Altigen Communications, Inc. (ATGN) CEO Jerry Fleming on Q4 2020 Results - Earnings Call Transcript

Altigen Communications, Inc. (OTCQB:ATGN) Q4 2020 Earnings Conference Call December 3, 2020 5:00 PM ET

Company Participants

Carolyn David - VP, Finance

Jerry Fleming - President & CEO

Mark Allen - Chief Technology Officer

Joe Hamblin - Vice President and General Manager

Conference Call Participants

Ian Castle - MicroCapClub

Operator

Greetings and welcome to Altigen Communications, Inc. Fourth Quarter and Fiscal Year 2020 Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions]

I'd now like to turn the conference over to your host Carolyn David.

Carolyn David

Thank you, Aman [ph]. Hello, everyone, and welcome to Altigen Communications Earnings Call for the fourth quarter of fiscal 2020. Joining me on the call today is Jerry Fleming, President and Chief Executive Officer; Joe Hamblin, Altigen's Chief Operations Officer, Mark Allen, our Chief Technology 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 September 30, 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 one 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 on price customers to the cloud as quickly as we can in today's call.

During this call, we will also be referring to certain non-GAAP 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's my pleasure to turn the call over to Jerry Fleming, President and CEO of Altigen, for opening remarks. Jerry?

Jerry Fleming

Okay. Sorry everybody let me learn how to use Teams on my conference call. I guess I was on mute talking away with some great results. Let me start over. So thank everyone for joining our call. I need some training. So earlier this afternoon we reported our fourth quarter and full year results for fiscal 2020. Revenue for the fiscal 2020 fourth quarter was $2.98 million, an increase of 12% compared to the same period a year ago. Revenue for the fiscal 2020 full year was $11.8 million, an increase of 11% over fiscal 2019.

So I'll first discuss the fiscal 2020 revenue by category and then I'll follow that with an update of our cloud business strategy. So beginning with our one-time product revenue, which represents software license revenue we just purchased by customers for their legacy on premises Altigen systems, in fiscal 2020 our one-time product revenue was $870,000 which was a decrease of 23% compared to fiscal 2019.

As we discussed previously, one-time product revenue will continue to experience a downward trend as a direct consequence of our cloud-first business strategy, but along those lines, our objective does remain to convert the remaining on premises customers to the cloud as quickly as we can.

Moving to our annual recurring revenue from our annual software maintenance agreements, which were also purchased by customers, which have an on-premise or in house MaxCS phone system and this includes product support of fixes and product upgrades, because annual recurring revenue is tied to onetime product revenue. This revenue will also saw a decrease over time as our on-premise customers migrate to the Altigen cloud. In fiscal 2020, annual recurring revenue was $2.7 million compared to $2.9 million in the previous fiscal year representing a 7% decline.

The third category we track is services revenue, which includes revenue received for cloud deployments, technical support and custom product development. We expect services revenue to trend upward over time, as we continue to grow our number of cloud customers, particularly as everybody start Microsoft Team Solutions.

However for any given quarter, service revenue may be up or down based on the timing of the completion of customer deployments. Sorry, Carolyn can you confirm if there's a problem on the line here? I don't hear edges. I am just a lot of background noise. So I apologize. That's the -- are you hearing me okay Carolyn? So I will go ahead and continue.

Carolyn David

I can hear you. Let's just confirm with the operator that the investors can hear us? Operator can you…

Operator

Yeah the background noise is from Mr. Allen's line.

Jerry Fleming

All right. Sorry about that everybody. Apparently, we have some more internal training to do. It's not just me. So let me pick up where I left off, however for any given quarter, our services revenues may be up or down based on the timing of the completion of customer deployments and our customization projects. That being said, fiscal 2020 services revenue was $610,000, an increase of 42% compared to fiscal 2019.

Now the final category and I think the one folks are most interested in is monthly recurring revenue, which consists of Altigen's various cloud-based software as a service offerings as well as our SIP Trunk communication service. Our monthly recurring revenue for fiscal 2020 was $7.6 million compared to $6.2 million in fiscal 2019, which represents a 23% increase year-over-year.

Now regarding our cloud business strategy, we have three distinct go-to-market models. First is our MaxCS cloud PBX, which is targeted at small to midsize business customers and for this product COVID-19 has had a significant impact on the MacCS small business customers. As everyone is aware, the onset of COVID-19 forced companies to support largely work at home workforce. The situation initially resulted in an increase MacCS-related revenues, mostly due to the fact that customers need to add additional licenses to support their employees in a new work at home environment.

On the other hand over the past six months, COVID-19 has also caused a significant negative impact on the smaller end of -- smaller range of that customer base. Many of those customers downsize or in some cases, went out of business. So that being said for fiscal 2020 our MacCS-only cloud revenue, just the MacCS PBX portion of our revenues excluding Fiserv and our Team Solutions grew by 3% compared to fiscal 2019.

Now while we have seen some slowing growth of our MacCS cloud platform as we continue to migrate our customers from on premise to the cloud, we're also working on the rollout of a next-generation cloud unified communications platform that will significantly enhance the current MacCS functionality. Our new UC features will include unified presence, instant messaging, web conferencing and a mobile UC app. Now the reason we're doing this for those small business customers that are too small to leverage teams, we're going to introduce this product to make sure that we keep those customers and keep generating revenue for that core MacCS business. For this product we expect to launch -- we expect to launch this product in our upcoming fiscal third quarter.

So now we've to provide you guys with an update on a Fiserv business. Historically, Fiserv has sold Altigen's MacCS PBX and our Interactive Voice Response or IVR solutions to their on-premise customers. Over the past few years, Fiserv has also migrated these solutions to the cloud and may now offer Altigen's PBX and IVR solutions as a hosted managed service.

Our fiscal 2020 cloud revenues from Fiserv grew by just over 40% in fiscal 2020 compared to fiscal 2019 cloud revenues. In addition, now that we've completed the integration of our MacCS PBX with the FrontStage Omni-Channel Contact Center solution, we're actively engaged in customer pilots with Fiserv. In fact, we're now in the final phases of our first MacCS front stage deployment at a fairly large Fiserv banking customer and expect to go live next month.

Because this is a completely new solution for us, I am referring to FrontStage, there has been a learning curve on both sides Fiserv and Altigen, but we're getting close to the end of that curve and we're looking forward to a full launch of the FrontStage Solution to the Fiserv customer base in calendar Q1.

Turning to Microsoft Teams, I'll first review our teams solution portfolio which for the past 18 months has included only our direct routing strip [ph] transfer teams and our hosted Skype for business, which is Microsoft's predecessor to Teams. In fiscal 2020, we recorded $793,000 in revenue for our Team Solutions, which is 150% increase over fiscal 2019.

This fiscal year, we've also added our new Teams service delivery management portal and a cloud-based Teams reporting solution to that Team solution portfolio yet so far. Next quarter, we plan to launch FrontStage for Microsoft Teams, which will enable us to address the growing market for integrated teams contact center solutions. In addition, in September, we acquired the CoreInteract platform from Blue Panda Communications. Now as part of that transaction, we also brought over the entire Blue Panda CoreInteract development team as well as Blue Panda CEO, Mark Allen whom I'll introduced shortly.

Just to provide a brief overview, CoreInteract is a digital customer engagement platform, which targets Team's enterprise users and is built as a native Azure, Microsoft Azure application, which seamlessly integrates the teams. So the timing of the release of our multiple new Teams applications and services really couldn't be better given our Teams is continuing its rapid growth in the corporate enterprise. In fact, Microsoft recently reported that they are now more than 115 million teams corporate subscribers up from approximately 20 million subscribers just a year ago.

In addition to the work we've been doing to introduce our new solutions and services for Teams, we've also been bolstering our technical operations capabilities to prepare Altigen for the demands of enterprise customers. Key to that strategy was the hiring of Joe Hamlin Altigen's new Chief Operations Officer. Joe was most recently Vice President of Enterprise IT Services at Sprint and brings to Altigen the operational expertise and discipline required for us to be successfully penetrating the enterprise market and I'll introduce Joe shortly as well.

So as I mentioned previously, Mark Allen has joined us from Blue Panda. Mark is now our new Chief Technology Officer responsible for driving our product strategy and I am going to turn the call over to Mark briefly to provide you guys with an update. Mark?

Mark Allen

Thank you, Jerry and I apologize for the description to my office. But hello, everyone for those of you I have not met, I've been a long time UC industry influencer and innovators starting with the creation of the Microsoft voice offering groundwork in 2006 and signing that over to Microsoft in 2007. After that I formed Blue Panda Communications and created CoreInteract and as Jerry nicely just said, CoreInteract is a first of its kind digital customer engagement platform specifically designed to extend the capabilities of Microsoft Commute.

CoreInteract platform is native Azure application globally scaled to provide advanced communication queuing for Microsoft Teams which improves the company's ability to communicate what their customers while increasing employee productivity. CoreInteract further includes advanced analytics and management reporting to provide organizations with a complete 360 degree view of their customer interactions.

CoreInteract adds critical communication features, not natively available at Teams and as such truly enables the company to replace their existing PBX systems with Microsoft Teams system. CoreInteract's extensive roadmap includes leveraging AI and cognitive services and advanced machine learning capability to our suite of solutions including customer facing tools for building automated customer engagement box and industry benchmarking reports. I'm very excited to be here with Altigen and many great things to come and I'll go ahead turn the call back to Jerry.

Jerry Fleming

Thank you, Mark. My line was muted so I will say that, Mark, we're excited to have you here as well and for the folks on the line obviously you can tell Mark is our CTO with the number of acronyms and Mark’s responsibility here is not only with CoreInteract, but to identify and leverage new technologies for us to drive our company forward.

So with that being said, I'd now like to introduce Mr. Joe Hamblin

Joe Hamblin

Thanks Jerry. Good afternoon, everyone. Actually my first three months here with Altigen have really been exciting and I am proud to be a part of the Altigen leadership team. The organization's enthusiasm has really been refreshing to me especially coming from a long time of some of the challenges I faced at Sprint over the years and some of our financial challenges, this is really just been a refreshing environment.

Since this is my first time joining me, the earnings call, I thought I would be appropriate for me to give you a brief summary of my background. It's been over 30 years with Sprint and our leadership roles most notably as Vice President of Enterprise Services where I was responsible for Sprint entire IT infrastructure and operations ecosystem. Prior to that I spent nearly 10 years as Director of Sprint's Unified Commutations and collaboration organization. In this role, we were able to demonstrate how UC has transformed the entire way of the enterprise and size of Sprint work, while at the same time, dramatically reducing our operational expenses.

My passion for Unified Commutations, my understanding of the challenges my former IT peers face on a day-to-day basis including dealing with such businesses challenging as the Coronavirus gives me unique insight my teams use to help drive enterprise sales. In addition I am able to leverage my use of operational expertise and organizational-ready strategies make sure Altigen is well prepared to play in the enterprise space.

You couple these things, couple my experience along with Altigen's years of communications experience and our focus on Teams and the emerging powerful suite of UC solutions positions us well for the long-term growth in this market. Again I am excited to be here, excited to be partnering folks like Mark and bringing in these new solutions, but at this time, Jerry I am going to turn it back over to you.

Jerry Fleming

All right. Thanks Joe and I do have, but not this time. So I appreciate your aim and you already have made a great impact here as Mark and we're certainly looking forward to work with you guys to continue to accelerate the growth of our business. But at this point, I am going to turn the call over to Carolyn David to review the financials in more detail. Carolyn?

Carolyn David

Great. Thank you, Jerry. Total revenue for the fourth quarter was $2.98 million down 1% sequentially and up 12% from the prior year quarter. For the full year 2020, total revenue grew 11% to $11.8 million. Our COG revenue was $2.1 million in Q4 up 5% from $1.98 million in the preceding quarter and up 30% from $1.6 million in the same quarter last year.

Compared to fiscal 2019, fiscal year 2020 cloud revenue increased 22% to $7.6 million. Software license revenue for the quarter was $135,000 down 52% sequentially and down 49% from $265,000 in the comparable period last year. On a 12 month basis, software license revenue decreased 23% to $870,000 in fiscal 2020 compared to $1.1 million over fiscal 2019. Our fourth quarter revenue from software-assurance decreased to $647,000 compared with $655,000 in the previous quarter and compared with $712,000 in the prior year period. Year-over-year software-assurance revenue declined 7% to $2.7 in comparison to $2.9 in fiscal 2019.

Our professional services and other revenues was approximately $115,000 for the current quarter compared with the preceding and year quarters of the $105,000 get $87,000 respectfully. For the full year 2020, professional services and other revenue was $610,000 up 42% compared to fiscal 2019.

Now let's turn to the margins, fourth quarter gross margin was 77.2% versus 80.2% of the comparable period last year. Year-over-year, gross margin decreased 440 basis points to 77% compared to the year ago period at 81.4%. The decrease in gross margin was primarily driven by the impact of higher amortization of capitalized software and acquisition-related cost and to a lesser extent a shift in our product mix.

The operating expenses for the quarter totaled $1.7 million up 5% from $1.6 million in the prior year quarter. For the full year 2020, GAAP operating expenses increased 8% to $7 million compared to $6.5 million for fiscal year 2019. Both the quarter-over-quarter and the year-over-year increase was primarily related to litigation expenses in connection with the pending CPI claim.

On a non-GAAP basis, operating expenses totaled $1.5 million for the fourth quarter of fiscal 2020 compared to the prior year fourth quarter of $1.6 million. Non-GAAP operating expenses totaled $6.6 million for fiscal 2020 compared what $6.3 million over fiscal 2019. For the fourth quarter GAAP net income was $20,000 or $0.00 per diluted share compared to $290,000 of $0.01 per diluted share in the comparable period last year. GAAP net income for the 12 months of fiscal 2020 totaled $1.4 million or $0.06 per diluted share compared with fiscal 2019 GAAP net income of $1.9 or $0.07 per diluted share.

I would like to note that our fourth quarter fiscal 2020 financial results include a non-cash tax expense at approximately $549,000 related to the company's income tax rate, which defers from its statutory rate primarily due to expired NOLs and the disallowance of expenses paid with the PPP loan proceeds.

Our non-GAAP net income for the current quarter was $873,000 or the $0.03 per diluted share compared to $635,000 or $0.02 per diluted share in the same quarter last year. Year-over-year non-GAAP net income was $2.9 million compared with $2.5 million in fiscal 2019 representing an increase of approximately 17%. Now let's turn over to the balance sheet, we ended the quarter with $6.6 million in cash and cash equivalents compared to $6.1 million at the end of the preceding quarter. Our working capital was $4.2 million compared to $4.1 million at the end of the preceding quarter.

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

Operator

Mr. Fleming, you line may be on mute again.

Jerry Fleming

This is weird because I didn’t put myself on mute, that's so strange okay. So let me start again guys. Sorry about that. I don’t know how this is happening. So thank you Carolyn. To summarize Altigen has been diligently working for the past five years or so to migrate our customers to the cloud and in fact today the majority of our cloud revenues have come from our hosted PBX platform, but for the past 18 months, we've also been working toward accelerating our revenue growth with new cloud solutions for Fiserv and Microsoft Teams. That aspect of our business is now starting to take root.

Building upon that, with the pending introduction of our FrontStage contact center and CoreInteract digital customer engagement platforms, we're now in the position to start driving new incremental revenue streams in these new market opportunities.

So at this time, I'll leave my mute button off in order to address any questions and I'll now turn the call back to the operator. Omar?

Question-and-Answer Session

Operator

[Operator instructions] Our first question is from Ian Castle with MicroCapClub. Ian state your question please.

Ian Castle

Jerry congratulations of the quarter. You seem to be pound around here in the last call it 90 or 120 days and also some technology as well. I am curious when you see all this coming together, could you provide may be some color on when you see these pieces coming together maybe acceleration revenue?

Jerry Fleming

Yes it's a good question, Ian and first of all I do need to point out there crummy trainers on how to use the mute button on Teams but they're good business guys. So, as it relates to the revenue, since both of these solutions we expect to officially GA and I'd say both these solutions and I am talking now about the FrontStage contact center for Teams as well as the CoreInteract for Teams to have available to us in calendar Q1.

So to the extent that we can get through these what to do as obviously as first time products, we'll have to get through the customer pilots, but we do expect to be either billing or very close to billing in calendar Q1, which of course is our fiscal Q2 and then the wrapping from there. So we will see an impact. I can't say what the impact will be, but we will see a revenue impact from both solutions in FY '21.

Operator

All right, Mr. Fleming it appears we have no further questions. Do you have any closing remarks?

Jerry Fleming

No, I think we're good for now and I appreciate everyone's participation. We will be back soon and we'll be reporting our fiscal Q1 results in January. So we look forward to updating everyone on our next call and thank you very much for participating today.

Operator

All right. Thank you. This concludes today's conference. You may disconnect your lines at this time. Again thank you for your participation. Have a great evening everyone.