U.S. Markets close in 5 hrs 36 mins

Edited Transcript of ATGN earnings conference call or presentation 23-Apr-20 9:00pm GMT

Q2 2020 Altigen Communications Inc Earnings Call

SAN JOSE May 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Altigen Communications Inc earnings conference call or presentation Thursday, April 23, 2020 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Carolyn David

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

* Jeremiah J. Fleming

Altigen Communications, Inc. - Chairman, President & CEO

================================================================================

Conference Call Participants

================================================================================

* Ed Gilmore

Little Grapevine - Analyst

* Ian Cassel

MicroCapClub LLC - Founder

* Mark Biwojno

Gigperfect LLC - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to your Altigen Communications Second Quarter Fiscal Year 2020 Financial Results Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to Carolyn David. Please go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Christie. Hello, everyone, and welcome to Altigen Communications' Earnings Call for the Second Quarter of Fiscal 2020. Joining me on the call today is Jerry Fleming, President and Chief Executive Officer; and I'm Carolyn David, Vice President of Finance.

Before we get into the second quarter performance, we hope that you and your families and colleagues are all safe and well during these challenging times. Our thoughts are with those most affected by COVID-19, particularly those on the front lines of this crisis. Our top priority is ensuring the health and safety of all our employees. Throughout this crisis, we have taken decisive actions to safeguard our workforce and maintain continuity of the business to serve and support our customers.

Earlier this afternoon, we issued an earnings release reporting financial results for the period ended March 31, 2020. This release can be found on our IR website at www.altigen.com. 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 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, 2019, 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?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Carolyn, and good afternoon, everyone. Thanks for joining us for today's call. As Carolyn mentioned, earlier this afternoon, we reported our fiscal 2020 first half and second quarter results.

Revenue for the first 6 months of fiscal 2020 was $5.8 million, an increase of 9% year-over-year. Revenue for the second quarter was $2.93 million compared to $2.84 million in the preceding quarter and $2.54 million in the same period a year ago. Net income was $497,000 in the second quarter versus $502,000 last quarter and $403,000 in our fiscal 2019 second quarter.

Per usual discussion, I'll also provide the details regarding our revenues for the 4 revenue categories we track, which include onetime product revenue, annual recurring revenue, services revenue and most importantly, monthly recurring revenue.

Onetime product revenue represents license revenue we receive from software licenses customers purchase for their legacy on-premises Altigen phone systems. In the second quarter, onetime product revenue of $250,000 increased by 22% compared to the previous quarter and 15% compared to the same period a year ago.

Onetime revenue -- onetime product revenue will generally demonstrate a downward trend as a result of our cloud-first business strategy. However, the impact of COVID-19, which has driven the requirement to support a new work-at-home workforce, our onetime product revenue increased as many of our customers added licenses to support the increased number of remote workers.

The second category, annual recurring revenue, includes revenues from our annual software maintenance agreements, which on-premises customers must pay to receive product support, bug fixes and software upgrades. Because annual recurring revenue is tied to onetime product revenue, it will experience a slow decline over time as a result of our on-premise customers migrating to the Altigen Cloud. In the second quarter, annual recurring revenue of $663,000 compared to $722,000 in the previous quarter and $702,000 in the year ago quarter.

The next category, services revenue, includes revenue from cloud deployments, customer support and custom product development. While we expect services revenue to demonstrate an upward trend over time, primarily due to cloud deployment and support contracts, we also expect to continue to see quarterly variances depending on when a particular custom product development project completes. Second quarter services revenue was $175,000, which decreased 18% versus the prior quarter and increased by 122% compared to the same quarter a year ago.

The final category is monthly recurring revenue, which consists of Altigen's cloud-based software-as-a-service plus our SIP Trunk communication service. Monthly recurring revenue for the second quarter was $1.84 million, an increase of 8% from the first quarter and 20% on a year-over-year basis.

We are continuing to see traction with our Microsoft UC and Teams solutions as evidenced by second quarter cloud revenues growing to approximately 11% for that category of total cloud revenues, up from 8% in the first quarter. This is despite the COVID-19 impact, which has delayed new projects while IT departments scramble to extend their existing communication systems for their remote workforces.

Along those lines regarding our FrontStage omnichannel contact center, during the quarter, we completed the integration of FrontStage to Altigen's MaxCS PBX, which is required for our current and for Fiserv's MaxCS customers. This quarter, we also expect to complete the integration of FrontStage to Skype for Business and plan the start of the Microsoft Teams integration later in the quarter in anticipation of the general availability of the Microsoft Teams APIs, which I've been speaking about.

While on the topic of Microsoft Teams, it's interesting to note that just a year ago, there were approximately 10 million active business Teams users. Microsoft announced earlier this month, that number had grown to more than 44 million active Teams business users in use by more than 5,000 -- excuse me, 500,000 organizations worldwide. Just as importantly, Office 365, which includes Teams, is now in use at more than 1 million companies globally, with approximately 60% of those organizations headquartered in the U.S.

So the outlook for Teams continues to look strong. The obvious implication for Altigen is that as more and more companies roll out Teams as their corporate standard for communications and collaboration, the greater the size of the target audience for Altigen solutions, which enhance the capability of Microsoft Teams.

Now at this time, I'll turn the call back to Carolyn to review the financials in more detail. Carolyn?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Jerry. Total revenue for the second quarter was $2.9 million, up 3% sequentially and up 15% on a year-over-year basis. Our cloud revenue was $1.8 million in Q2, up 8% from $1.7 million in the preceding quarter and up 20% from $1.5 million in the same quarter last year.

Second quarter revenue from software assurance decreased to $663,000 compared with $722,000 in the previous quarter and compared with $702,000 in the prior year period, representing a decrease of 8% and 6%, respectively.

Perpetual software license revenue was approximately $250,000, up 22% sequentially and up 15% from $217,000 on a year-over-year basis. Professional services and other revenues was approximately $175,000 for the current quarter compared with $214,000 and $79,000 in the preceding and prior year quarters, representing a decrease of approximately 18% and an increase of 122%, respectively.

Turning to the margins. Second quarter margin was 75.9% versus 77.6% in the preceding quarter and 81.7% in the comparable period last year. The decrease in gross margin was primarily driven by the impact of higher amortization of capitalized software and acquisition-related costs and, to a lesser extent, a shift in our product mix.

GAAP operating expenses for the quarter totaled $1.7 million, the same for the preceding and the prior year quarters. GAAP net income was $497,000 or $0.02 per diluted share compared to $502,000 or $0.02 per diluted share in the preceding quarter and $403,000 or $0.02 per diluted share in the same period a year ago.

Non-GAAP net income for the quarter was approximately $630,000 or $0.02 per diluted share compared with $621,000 or $0.02 per diluted share in the prior quarter and $430,000 or $0.02 per diluted share in the same quarter last year. This represents an increase of 2% and 47%, respectively.

Now let's turn to the balance sheet. We ended the quarter with $4.9 million in cash and cash equivalents, an increase of 10% over the preceding quarter. Working capital was $3.7 million compared to $3.4 million at the end of Q1, representing a 9% increase.

This concludes the financial review. I will now turn the call back to Jerry.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Thank you, Carolyn. To summarize, we are continuing to focus on growing our cloud revenues organically, through strategic partnerships and via opportunistic acquisitions. We do remain encouraged by the momentum we're seeing with Microsoft Teams and our Microsoft UC and Teams solutions. But this is really just the tip of the icebergs -- iceberg.

In addition to our pending launch of the FrontStage omnichannel contact center, we are working on a number of solutions, which will expand our cloud service offerings. Later this quarter, we'll be launching our new Teams service delivery portal providing the ability for partners and customers to easily set up and configure Altigen's direct-routing SIP service for Microsoft Teams, thus enabling simplified user management, faster deployment times and lower administrative overhead.

We'll also be launching our new cloud-based fax service, adding the ability for our business customers to send and receive faxes via e-mail using Altigen's SIP Trunk service.

Finally, as we announced earlier today, we'll be introducing a new caller authentication service in conjunction with our SIP communication service. This service, which is important to any organization needing to restrict access to sensitive customer information, identifies and authenticates inbound callers before the call is even answered by a company representative, thus eliminating the threat of spoofed, manipulated or virtualized calls.

We also have a number of additional solutions in the works, all designed to enhance Altigen's position as a complete end-to-end Microsoft-centric cloud communications provider. I'll provide updates as these solutions are closer to their release dates. But now in order to address any questions, I'll turn the call back to the operator.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll take our first question from Edward Gilmore with Little Grapevine.

--------------------------------------------------------------------------------

Ed Gilmore, Little Grapevine - Analyst [2]

--------------------------------------------------------------------------------

Congrats on the quarter again. Just had a couple of questions for you. For the new customers that you're seeing come in this quarter, do you have any sense, percentage-wise, maybe how many of them are -- have had Teams in the past and are adding Altigen versus how many are new to Teams and new to Altigen at the same time?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Well, that would be a result of our direct routing service, but I can tell you that a lot of companies have rolled out Teams, and I went through some of those statistics. But every single company that we work with is new to Teams' phone system.

In other words, they're deploying Teams not only as a communication and collaboration platform, which is PC to PC, internally for the company, but externally, now they can make and receive phone calls to their customers, prospects, partners, et cetera. Every one of those customers is new to Teams' phone system, and they're also new to Altigen.

--------------------------------------------------------------------------------

Ed Gilmore, Little Grapevine - Analyst [4]

--------------------------------------------------------------------------------

Okay. Great. And then just 2 more questions. On the FrontStage partnership, do you have any sense of timing on when that launch would be yet? And then also I don't know if you can share, but how many customers will be taking that customer service software at launch?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I'm sorry. So Ed, are you talking about the FrontStage or the new announcement about the caller authentication?

--------------------------------------------------------------------------------

Ed Gilmore, Little Grapevine - Analyst [6]

--------------------------------------------------------------------------------

I'm sorry, the FrontStage.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, we do expect a lot of customers. We have a number of contracts right now. I think we have about 5 or 6 contracts for FrontStage. And so we do expect that to launch sometime this quarter. And as I mentioned, we have -- there's sort of 3 variations of FrontStage, one with our PBX, one with Skype for Business, and we have a bunch of Skype for Business customers currently that we'll be targeting to move to -- migrate to the FrontStage platform.

And then the net new customers will be the Teams customers, and that will be -- I don't expect that to launch until sometime in calendar Q3 just based on the availability of the Microsoft APIs. And Ed, I'll have to make one political comment. You're lucky, I'm not President Trump because you only get to ask one question in his press releases, but -- or his press conferences, so. But go ahead and ask your third one.

--------------------------------------------------------------------------------

Ed Gilmore, Little Grapevine - Analyst [8]

--------------------------------------------------------------------------------

Okay. Great. Sorry, just one quick one. For the new services that you kind of mentioned today and were highlighting, it's exciting to hear that. How long until the sales force at Altigen is able to start selling that and offering it to customers?

--------------------------------------------------------------------------------

Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [9]

--------------------------------------------------------------------------------

Well, some of these are dependent -- we're selling them -- we're positioning them right now in terms of customers. So a lot of this is just as quickly as we can get customers to adopt, pilot and then put the solution into production. So that's more -- you're kind of asking me for a sales forecast, the way that -- on that one, but we're expecting good results. I can -- I guess, I can characterize it that way since we don't have customers on the platform currently.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

And next, we'll take a question from Ian Cassel with MicroCapClub.

--------------------------------------------------------------------------------

Ian Cassel, MicroCapClub LLC - Founder [11]

--------------------------------------------------------------------------------

Jerry, congratulations on the quarter.

--------------------------------------------------------------------------------

Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [12]

--------------------------------------------------------------------------------

Ian, thank you.

--------------------------------------------------------------------------------

Ian Cassel, MicroCapClub LLC - Founder [13]

--------------------------------------------------------------------------------

My question relates to sort of the momentum you're seeing. It seems like the environment we have with us, with COVID-19 has been maybe a stimulant to your business a little bit. I'm just wondering if that -- if you've seen kind of that momentum that you're seeing overall kind of carry over to Q2 and see that throughout the rest of the year as well? Or is it too early to kind of make a conclusion on how this affects you overall?

--------------------------------------------------------------------------------

Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [14]

--------------------------------------------------------------------------------

Yes. I think some of those are -- there's actually pluses and minus, let's say, the COVID-19 impact on our business. The plus being this current quarter where customers -- these are on-premise customers. Our cloud customers already had everything they needed. To -- if the person worked in the office or worked from home, it didn't really matter. They simply log in from where they are.

The on-premise customers had more restrictions because they didn't have the latest and greatest capabilities we offer in our cloud. And so as those customers, we saw a little bit of bump in the license fees because they had to enable those work-at-home people. Now hopefully, that will sort of cause them to migrate to the cloud. And we'll get some additional impact as a result of that.

On the downside, we did have a number of -- pretty small businesses cancel their service because COVID-19 pretty much put them out of business. And so it's not a great number. It's a single-digit number. But -- so we saw the downside impact on that side.

And then the other, I'll call it, downside impact, but it's really a delay in that I mentioned the IT departments are scrambling. Usually -- they don't have enough time to go get something new. So they're scrambling to enable their existing communications infrastructure to support their work-at-home workforce which has delayed a number of projects for us for the new things they want to do.

Now longer term, all of those things, I believe, are going to work to our -- to Altigen's advantage as we see more work at home. Companies need to pay advantage to distributed workforces. And the kinds of capabilities we can help them with when they deliver that type of service, kind of forces them to the cloud because it's difficult to deliver it from your on-prem solution.

And personally, we believe -- personally, I believe, and I say as a company, we believe here too, that companies are going to be forced to reevaluate their DR strategies, disaster recovery strategies, and actually have a plan and things in place to support a work-at-home workforce even if the folks come back in the office in the event that something like this happens again so they don't get caught -- don't get blind-sighted once again.

So I think all of those longer-term will continue -- will contribute positively to what we're doing and will certainly help Teams, which will help us.

--------------------------------------------------------------------------------

Ian Cassel, MicroCapClub LLC - Founder [15]

--------------------------------------------------------------------------------

Just a follow-up question to that. I've seen a lot of other companies, large companies and new SaaS players, it seems like everybody is putting out a press release about how they integrate into Microsoft Teams, kind of jumping on at least the public relations bandwagon of how Teams is doing so well.

Maybe just to kind of push it back to you. How do you kind of differentiate yourself from these other companies that say they kind of do the same things that you do? Or how do you -- how are you different from these other companies?

--------------------------------------------------------------------------------

Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [16]

--------------------------------------------------------------------------------

Well, I'll have to be perfectly honest with you. We don't lie about our capabilities. That's number one. And what I will tell you is that the Teams APIs are not general availability, no one can deliver the capabilities we're talking about with Microsoft Teams.

So regardless of what their press releases say, and I've seen some of them, you have to be potentially in this industry or somewhat technical to read between the lines to see what they're really saying. These are -- the fact that you can open a -- schedule a meeting in outlook doesn't make you integrated with Teams, for example, and I'll just give you -- that's what RingCentral states. And so there are -- most companies like that that put these releases out that what they're able to do are not native Teams integration.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

(Operator Instructions) And we have a question from Mark Biwojno with Gigperfect.

--------------------------------------------------------------------------------

Mark Biwojno, Gigperfect LLC - Analyst [18]

--------------------------------------------------------------------------------

I'm just curious if you guys have any plans in terms of widening an investor audience potentially by either working -- as far as I understand the security is not depository trust eligible, either working on that or working on perhaps a NASDAQ uplisting, if there's any potential for that in the medium to longer term future, if you could give us any insights.

I know it's kind of forward-looking, but like just generally how you perceive those kinds of investor relations related regarding the stock market issue.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. You're welcome. So yes, I would call this a medium to longer term. Our immediate task at hand is to grow our business profitably, build our cash, increase the value, right, of our asset here and increase shareholder value overall. And when the time is right for us to move back on to NASDAQ, then we'll do it.

And we do understand that a lot of potential investors don't necessarily have access to OTC-traded companies, and that would be one of the reasons we'd have an interest in moving in that direction, but I don't think we're quite ready for that yet.

--------------------------------------------------------------------------------

Mark Biwojno, Gigperfect LLC - Analyst [20]

--------------------------------------------------------------------------------

Okay. Do you know -- do you have any kind of insights into COVID-19? Do you consider that a negative or a positive just overall for your business? Just the last question.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. I'll call it a short-term negative because there is impact on our customers and a lot of small businesses that went under before the Paycheck Protection Program was even available. And I'm not sure how many will be able to get access to the -- either got access to the first round or will have access to the second round. So the small businesses that are our customers, we're going to see some impact from that.

Longer term, as I mentioned, 2 things are happening that are very -- in my mind, very positive for our outlook. And #1 is the rapid growth of Microsoft Teams from 10 million to 44 million users, which now, once a company standardizes on Teams, right, now they say, "Geez, I'm making all these phone calls internally, and I've got all these nice web chat, web conferencing, all sorts of great capabilities. Why am I still paying for a phone system separately?" And when they come to that conclusion, that's where Altigen comes in once they look to migrate to Teams' phone system.

So I think that will be #1. I think #2 is just generally collaboration and -- communications and collaborations platforms will benefit long term because companies are going to have to start thinking more about, as I mentioned, their disaster recovery strategies. And even those that say, "Hey, working from home is not so bad. We actually get more productivity out of our employees because they're not wasting so much time on the road." So I think those 2 factors we'll see will be nice long-term contributors to our growth in this area.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

(Operator Instructions) And it looks like we have no further questions at this time. So I'll turn it back over to management for any closing remarks.

--------------------------------------------------------------------------------

Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [23]

--------------------------------------------------------------------------------

Okay. Thank you, and thank you, everybody, for joining our call. Thank you for your questions. We look forward to updating you on our next quarterly call.

--------------------------------------------------------------------------------

Carolyn David, Altigen Communications, Inc. - VP of Finance & IR Officer [24]

--------------------------------------------------------------------------------

Thank you, everyone.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, and have a great day.