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

Good afternoon, ladies and gentlemen, and welcome to the Altigen Communications Second Quarter Fiscal Year 2022 Results Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host Carolyn David, Vice President of Finance. Carolyn, the floor is yours.

Thank you, operator. Hello, everyone, and welcome to Altigen Communications Earnings Call for the Second Quarter Fiscal 2022. Joining me on the call today is Jerry Fleming, President and Chief Executive Officer; Ryan Day, our new Chief Strategy Officer; Trent Rowley, Altigen's new 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 March 31, 2022. 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 matrix. 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 tape 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 the 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 OTC, 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 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. So we have quite a few updates for you today, and we'll begin with a brief summary of our numbers for our fiscal second quarter. Carolyn will then return a little bit later in the call to review the financials in detail after commentary from Ryan and Trent. For our fiscal 2022 second quarter, we reported revenue of $2.5 million, down about 5%, which was not totally unexpected compared to the year ago period. Now despite the top line performance, our non-GAAP net income increased 43% and our adjusted EBITDA was up 44%. Our total cloud service revenue for the second fiscal quarter increased by 1.3% compared to the same period a year ago. I can succinctly describe the revenue during the quarter, top line revenue during the quarter is more of the same. However, as we discussed during our Investor Day presentation on March 8, that is about to change. We finally started to roll out many of our new UCaaS Customer Experience as a Service and CCaaS products. As a result, while we're still in the early days because these products are sold on a monthly recurring Software-as-a-Service basis, it will take a few quarters for those products to ramp up and start contributing meaningful revenue streams. But we are now finding in the position in which we can start building upon our existing revenues. So I'll take a few [indiscernible] those products and their current status. And the first is CoreInteract. The latest version of CoreInteract contains much of the functionality that customers are requesting. And actually, when we introduced it, they wanted more functionality, even though they said most of what they wanted, they wanted more functionality versus the initial product that we introduced. And strangely enough, they're willing to pay more for that functionality. So as a result, we had to more or less fast-track 2 additional applications to meet those requirements that I'll briefly describe. The first is Workgroup Insights, which is a real-time reporting application built on top of CoreInteract. Now Workgroup Insights is a unique enterprise application that is placed key work group and individual KPIs for managers and supervisors. This is particularly useful for the large companies we're targeting with distributed workforces, since it provides the business managers with a real-time view of their employees' activity and performance, regardless if they're in the office or working from home. Now the second application we introduced was CoreEngage. And this is a truly exciting and one-of-a-kind end-user desktop productivity application, which is also built on CoreInteract. CoreEngage presents users with a 360-degree view of their customers, which includes all customer interaction activity in a single consolidated view. This includes things such as phone calls, voice mails, instant messages, e-mails, any interaction with that customer will be displayed in that single view. CoreInteract -- CoreEngage, I'm sorry, further integrates with the company's back end systems such as CRM, customer service systems, order management systems and the like and presents just the relevant data a user needs to see when a customer contacts them in order to best serve that customer. CoreEngage is really the cornerstone application for our strategy of taking the contact center to the enterprise. As such, the CoreInteract application suite, which includes CoreInteract, CoreEngage, Workgroup Insights, the CoreInteract application suite both improves the company's customer engagement capabilities and increases employee productivity at a fraction of the cost of today's contact center solutions. Another new unique product is Core Attendant. This is an operator console for Microsoft Teams, which enables company operators and receptionists to quickly answer and transfer phone calls to an individual or a department. I mean that's not in sighting, but Microsoft does not have an operator console for Teams and pretty much every company needs at least one operator console in their business. So this is a great opportunity for us to offer Core Attendant on our freemium model. In this case, we offer the first instance for free and then charge for additional instances to generate revenue on that side. But we're doing this because there is no published list of companies that have deployed Microsoft Teams phone system, so it's very resource-intensive to try to build such a list. By offering one copy free of Core Attendant via downloads in the Microsoft Team store, we can quickly identify those companies using Teams phone system, and then target those companies with our additional applications and services. Moving to the contact center. We are somewhat at this point in the FrontStage Omni-Channel Contact Center for Microsoft Teams is still in customer previous stage. There have been enough number of hands free requests from our customers that need to be incorporated into the FrontStage product, so it will likely be next quarter when those are completed, and we can truly start taking customer orders. The good news is that the version of FrontStage for our MaxCloud UCaaS solution is ready to go and customer pilot lists are in process now that our new MaxCloud UC app is going through the customer acceptance testing. We do expect to launch the full MaxCloud UC platform with the FrontStage Contact Center over the next month. I'll also provide a brief update on the status of our FinTech solutions. So our full suite of solutions consists of Altigen's SIP Trunk service that now includes both caller verification and voice biometrics for secure account access, also includes our interactive voice response or Bank by Phone application, our new MaxCloud UCaaS platform and the FrontStage Omni-Channel CcaaS solution, all integrated into Pfizer's bank and credit union for processing platforms. As I briefly mentioned, most of these solutions are now in the customer pilot phase and revenues will be kicking in as soon as Pfizer begins to roll these products out. I'll now turn to a topic that I'm sure is in the minds of everyone and that is our acquisition of ZAACT Consulting. To briefly recap, last year, we engaged an M&A firm specializing in the technology sector to identify Microsoft systems integration partner having deep expertise in the Microsoft technology stack, and specifically Microsoft Azure and Microsoft Teams. We weren't that interested in [indiscernible]. It was important to find a systems integration organization which had the technical skill sets required by enterprise customers at an enterprise customer base, and were a profitable growing company. ZAACT Consulting was the only company to meet these expansion requirements. We had many, many meetings with the ZAACT executive team as we work through the potential combination, the synergies between our 2 companies became crystal clear, essentially addressing, in which case, our companies essentially address the same types of business challenges, ZAACT from a custom development and services perspective, Altigen from a software perspective and all focused on Microsoft Azure and Microsoft Teams. As a result of the [indiscernible] along with our own product development efforts, we now uniquely have world-class solutions and services, which leverage Microsoft Teams and Azure. Clearly, the Teams is an important platform for us to focus on due to the tremendous growth that it has seen, and it will continue to experience. Azure is equally important, not only because all of our Teams customers rely on Azure cloud services, but also because we can support an Azure deployment anywhere in the world. In fact, our development and support teams are not only in the U.S., but also in the U.K., Taiwan and Nepal. So we have support operations around the globe, which is really quite uncommon for a company of our size. Many of you are also aware that Altigen has historically, outside of Pfizer, largely focused on the SMB market. This is only because we did not have solutions suitable for enterprise customers. It has been our objective for some time to move up to the enterprise space, and now we have the solutions and service capabilities enabling us to do so. I should also point out that most of the Altigen people and all of the ZAACT people come from enterprise backgrounds. So we are well versed with what takes to sell, service and support enterprise customers in the combination of Altigen and ZAACT as is well positioned to become a leading provider of teams, solutions and devices. Now at this time, I'd like to turn the call over to Ryan Day, Founder and CEO of ZAACT Consulting; and now Altigen's Chief Strategy Officer. Ryan?

Thank you, Jerry, and good afternoon, everyone. It's certainly my pleasure to join the call today. I'd like to spend a few minutes talking about my perspective on Altigen acquiring ZAACT Consulting, as has been noted on several occasions. I was not looking for a company to acquire ZAACT. Altigen really impressed me with the type of business it was and I thought there was a great fit for our existing employee base from a culture and focus perspective. After several discussions with the executive team at Altigen and doing some research on my own, I decided to move forward with the transaction. Jerry and his team's understanding of the communications side of Microsoft and their firm grasp on where the future of Microsoft is headed, which, in my opinion, is Teams, was a very attractive proposition, and they've been very accommodating to ensure that our team feels comfortable and that we fit in with the existing organization. Now that we have fully closed and acquired, it's time to roll up our sleeves and get to work on the integration. We are one company that can use all the information, connections, experience and abilities to move us all forward at an accelerated pace. As Chief Strategy Officer, my goals are to focus on our partnership with Microsoft and to help us work with large key clients. With Microsoft, realize that we not only need to be acquired with the Microsoft Teams in the field, but we need to have some significant insights and relationships with leaders in Redmond and other areas. These relationships and ensuring that we are in lockstep with Microsoft is what I have been tasked to do at Altigen. I'm currently meeting with local Microsoft contacts looking for introductions and advice on how to grow our partnership. I've also found that many Altigen employees have great relationships with Microsoft, and I plan on tapping into that to help our cause. One of the items we want to work on quickly is to become a managed partner with Microsoft, something that ZAACT Has experienced doing. To us, this is a step which is done to become a larger, bigger player with Microsoft and all we need to do. As far as working with key clients, we have found great success in helping large enterprise customers utilize ZAACT's consulting depth to leverage Microsoft products for internal business process automation. When we combine this with Altigen's teams products, we feel like we can be a very strategic company, working with in both areas of the clients. Already, we have had several combined demos with existing clients and there have been significant interest in learning and engaging more with the combined offerings. Now I'd like to introduce Trent Rowley, ZAACT's President and COO, and Altigen's new Chief Operating Officer. Trent?

Thanks, Ryan, and hello, everyone. I'm excited to be on the call today and to thank everyone's acquaintance. My excitement for being here centers mostly around the main ideas that Jerry and Ryan have presented thus far, specifically, the combined opportunities we can now bring to clients and our collective employee base that will drive shareholder value. Over the years, ZAACT has been successful at tackling technical business systems projects for large clients centered mostly around Microsoft technologies and in optimizing our customer revenue and profit. However, we've not had our own product portfolio to complement our custom development and to offer an alternative delivery model to our clients that will generate reoccurring revenue for our company. Conversely, Altigen has a highly successful recurring revenue-based product offering which has served clients focused on a specific need, but they have lacked the customization capabilities that ZAACT brings to the table. Today, and together, we will be able to maximize per customer revenue and profit potential, bring a higher level of service to our customers, provide a desirable company for current and potential employees and an attractive opportunity for investors. As the President and COO of ZAACT, I focused on driving company efficiency to ensure a competitive and desirable offering in the marketplace to maximize company value and stability and to ensure our ability to hire and retain top talent in a competitive employment market. As the Chief Operating Officer of Altigen, my focus will be similar with an initial efforts being focused on the following: integrating the 2 company systems, people and processes; keeping the best and essential parts of both companies and ensuring current activities continue successfully. This includes identifying and improving areas of inefficiency and/or ambiguity to drive more revenue per employee, to better our ability to exceed customer expectations and to allow for the information to drive management decisions. If we execute on this successfully, we can drive company growth and profitability by setting definable, reachable and measurable contribution targets across the company, and provide employees to support to succeed while holding them accountable to these targets. Ultimately, my efforts are designed to increase shareholder value by ensuring Altigen delivers sustainable growth and profits. Thank you for your time today. Now I'll turn the time back over to Carolyn David, Altigen's VP of Finance. Carolyn?

Thank you, Trent. Total revenue for the quarter was $2.5 million, down approximately 5% on a year-over-year basis. This decline in total revenue was driven primarily by a decrease of roughly 26% in our legacy products revenue. Legacy products are primarily comprised of perpetual software licenses and software assurance revenue. As discussed on our previous calls, we expect this trend to continue until we start to ramp revenue from our new product lines in the coming quarters. Gross margin was 70% compared to 73% in Q2 last year, representing a decrease of approximately 300 basis points. The decrease in gross margin was primarily driven by higher amortization costs for capitalized software and a shift in our product mix. GAAP net income and EPS for the current quarter was $65,000 and breakeven compared to GAAP net loss of $336,000 or negative $0.01 per diluted share in the prior year quarter. On a non-GAAP basis, net income increased 43% to $300,000 or $0.01 per diluted share, and adjusted EBITDA increased 43.7% to roughly $300,000. Turning to the balance sheet. We continue to generate cash this quarter. We ended the quarter with $7.2 million in cash and cash equivalents, up 6% compared to the preceding quarter. Working capital was $6.1 million compared to $5.8 million in the prior year quarter, representing an increase of approximately 4%. This concludes the financial review summary. I will now turn the call back over to Jerry. Jerry?

Thank you, Carolyn. And I guess I have 2 messages I'd like to make sure I impart today. 1, we finally have a very significant number of new solutions that are finally coming to fruition, all focus on the enterprise market. And #2, those new products, combined with our new enterprise services capability with ZAACT puts us in a great position to start really gaining traction in the market. And stay tuned on future earnings calls where we can update you further. So at this point, I'm going to turn the call back to the operator for questions. Operator?

[Operator Instructions] And your first question today is coming from Neil Cataldi.

Great to see the products finally out the door in March. Can you talk a little bit about the pipeline today? What is the early response been? And maybe what are the range of opportunities you're seeing in terms of fees?

Yes. Thanks for the question, Neil, and thanks for joining. That's a good question. I'm going to really focus on CoreInteract. CoreInteract, as I mentioned, is the cornerstone of our growth strategy. And as you know, that's a fairly new product with the new applications. So we have right now in our pipeline for CoreInteract, and I'll just, round it off to around 30 customer opportunities that are -- when I say opportunities, these are customers evaluating our product, moving to a pilot phase, moving to some sort of a proof of concept, but in some sort of evaluation process. The total seats represented by those customers is in excess of 4,500. So -- now can I give you a forecast and say how many are we going to close, how quickly they're going to close? No. But I think this certainly signifies the, let's say, the reception in the market we're getting with CoreInteract, there's nothing else like it, there's nothing like CoreEngage. And I think it will serve as a good benchmark, right, for future revenues to come.

All right. I know you've talked in the past about some of these opportunities being, I don't know, a small is like 100 seats, but as large as several thousand seats. You mentioned 30 opportunities, 4,500 seats. Is there a bit of a like land-and-expand dynamic here? How should we think about the seat number you gave? And what we may see from you starting to get engagement with some of these entities?

That's a good question. Some of these companies are, let's say, small and midsized companies, 200, 300 employees, something like that, and some are over 5,000, 10,000, 20,000 employees. And so yes, so the numbers I gave is a fairly broad range. Now for those very large companies, I've given you sort of the early forecast because we do expect to have a land and expand and hard to say right now, Neil, I've given some numbers on prior calls and Investor Days. I think that anybody using a CRM product in one of these companies is a target for us. And that's lots and lots of users in excess typically a 20% of the employees. Now can we hit that? We're going to find out, but I think that's the realistic potential when we look at a total number of employees on our total opportunity, but we've got to improve our ROI first and work it out from there.

Okay. 30 opportunities, have you guys had any bookings yet? And if so, can you maybe quantify what you expect the sales cycle to look like and what the number of bookings have been?

I'll have to defer to Carolyn on bookings. I know it's probably some small bookings at this point where most of the people are proof of concept because they've been waiting for the CoreEngage and work with Insights applications. So it's probably not -- if there is much, it's not much, which is why I don't know what it is or else it would now. But -- I'm sorry, what was the second part of your question on that one, Neil?

The second part was how long do you expect the sales cycle to be? You've got 30 opportunities moving into pilot proof of concept, how long might that pilot phase need to be?

Sure. And that's kind of a tricky question because it really depends on where you catch the customer in the sales cycle and some don't do anything. So I don't know how to calculate that number. But normally, what we'd expect to see with the CoreInteract is, if there's really an active project, not to exceed 90 days, start to finish. Now some can be a lot quicker. It's kind of tough to do faster than 30 days just because there's a corporate paperwork. But -- so I think you could say 60, but I'd be more comfortable saying as probably 90 is a little safer number.

Okay. So minimal bookings thus far, which isn't a surprise, the product launched in March, but you're seeing great traction. And it sounds like it's fair to say that when you report next you'll probably be able to talk in much greater detail about the bookings behavior in the current quarter. Is that fair?

I think so. Yes, it is fair. And just maybe provide a little more color. So we're coming out at the base CoreInteract product is $15 a user. It's an additional $15 per CoreEngage, that's for voice. In the next phase, and you've heard Mark Allen give us Phase 1, 2 and 3, we get to the next phase, we'll be adding SMS and e-mail and some other capabilities in. Those are all $15 as well per user. So we're going to be at this range somewhere between the very base license of $15 up to probably a whole bundle of around $60 or $75, depending how deep somebody goes in. So what we'll see over time is not only increased number of users, but we should also see ARPU going up. So early on, they don't start with the base stuff. We only have 2 licenses out right now. But over time, that we're going to be able to grow it both ways. So I think at least will be an indicator of how we're doing at the end of this quarter when we can report some numbers for you guys.

Okay. And then 1 quick question about ZAACT and their customer base. What is the opportunity or what might the opportunity be with the companies there already working with? Can you tell us anything about those companies or the profile of them? And is that something that may be some, I don't know, low-hanging fruit for you guys?

I can. I'm going to defer either Trent or Ryan. I do know the answer to that, but I'm going to refer to the experts here because they have been involved with the introductions of Altigen to some of their larger customers, and I think they can probably give you a better picture. Trent or Ryan if you guys could jump in on that one?

Sure. I can jump in.

Do you want me to take that?

Yes, no problem at all. So generally speaking, we work with an enterprise level, midsized to enterprise-level clients. We've actually already introduced Altigen into a very large nonprofit agency. We've introduced them into one of the largest credit unions in the country and then as well as some of our other clients. So that process of integration is already happening as far as the clientele that we have currently. I don't know if we want to go into any more detail than that. I will say that our client base, because we do focus on the larger clients, it's not as many clients, but each client has the potential of larger and more complex projects and needs.

And there are no further questions in queue at this time. I'd like to pass the floor back to management for closing remarks.

Okay. Well, I'd like to thank everyone for joining our call. And it was a busy week this week to some folks at investor conferences, so we certainly appreciate your participation, and we look forward to updating you on our next quarterly call. Thank you very much.

Thank you, everyone.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.