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Edited Transcript of ATGN earnings conference call or presentation 24-Jul-19 9:00pm GMT

Q3 2019 Altigen Communications Inc Earnings Call

SAN JOSE Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Altigen Communications Inc earnings conference call or presentation Wednesday, July 24, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carolyn David

Altigen Communications, Inc. - VP of Finance & IR Officer

* Jeremiah J. Fleming

Altigen Communications, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Arham Khan;Eden Capital;Analyst

* Ian Cassel

MicroCapClub LLC - Founder

* Maj Soueidan;GeoInvesting;Co-Founder

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to your Altigen Communications, Inc. Third Quarter Fiscal Year 2019 Results Conference Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to Ms. Carolyn David, VP of Finance. Ma'am, the floor is yours.

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Carolyn David, Altigen Communications, Inc. - VP of Finance & IR Officer [2]

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Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us today for Altigen Communications Conference Call for the Third Quarter Fiscal 2019.

On today's call will be Jerry Fleming, President and Chief Executive Officer; and I'm Carolyn David, VP of Finance. Earlier this afternoon, Altigen issued a news release reporting financial results for its fiscal 2019 third quarter ended June 30, 2019. This release can be accessed from the Investors Relations section of Altigen's 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 at Altigen's website.

As usual, before I commence the review, I would remind all participants that today's call may contain forward-looking information regarding future events and future financial performance of the company. We wish to caution you that such statements are just predictions and actual results may differ materially due to certain risks and uncertainties that 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, 2018, 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.

I would also like to note that during this call, we will provide financial information that has not been prepared in accordance with generally accepted accounting principles in addition to our GAAP results. Management uses these non-GAAP financial measures internally to analyze our financial results and believe they are useful to investors as a supplement to GAAP measures in evaluating the company's ongoing operational performance. Please refer to today's press release for a reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures.

Now it's my pleasure to turn the call over to Jerry Fleming, President and CEO of Altigen. Jerry?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [3]

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Thank you, Carolyn, and good afternoon, everyone. Thanks for joining us for today's call. Earlier this afternoon, we reported our fiscal 2019 third quarter results. Revenue for the third quarter was $2.7 million compared to $2.5 million in the previous quarter and $2.6 million in the same period a year ago. GAAP net income for the quarter was $612,000 compared to $403,000 in the previous quarter and compared to $92,000 for the same quarter prior year.

At this time, I'll also provide some additional details regarding the composition of our revenues based on the following revenue categories, which are onetime revenue, annual recurring revenue and monthly recurring revenue. So I'll start with our primary objective, which is monthly recurring revenue, which consists of monthly subscriber revenue from the Altigen-hosted PBX, our hosted Skype for Business platform and Microsoft Teams, along with our SIP telephony services, which operate across all 3 platforms.

So total monthly recurring revenue for the third fiscal quarter was $1.6 million versus $1.5 million the previous quarter and $1.3 million in the same period a year ago. Now to-date, the majority of our monthly recurring revenue has been based on our hosted IP-PBX or phone system solution, which we call MaxCS and which is delivered as a monthly service. We're also able to add value to -- with our applications to Microsoft solutions, mainly Skype for Business and Microsoft Teams. Now at this point to add some clarity, I'll recap Altigen's unique business model. So the short description is that Altigen delivers Microsoft-centric unified communications as a service solutions to businesses, primarily based in United States. Now if I eliminate the industry speak, that means Altigen host business phone systems in our cloud. And instead of a customer having to pay tens of thousands of dollars up front for their business phone system, they simply pay us on a per user per month basis, which means no capital expenditures and a predictable monthly operations expense.

Now in addition to providing the hosted business phone system, we offer additional capabilities such as web chat, mobile phone integration and contact center applications. So collectively, with the phone system, these capabilities are referred to as unified communications. So we deliver a complete solution and by implementing unified communications for companies, we're able to help them improve their customer engagement activities, we can increase their employee productivity, and we generally lower their overall communications costs. So we're able to deliver all of these capabilities with our own PBX, but we're also able, as the Microsoft partner, to leverage our unified communications applications and SIP Trunk services to add value to Skype for Business and Microsoft Teams Phone Systems.

Now I get a lot of questions about the differences, so I do want to clarify, what is the difference between Microsoft Skype for Business and Microsoft Teams Phone System? Skype for Business, I think there was a few earlier versions of Skype for Business, has been Microsoft's flagship unified communications solution for the past 10 years and was primarily deployed at the customer's business location, which we call on-premises.

Microsoft Teams, which has been released more recently, is part of Office 365 and includes the Skype for Business online capabilities. That's only available for Microsoft as a hosted solution, not deployed on-premise. And according to Microsoft, Teams is the fastest-growing application in the history of Microsoft and now boasts more than $13 million active daily users. And for those of you who are familiar with Slack, that's more users than Slack claims. Microsoft has a real leg up because Teams is part of Office 365, and Microsoft has announced that they have more than 160 million commercial Office 365 users, which means 147 million of those users have yet to deploy Teams. So we expect the number of Teams' user to continue to grow rapidly.

Now what does that mean for Altigen? So with regard to the Microsoft opportunity, our opportunity is twofold. For companies not yet ready to migrate to Microsoft Teams, we offer Hosted Skype for Business, along with our integrated call routing and contact center applications or unified communications applications, plus our SIP Trunk services, which are SIP telephony services, the phone service. For companies who have decided to make the transition to Teams, we can offer those same set of applications, call routing, contact center unified communications applications and as of yesterday, we now also offer our SIP Trunk services for Microsoft Teams Phone System. So regardless of which way a customer wants to go, whether it's the Altigen PBX, Skype for Business or Teams, we can deliver a very similar solution set with all of our capabilities and therefore, be quite competitive in the marketplace.

Now following up on my comment about as of yesterday with Microsoft Teams Phone System, many of you may have seen our press release, announcing our new direct routing SIP service for Microsoft Teams. And I just want to explain that for a moment. So direct routing is a Microsoft designation for SIP phone service, which has been certified by Microsoft to directly connect Teams Phone System. So in other words, just anybody can't do it. It needs to be a certified Microsoft solution. Now with the launch of our direct routing SIP service, we can deliver our SIP Trunk services to any organization which has deployed Microsoft Teams Phone System. So this not only provided us an opportunity to grow our SIP services business, it also enables us to upsell our integrated routing, contact center and unified communications solutions to those customers that have deployed our SIP service. It would establish a, say, nice beachhead for us in addition to generating SIP services revenue.

So just to summarize, and I'm certainly happy to take questions later, as Microsoft continues to migrate customers to Teams and Teams Phone System, Altigen will be increasingly able to target these customers with our direct routing service and unified communication applications.

Now it also -- I briefly mentioned Fiserv in previous calls. Fiserv's an $18 million financial services company, which sells Altigen unified communication solutions to their customers on a white-label basis. With Fiserv, what we've done is integrate our unified communications applications to Fiserv's, what they call, core banking and credit union software applications, which enables Fiserv to offer one-stop shopping to their bank and credit union customers, addressing both their business and their communications needs.

Now turning to our legacy business, which has been historically focused on onetime product sales in annual software assurance contracts, we do expect that business to continue on a path of slow decline due to customers' preferences to migrate to the cloud. For example, in the third quarter of this year, fiscal 2019, we recorded just under $1 million in product and software assurance revenue compared to $1.3 million in the same period a year ago. Now this is to be expected as we push our customers to the cloud, we're going to get less on-premises revenue. And our objective remains to convert as many of these customers as possible to the cloud, and we'll replace those onetime and annual recurring revenues with much more financially lucrative, cloud-based monthly recurring revenues. One additional point I'd like to make is that our service revenue has also historically been based on a onetime revenue model, consisting primarily of custom software development. We do the development, customer pays us. We're also looking to grow our services revenue on a monthly recurring revenue model. Along these lines, last quarter, we introduced a new service and support program in which customers can pay a monthly recurring support fee for our MaxCS IP PBX for Skype for Business or for Teams, whichever they choose to deploy. So now as our cloud deployments continue to grow, we also expect to see growth in monthly recurring services revenues associated with those support contracts.

Now before I turn the call back to Carolyn, I want to mention 2 additional events that occurred during our fiscal third quarter, and I get lots of questions on these. So first, Altigen's longtime shareholder rights plan, which essentially was -- you can refer to as a poison pill, prohibited individual institution ownership of more than 15% of Altigen shares. That expired this past May. So this opens the door for our larger shareholders to increase their ownership of Altigen's stock without any fear of reprisal, shall we say.

Second, last month, we extended our Fiserv reseller agreement, which is scheduled to renew this August, to include Altigen's deployment and support services, which will now be sold by Fiserv on a white-label basis.

So all that being said, our total recurring revenue as of the end of this past quarter, now stands at 86% of overall revenues as we continue to target 100% recurring revenues in our business model.

And now with that, I'll turn the call over to Carolyn for her to review the financials in more detail. Carolyn?

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Carolyn David, Altigen Communications, Inc. - VP of Finance & IR Officer [4]

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Thank you, Jerry. Total revenue for the third quarter was $2.7 million, up 4% from $2.5 million in the preceding quarter and compared to $2.6 million in the same period a year ago, an increase of 4% year-over-year.

Our cloud revenue for the quarter was $1.6 million, up 3% from $1.5 million in the previous quarter and compared to $1.3 million in the same period a year ago, representing an increase of $335,000 or 20% -- 27% year-over-year. Product and services revenue for the third quarter 2019 was $365,000 compared to $296,000 in the previous quarter and compared to $529,000 in the prior year quarter. Software assurance revenue for the quarter was $693,000 compared to $702,000 in the preceding quarter and compared to $768,000 in the comparable period last year.

Turning to margins. Third quarter gross margin was 80.6% compared to 81.7% in the preceding quarter and compared to 83.9% in the comparable period last year. The decrease in gross margin was primarily due to a shift in our product mix. GAAP operating expenses for the quarter totaled $1.6 million compared with $1.7 million in the preceding quarter and compared to $2 million in the comparable period last year.

On a non-GAAP basis, operating expenses for this quarter totaled $1.5 million compared to $1.6 million in the preceding quarter and compared to $1.7 million in the prior year quarter. The year-over-year expense decrease was primarily due to reduced litigation-related costs. For additional information, please refer to the company's filings with the OTC market, including the company's most recent quarterly report filed on May 20, 2019.

Net income on a GAAP basis was $612,000 or $0.02 per diluted share versus $403,000 or $0.02 per diluted share in the preceding quarter and $92,000 or $0.00 per diluted share in the comparable period last year. Non-GAAP net income for this quarter was $662,000 or $0.03 per diluted share compared with $440,000 or $0.02 per diluted share in the previous quarter and compared with $458,000 or $0.02 per diluted share in the same quarter of last year.

Moving to the balance sheet. We ended the quarter with $4.6 million in cash, cash equivalents and restricted cash compared to $4.7 million at the end of the preceding quarter. Working capital was $3.4 million compared to $2.9 million at the end of the preceding quarter, representing a 14% increase.

This concludes the financial review. I'll now turn the call over to Jerry to close out the call. Jerry?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [5]

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Thank you, Carolyn. And while we still have a lot of work to do, I did want to point it out that we feel confident that we're continuing to build the foundation and lay the groundwork to take advantage of market growth opportunities, particularly with Fiserv and Microsoft, as discussed.

So at this time, in order to address any questions, I'll now turn the call back to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take your first question from Jacob Chan with Tenex Capital.

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Unidentified Analyst, [2]

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This is Jacob over here. So really great job over the results. I was just wondering because I was looking at the Microsoft Inspire, and I think that a couple of players are announcing that they are sort of push out Microsoft Teams contact center at being to quarter 4. So just want to find out from you in terms of the Contact Center offering, how would you price your product and what are term considerations? So I mean talking about Microsoft Teams, so it's Contact Center just over year?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [3]

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Okay. Now that's good question, Jacob, and thanks for that. So if you would take a look at least the one particular reference to the press release you're talking about, you'll notice there's no Microsoft quote in that press release by one of our competitors. So it's pretty much of a nonevent. That -- there is no integration between that solution and Microsoft Teams. So you can try to read between the lines, but looking into it, it's impossible to integrate directly to Microsoft Teams at the moment for any vendor in the world because Microsoft has not yet released their APIs. So what we're able to do, today is for our Microsoft Teams user, we're able to deploy our solution with our Hosted Skype for Business. Skype for Business integrates with Teams, and we can deliver seamless experience. And we're one of the few vendors in the world that host Skype for Business and also build our own Contact Center solutions.

Now going forward, when Microsoft does release that API, which is rumored to be somewhere around the end of the calendar year, yes, we'll be there with our direct integration to Teams as well. Does that answer your question?

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Unidentified Analyst, [4]

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Yes. It was great. May I just follow up on you, is there considered price range you are looking at to price the product?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [5]

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Yes. So our product ranges -- we have an entry level and advanced Contact Center solution. So we arrange -- actually, we have a real entry level. So we're at the very entry level, it's $15 per user per month. We have a more -- a little bit more advanced version of the entry level, it's $30 per month. And if you -- if our customers are looking for the full omnichannel experience, and I'll just explain what omnichannel is for perhaps some of participants on this call who may not know. Omnichannel is -- represents the scenario, the situation when a company is looking to not just route their voice phone calls, they also want to route their chat request, their e-mail request, their social media, post SMS, voicemails, e-mails, and our omnichannel contact center that we'll be releasing just a little bit later this year, aggregates all of those different channels into a single solution therefore, omnichannel. And that's $100 a month in operation for that solution.

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Unidentified Analyst, [6]

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All right. Just one last question for me. As of this quarter -- I mean I was looking at property and equipment values. Last quarter, there was $35,000 and right now just looking at the balance sheet that we have right now, talking about $1 million. Would you be able to share with us what accounted for the increase in the property and equipment amount?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [7]

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Yes. Carolyn can answer that for you.

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Carolyn David, Altigen Communications, Inc. - VP of Finance & IR Officer [8]

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I'm sorry, the call wasn't coming through very clearly. Could you repeat that question, please?

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Unidentified Analyst, [9]

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Sure. All right. So my question is pertaining to the property and equipment value in the balance sheet. So if we were looking at it, on the previous quarter, it was about $35,000 and right now it's about $1 million. So I was just wondering what accounted for the sharp increase in property and equipment?

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Carolyn David, Altigen Communications, Inc. - VP of Finance & IR Officer [10]

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Okay. Great question, yes. And the reason why that increase is primarily due to -- we are capitalizing our software. And this year, year-to-date, for the 9 months, we've added approximately 700 -- little over 700,000 in cap software into properties and equipment, and we'll amortize that over a 3-year period.

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Operator [11]

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We will take our next question from [Alual Chang], a private investor.

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Unidentified Participant, [12]

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Could you give us a quick update on the partnership with Cisilion? And how has that being progressing? How did the relationship begin? Did Cisilion reach out and then sell, or was it through other channel?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [13]

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I'm sorry, partnership with which company?

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Unidentified Participant, [14]

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Cisilion.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [15]

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Solutions?

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Unidentified Participant, [16]

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Cisilion, yes.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [17]

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Are you talking about Fiserv? Or Microsoft? Or -- I'm not sure. It's just a solution. I don't -- that doesn't register.

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Unidentified Participant, [18]

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Cisilion, S-I-S-I -- sorry, C-I-S-I-L-I-O-N.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [19]

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Oh. Cisilion. I'm sorry. Okay. Cisilion, yes that's a tricky name. Okay. Sorry about that. Yes, now that partnership is progressing nicely. Cisilion is one of Microsoft's largest partners in the United Kingdom. They have -- it was a result of the -- actually, let me first answer one of your questions, how did that partnership start. Microsoft actually recommended that Cisilion talk to us about our solutions for Skype for Business and Teams. So that's how the introduction was made. That's how the partnership started. And we've been working with them for 6 months-or-so now, primarily pushing both our Hosted Skype for Business solution in the U.K. as well as our Contact Center solution for Skype and for Teams. And we have quite a number of large opportunities we're working on with them, and I will have to say that the partnership's going very well.

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Unidentified Participant, [20]

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Oh. Okay. Just a last question. With many of our competitors offering vertical integration with Microsoft [Skype] . Do you see any pricing power from your clients to keep our margins low?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [21]

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Yes. I think one of the -- so one of the differences we have in those situations is that there are -- yes, there are other -- and there will be, right? There will be competition in any market that's working for Cisilion. One of the advantages that we have with our solution is first of all, I don't think any of our competitors on the contact center side offer the direct routing for Teams. So in other words, we're able to deliver the phone service and have a leg up in the competition. We're in there first and be able to add our applications on top of that. And number two, our solutions for Microsoft Teams are deployed in Microsoft Azure and some of these -- in fact, the press releases that Jacob was talking about for vendors that have their solutions deployed in Amazon, AWS or Google. Yes, they can put press releases out, but I can tell you, if you don't have your solutions deployed in Azure, you're going to have a very difficult time getting Microsoft's attention.

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Operator [22]

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We will take our next question from Ian Cassel with MicroCapClub.

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Ian Cassel, MicroCapClub LLC - Founder [23]

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Jerry, I have 2 questions kind of revolving around the same thing. They're kind of both -- kind of open ended, just appreciate some color on them. When I look at the business, you have kind of 2 big opportunities with Microsoft whether it's Hosted Skype for Business or Microsoft Teams, which hopefully they'll open up their API at the end of the year and also Fiserv. And kind of both of those situations have been around maybe for a few years that you've been addressing. Just curious how you're attacking both those opportunities? And it seems like both of them, if you discuss reasonable penetration at both those markets could 10x the size of your business. So I'm just curious, how you're approaching the Microsoft situation may be differently than you did a year or 2 years, 3 years ago? Are you hiring more internal salespeople? How are you attacking that opportunity differently? Then similar with Fiserv, I think they represent almost 1/4 of your business now today. So there has been some penetration there. But again, that's a huge business with huge potential for you. How do you get Fiserv more engaged to really sell your products?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [24]

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Okay. You're welcome. So let me start with your question about Microsoft. And we've been talking about Teams for a while, and of course, Microsoft's been pushing Teams they announced in 2017. So they've been pushing us for about 2 years now. But only recently, and I'm talking about the last few months, did they announce that Teams was on a par -- at future parity, I believe their term is, with Skype for Business. So that allowed customers -- yes, you have a solution, but it's not a very good, right? Prior to that. Now customers can start deploying that and from our -- but they don't have the APIs available. So what we can do with Teams is offer direct routing.

And only in March did they open up -- they announced direct routing a year ago, but only in March did they allow us to actually connect to their auto attendant. And I'll just quickly explain auto attendant for the folks in the call. That's the -- when you call into a company, "Hello, this is ABC company, press 1 for service, 2 for sales, 3 for company Director" That's an auto attendant. If you can't connect to that, you don't have anything. So that just became available, and now we're starting to drive opportunities into Teams. And the -- one of the challenges has been where they've been sort of back and -- well, they haven't been back and forward because they've been migrating from Skype for Business online to cloud PBX to Skype for Business on-premise 2019, the latest release, and Teams Phone System. There's been a lot of confusion in the marketplace. So that has definitely slowed things down a little bit. Now that Microsoft has put a stake in the ground and said Teams is ready for prime time, and they've opened up the direct routing. That's opened up -- finally, I think opened up the opportunities for us. It won't be the floodgate chat until the API is available. But we sell to Microsoft customers through Microsoft partners and the partners were reluctant to jump on board when they knew Microsoft wasn't ready for prime time.

So this is what's really changing in that regard to enable greater opportunity for both Skype and Teams. And the reason it creates an opportunity for Skype, now that Teams is out there a company can say, "I know what it does. I'll just prefer Skype. I'll stay with that for a while. We can offer an easier solution." Now Fiserv -- that's a good question. There has been -- I can't get in so many details, but I'll just say there have been some internal changes that have created opportunities for us to be more strategic with Fiserv. So -- I'm sorry, I can't give you more details on that, but it's certainly moving in the right direction.

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Operator [25]

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(Operator Instructions) We will go next to Maj Soueidan, GeoInvesting.

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Maj Soueidan;GeoInvesting;Co-Founder, [26]

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Just a quick -- most of the questions I -- were answered here today that I wanted to ask you, but I have one question, maybe if you get into a little bit. So you're seeing a decline in your assurance revenue as you have more customers migrate over to the -- your cloud solutions. So in this quarter, it's -- you had like a decrease obviously, in that area, the on-premise business. How much of those customers are going to the cloud? So you lost some money in the assurance -- I'm sorry, you lost some customers in the on-premise business. Do you have a read or a number what percent of those clients are coming back to you on your cloud for the quarter, for example?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [27]

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Yes. I don't know for this particular quarter, Maj. But yes, I'd say generally speaking, we're seeing about half. And the reason -- so you can ask me next why don't we see 100%. And a lot of the customers that we have that are very small customers that are -- that were on software assurance, paying us about $100 a year. Honestly, they can go find a cheaper solution somewhere else. I mean we really -- service very well in our cloud a [10-user customer], and we have a lot of those. We kind of started around 20 users or so and really we're targeting larger than that, but we kind of started 20 before we can do a good job for them on a cost-effective basis.

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Operator [28]

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We will take our next question from Arham Khan with Eden Capital.

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Arham Khan;Eden Capital;Analyst, [29]

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This is Arham from Eden Capital Investment Group. Great job with the cloud condition so far. I just had a few questions regarding your customers there. You said you're at 86% recurring revenue now as a company, and have -- you move closer to 100%. What can you tell us about net margin? It's increased sequentially over the last few quarters -- over the last several periods however you look at it regardless of litigation expenses. So what can you talk about there as you move towards 100% recurring revenue?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [30]

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As we move toward 100% recurring revenue, our gross margins won't be as high as they are. And the simple fact is that looking at the old model when companies were buying our software on-premises or paying us software assurances or approaching 100% gross margin, right? But it's just not very much money. So yes, the margins look great, but -- so we're sacrificing a couple of points in margin for 10x the revenue and much higher gross profits.

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Arham Khan;Eden Capital;Analyst, [31]

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Okay. Got it. So last week, as it stands today, how -- what percentage of your customers are left to migrate onto the cloud?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [32]

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We have -- I don't know the percentage, but I can tell you there's around 1,400-or-so customers in that ballpark that are still running an Altigen phone system on-premise. And we have about -- in the cloud, we have -- approaching that number. Not quite that many, but getting closer to that number.

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Operator [33]

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We will take our next question from [Edward Gilmore] with Grapevine.

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Unidentified Analyst, [34]

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Just a quick question about services revenue. Going forward, are you going to breakout services revenue? And do have a target percentage that you think you could grow that to as a percentage of overall revenue?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [35]

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Yes and yes. I don't know when we'll break it out. Right now it's not a tremendously meaningful percentage of our revenue. It's -- it was about 5% this quarter. But yes, as we -- a lot of it today is still -- we're just -- we're starting to go to the monthly recurring revenue, we just start building it up with our service contracts and it becomes meaningful, we'll certainly include that as a breakout just so we can report our SaaS revenue, our SIP Trunk revenue as well as our services -- monthly recurring services revenue because there's a little bit more clarity in this business.

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Unidentified Analyst, [36]

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Okay. Yes. And there's a support revenue. Was that -- is that a fixed amount for contract size? Or does it increases as a percentage of the contract? And do you have a sense of gross margins on that?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [37]

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Yes. Well gross margins -- I think the gross margin consideration's based on personnel. So if -- Carolyn can answer that question better. But it's a fixed cost per user. So it actually -- on a per user basis, it'll decline of a little bit, it's $3 per user. That's what we charge. So for 100 users, in addition what they pay us for cloud services, they would pay us $300 for that level 1 support. Now at 1,000 users, you're probably not going to pay me $3,000, right? I'd like to discount that a little bit, but again, the cost of my service delivery is not going to increase dramatically either to provide that service. Does that make sense?

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Operator [38]

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We will take a follow-up question from [Jacob Chan] with Tenex Capital.

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Unidentified Analyst, [39]

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It's Jacob again. So I just wanted to ask you a question because I think in view of this Microsoft Teams opportunity I think's really huge. And I think what we encountered in the previous quarter is we kind of took a longer time to deploy our (inaudible) because I guess that it'll be a bigger deployment. So going forward, how do you view about our ability to cope with a larger customer deployment? And do we have sufficient manpower to deal with all this? And again, I just want to find out from you as well, like, how do we actually maintain our service support given our increased number of customers going forward?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [40]

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Okay. Yes, it's a good question. So it's really -- the deployment takes longer not so much because of such a -- or more complex system. It's just that there's more people involved, so the planning process really, really takes longer. Deployment for us typically is a week, maybe 2 weeks is kind of complex, right? Now that's longer than a deployment for our MaxCS phone system, which is a day. This is a little bit more complex, but we're not talking about months and years to deploy things. So yes, we have -- because we have visibility into the pipeline, and we know when the deals are closing. And we have plenty of staff to handle the expected business, and as we continue to grow, it's just the age-old story then we add resources to be able to meet the expected demand. And based on the skill sets we'll be looking for -- with Microsoft background, these are not hard people to find.

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Unidentified Analyst, [41]

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All right. So I did want to find out from you, I guess we are competing ourselves in terms market spending with other peers we seem to be underspending. And I do seriously feel that Microsoft Teams is going to be a huge opportunity, especially for us. How do you actually intend to navigate around it? And to create awareness about our solution?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [42]

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Yes. It's a good question. We're definitely going to be ramping up our marketing spending, particularly in Teams. It's kind of tough to cut through the clutter when you have, I'll just call it, a horizontal solutions while competing with much larger companies that everyone has heard of. But when we're able to zero in just on Teams or just on Fiserv and financial services then we can direct our marketing efforts much more effectively and utilize those funds much more effectively. So I don't know that you'll see anything. I don't think you're going to see us -- I don't think we'll have a commercial at halftime for the next Super Bowl, but definitely, we're going to be increasing our marketing spend, targeting those users that are looking specifically for Teams solutions primarily.

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Operator [43]

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Our next question comes from [Earl Leow], private investor. (Operator Instructions) I am showing no response. We do have a follow-up question from Maj Soueidan, GeoInvesting.

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Maj Soueidan;GeoInvesting;Co-Founder, [44]

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Interestingly, Jerry, I guess you said you're going to maybe increase your marketing spend moving forward. Can you give us an idea of some of the returns you get on your marketing initiatives? Do you have any stats like that at all to share?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [45]

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Yes. We do. It's -- I don't have them at my fingertips, Maj, to tell you what's the most effective. I think that's always the challenge in the marketing mix and those things we do, but I'll tell you what we do right now is we do a lot of our spend is on street shows. Those are kind of to be seen. I don't think they get the greatest return from those. We do Google AdWords. That's one of the things we're going to crank up because the challenge with Google AdWords, if you're very generic, you'll just spend a whole bunch of money on clicks, you're not going to get any results. But when people are searching for direct routing for Teams, then I can get good results. So you're going to -- you'll see that pick up. We're doing LinkedIn ads. We have e-mail campaigns, webinars, insight telemarketers. So we are putting resource in there, it's just you're not going to see it on the billboard if you were in San Jose on Highway 101. So you're not going to see us probably on television, but we're trying to target those people that are looking for the types of solutions that we have to offer and spending our marketing dollars there. So the average person may not see it, but we're not targeting you, right? We're targeting the CIOs of the companies that we're going -- size companies that we're going after.

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Operator [46]

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We do have a follow-up question from [Alual Chang] , your private investor.

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Unidentified Participant, [47]

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[Skype] have overall 1,000 subscribers, and I think the market opportunity is around 5,000. So we know that (inaudible) Skype for Business. Is it still valuable for us to sell Skype for Business? Or are we going -- we are indeed focusing on Microsoft Teams? And what is our biggest opportunity right now?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [48]

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Okay. Now those are good, insightful questions. Now Microsoft is going to support Skype for Business, they've announced, for the next 10 years. Maybe it'll be longer, but what they've announced is 10 years. And so the benefit for us for Skype for Business today as they roll out Microsoft Teams, and Teams is very much a collaboration-centric product. I hate to get into technical terms here. Now where Microsoft's Skype for Business is very much of a communication-centric product, and we're finding companies, a lot of companies -- I can't say it's quite 50-50, but a very high percentage of customers prefer the Skype for Business interface. They're used to Skype for Business and -- at their own location. So they oftentimes prefer to put their Skype for Business users in our cloud and they'll migrate to Teams later.

Long term, yes, it's going to be Teams and Teams only, and we're preparing for that. As I said, the API is not available, so it's really difficult to fully leverage that. But we can also, in addition to offering Skype as an alternative to Teams, in order to deploy our Contact Center, which sits on top of Skype, fully integrated Skype because of the integration between Skype and Teams, that also creates an opportunity for Teams' customers to deploy, what Microsoft would call, hybrid environment. It's all your business users on Teams, all your Contact Center users on Skype for Business, fully integrated on the back end. So yes, for the foreseeable future, there's still quite a useful life on Skype for Business, but long term, yes, it'll be Teams.

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Operator [49]

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There appear to be no further questions at this time. I will now turn the conference back over to today's speakers for any closing comments.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [50]

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Okay. Thank you, operator, and thank you, everyone, for joining us for today's call. I do have one final note. Our next presentation or visit is going to be at the 2019 MicroCap Leadership Summit in the Chicago area on September 27. So we'll be there presenting our solutions and our story. And next after that will be our earnings call that'll be held in mid-November sometime since that'll be the year-end call. So thank you for participating. We look forward to seeing you at the event or on the next call.

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Carolyn David, Altigen Communications, Inc. - VP of Finance & IR Officer [51]

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Thank you, everyone.

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Operator [52]

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