themselves are a case in point. While they're probably generally considered as a software company, they still recorded $6 billion in services, not million, billion dollars in services and services revenue their last fiscal year, and they have partners to deliver services. A bit closer to home is a recent CoreInteract customer who has deployed about 10 CoreInteract users today with plans to grow that number to hundreds of users. They also had a requirement to integrate with their CRM system, which resulted in a services engagement of $50,000. Fortunately, in this case, Altigen had the internal expertise to perform those services in-house. But the reason for me bringing this up, had we not been able to deliver those services, we would not have won the CoreInteract business. This example demonstrates the fact that enterprise services is not an important component for success, is a critical component for success. In our case, we have identified a short list of Microsoft partners. We're well-versed in Microsoft technologies that we deal with and we're capable of delivering enterprise services around Altigen solutions. Our objective is not to focus on services revenue, but far more importantly, to accelerate sales of Altigen's cloud software due to our ability to deliver a complete enterprise solution. Now hopefully, that adds some clarity to our acquisition strategy. By the way, we're continuing to negotiate with these couple of organizations, and we do hope to be able to conclude a transaction sometime this quarter. Also provide a brief update on our planned Investor Day virtual conference. We were initially planning to conduct the conference this week or the following week. However, due to a few logistical issues, we need to move that back a couple of weeks. The biggest issue is synchronizing schedules with our keynote -- our planned keynote speakers, which will include a representative from Microsoft, a representative from Fiserv and an industry consultant that will, I think, provide much better color for our shareholders and prospective investors of what's going on in this industry and why Altigen has such a great opportunity. By the way, I also want to make sure by the time we have our investor conference that all the Phase 1 products are released. So we can focus on the business opportunities with those solutions and not talk about planned product release schedules. So I'm targeting the third or fourth week of February to hold that conference, and we will issue a press release as soon as we have the date nailed down. And finally, although we are a bit later in the market than we had hoped to be, I can assure you the market opportunity is still wide open. In fact, a few years ago, a very well-respected investor and Altigen shareholder asked the question on our earnings call of me as we were going through our first transformation from hardware to software to cloud. The question was, what inning are you in? Now I would like to answer that question now as it relates to the new Altigen. And the answer is the game has just started. We're in the top of the first. Altigen is the home team, and we're getting ready to come up to bat. So with that, I'm going to turn the call back to the operator to answer any questions you may have. Operator?

[Operator Instructions] Your first question is coming from Neil Cataldi from Blueprint Capital Management.

It seems a safe assumption, given the color you just provided on the Investor Day that you expect all of the products you've referenced to launch in February. Is that reasonable?

Yes. Yes, Neil, it's correct.

Okay. And can you -- on past calls, you provided a little insight on the pipeline. I don't know if there's any updates there, but can you maybe add a little color on the demand side of the equation, perhaps trying to address how fast you can capture some of that pipeline once these products are launched in February?

Absolutely. And you know my view on that is not that I don't want to provide that. It's just that there is not necessarily a linear relationship between the number of resellers we have and let's say, the deals they have in the pipeline and what that might mean for revenue, but I understand it's important as a shareholder metric. But let me just give you a quick example before I talk about that. We have customers in our pipeline, through resellers or direct, as small as 20, 30 users. I have them as large as 90,000 users, right? So if I just sort of give the customer, it doesn't really tell a good picture. But yes, we are continuing to grow our partner channel. Partners are signing -- continuing to sign on. They're piloting our software. We have customer pilots going on across the board, right? It's not just one product. So those things are moving forward. It's just the -- it's the 80-20 rule. And so I can't tell you which 20% of the partners we have on board are going to generate that 80% of the revenue. I mean that's -- no company can. It's the same for any of us in this business, but I can quite assure you that, yes, demand is continuing to build.

Okay. Maybe I'll rephrase it just a little bit. What do you -- how do you think about sales cycle? Are we talking about maybe weeks to get some initial bookings? Or are we talking about months?

Yes. I mean, in our business, Neil, it's -- sometimes it's quicker than others. I think I can still rattle off that I've done for the last 30 years in the software business, it's about 6 months, and it depends where you come into that customer sales cycle. Sometimes it's sooner, sometimes it's longer. But -- and it depends who you have as well. We have some very interesting resellers that are going to be sort of rolling up our solutions in their service delivery offering. There will be 0 sales cycle. It just comes with the solution. But if we're going to have to go through and find a partner or find a customer and they have a project and they're going to evaluate competitors, we can look at 6 months, but this has been going on. We're not starting tomorrow. We've already been showcasing our products, right? So we do have a pipeline that I've been talking about built up.

Yes. You've referenced on past calls over the past 6 months that there's been upwards of 100 opportunities. So that it's fair to say that, that pipeline has been baking for a little while?

Yes. And again, these are -- most of them have come through partners and at various stages of qualification, I have to say that. So I wish I could say that they were all 6 months, and they're ready to sign tomorrow. That's one of the challenges we go through a reseller partner, maybe they're not as qualified as I would like to qualify them, but we get access to opportunities that we otherwise wouldn't. But yes, I can say that both the number of resellers that we have signed and the number of opportunities we have in the pipeline continues to grow.

Your next question is coming from Vipul Patel.

I have a couple of questions. First question is regarding cash on balance sheet. I understand that the company is looking for acquisition, but considering that -- and if management is thinking that shares are available at a better price, are you considering buyback?

Well, at the moment, we are looking to use the cash for -- I think we can put it to better use with an acquisition. For example, if I took -- I'll just pick a number, $3 million of cash and bought back shares and reduced our share count by 12%, for example, I think we'll get a far better return, taking that $3 million for the types of Microsoft partners we're looking for to give you guys and myself as a shareholder, a much better return than 12%. So that's our game plan at the moment. As we continue to build cash and we don't see share performance there, and we don't have acquisitions, yes, that's -- certainly a buyback is not out of the question. I just think we can use our cash more prudently and to better value for our shareholders.

Second question is related to in the last couple of calls, I think you also agreed that we missed a deadline on a couple of times, Phase 1 as well as like CoreInteract missed deadlines a couple of times. So what are the learnings that team had in the future? Like what or are the steps you're planning to implement in the future, so it doesn't happen?

Yes, that's a good question. And it's -- I'll try to give maybe not so technical an answer, it sounds like you could probably understand that, but I'll try to give more of a layperson's answer. Part of the process is why we hired Redapt, and you guys take a look at their website, R-E-D-A-P-T, they are really good. And they've helped us a lot just in terms of processes across the board. In addition, what we've done, we've got Mark Allen, who is a brilliant CTO. It is not a day-to-day management. It's not a skill set. This is why we're bringing in a day-to-day manager as Director of Development to crack the whip on our developers and make sure that the dates we have, the dates we commit to are the dates we deliver on. Those are the two primary things. I think we've done a little bit better job of synchronizing our engineering organization with our quality assurance organization as well. So we don't have so much delay gap between turning something from development over to QA and back again. And so I think the combination of those 3 things, we've definitely tightened things up from -- I was not happy, as most of you probably know, on our last call as we hadn't tightened them up. I think we've made some great strides in that regard. And are we there yet? Probably not quite, but we're a heck of a lot closer, and I think these additional measures we're taking will get us where we need to be.

Okay. And my last question is related to you mentioned that developer trends are doubled in Nepal in the last 6 months. So can you just throw some light on like when will productivity starts? And what stage the team is in?

Well, at the stage, they're working on multiple products. Most of the products I talked about, they're working on. So we've sort of, I would say, separated the teams or segregated the teams, right, to work on specific product areas. Before everybody was kind of working on everything. We had a very small team. We had 6 people when we acquired Blue Panda and we acquired the Nepal team, we have 15 there now. Okay? So yes, more than doubled. But because of that, now we -- let's say, the cream has risen to the top. We know who our top people are, and they do now have specific product priorities. And -- but each one is slightly different, right, depending on the time frame that those solutions will come out. I don't know if that answered your question or if I need to clarify for you.

Sure. And like when do we -- when does management see that all of the great work management and team is doing will start flowing through the revenues, top line and bottom line?

Sure. The important part, yes. When are we going to start seeing revenues. Well, what I can tell you is, this quarter, we'll start seeing bookings, okay? But you guys know, I think everyone is aware how the SaaS business works, right? It's monthly for users. So it takes a little time to ramp that business up, but we're going to start our bookings. And the way it works, right, is yes, I expect it every quarter, every I don't know if every month, some months are better than others. Every quarter, we will ramp our SaaS revenue, and we're going to start to get to the point. Initially, yes, it's probably not going to be significant, right? First quarter or 2, probably not. We're not going to set the world on fire, just because it takes a while to build it up. Over time, we'll start seeing a significant contribution. And by the way, I mentioned we do have a few more development folks to hire. We're not going to greatly increase our expenses. In fact, our expenses will be lower than last year. So we're going to see much better financial results, not only in top line but also in net income as that kicks in. It's really hard for me to say. These are all version 1 products. They've never been sold before and many of them don't even have any competition. So that's why it's a little bit hard to assess exactly how many license we can generate when. But we'll certainly, once we start those bookings, we can give you guys those metrics and we can start tracking the uptick.

[Operator Instructions] There are no further questions in the queue. I will now hand the conference back to our host for closing remarks. Please go ahead.

Okay. Well, I will -- although Carolyn hosted, I'm going to go ahead and take over here guys, and Carolyn is quite under the weather. So I appreciate you stepping up, Carolyn. But yes, thank you, everybody, for joining. We appreciate your participation and look forward to providing even more detail on our Investor Day and, of course, at our next quarterly earnings call. Thank you very much.

Thank you, everyone.