Altigen Communications, Inc. (OTCQB:ATGN) Q3 2022 Earnings Conference Call August 18, 2022 5:00 PM ET
Company Participants
Brian Siegel – Senior Managing Director, Hayden IR
Jeremiah Fleming – Chief Executive Officer
Trent Rowley – Chief Operating Officer
Carolyn David – Chief Finance Officer
Conference Call Participants
Neil Cataldi – Blueprint Capital
Operator
Good afternoon, ladies and gentlemen, and welcome to the Altigen Communications Third Quarter Fiscal Year 2022 Results Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host, Brian Siegel. The floor is yours.
Brian Siegel
Thank you. Hello everyone, and welcome to Altigen Communications earnings call for the third quarter fiscal 2022. Joining me on the call today is Jerry Fleming, President and Chief Executive Officer; Trent Rowley, Altigen’s Chief Operating Officer; and Carolyn David, VP of Finance.
Earlier this afternoon, we issued an earnings release reporting financial results for the period ended June 30, 2022. This release can be found on our IR website at www.altigen.com. Please note that we have added some supplementary tables with new revenue breakouts and metrics. We believe this will help improve transparency into our business and we will continue to evaluate additional metrics as our new products begin to contribute to our results.
We have also arranged a 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 the future financial performance of the company. We wish to caution you that such statements are just predictions and actual results may differ materially due to certain risks and uncertainties that pertain to our business.
We refer you to the financial disclosures filed periodically by the company with the OTCQB over-the-counter market, specifically, the company’s audited annual report for the fiscal year ended September 30, 2021, as well as the safe harbor statement 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 the results. A reconciliation of GAAP to non-GAAP measures and additional disclosures regarding these measures are included in today’s press release.
Now, I’d like to turn the call over to Jerry Fleming for opening remarks. Jerry?
Jeremiah Fleming
Thanks Brian, and good afternoon everyone. Thank you for joining us for today’s call. So, I’ll start off the call today with a brief update on our various business initiatives. Following that, Trent will speak about the integration of our recent acquisition ZAACT Consulting with Altigen, then I’ll turn over the call to Carolyn to review the financials.
So, as a reminder, over the past 20 years or so, we have transformed from an on-premises hardware-centric company to an on-premises all software-centric solution with our products and ultimately to a hosted cloud solution. However, as Unified Communications Technology has evolved and advanced, customer needs have also evolved. Therefore, our older MaxCS PBX centric technology is no longer state-of-the-art. And while our hosted MaxCS products still represent the vast majority of our cloud revenues, it became clear that we needed a more modern architecture to drive growth and enhance margins.
Our solution to that was to introduce MaxCloud, a new geo-redundant multi-tenant complete UCaaS platform. Not only does MaxCloud overcome the challenges we were experiencing with MaxCS, more importantly, it gives us the opportunity to grow our UCaaS business based on the MaxCloud enhanced architecture, integrated UC functionality and new mobile applications.
MaxCloud will be formally released next month and will be sold through our strategic partnership with fintech giant, Fiserv and through Altigen’s legacy channel partners.
Fiserv integrates our products into its core account processing platforms and exclusively host those products in its own data centers sold under the Fiserv brand ConvergeIT name to its financial services clients. Fiserv currently has about 100 legacy on-premise and hosted MaxCS customers with the latter accounting for about one-third of these customers. In total, there are about 3,500 seats that Fiserv plans to migrate to the new MaxCloud platform, initially targeting the migration of existing hosted MaxCS cloud customers.
While this is good news in and of itself, most of these customers also have the requirement for our new FrontStage contact center platform. Additionally, due to the heightened security risks for banks and credit unions, our secure access SIP Trunk solution, which includes caller authentication and voice biometrics is also a very appealing add-on to most Fiserv customers. So as these customers migrate to the new MaxCloud platform, we see the potential for significant upselling opportunities. Now to quantify this opportunity today, because many Fiserv customers deploy our full solution suite, the average revenue from those customers as they migrate to the cloud, is roughly 10 times what we see from an on-premise customers.
And as the Fiserv customers adopt MaxCloud, what we’re seeing on average is that a smaller customer would spend approximately $3,000 per month on an Altigen solution, while a midsized customer can be expected to spend about $8,000 per month on the Altigen solution. And then the larger customers typically look to be spending an average of $20,000 or more for the Altigen full suite of solutions. Again, these numbers still can go up fairly significantly due to upselling the FrontStage and other ancillary products.
In addition to its plan to migrate current MaxCS customers to MaxCloud, of course, Fiserv is also targeting its broader base of approximately 5,000 banks and credit unions that are Fiserv customers that do not currently use the MaxCS system, and of course, pitching the entire MaxCloud and Altigen solution suite to those customers.
During our third quarter, and as part of an advanced deployment, Fiserv rolled out their first customer on the combined MaxCloud and FrontStage platforms. This particular customer is a regional bank with $4 billion in assets and is a net new customer for Altigen. To date, the feedback has been very positive from both Fiserv and the bank for the new solution. In addition to this customer, Fiserv has either secured or submitted quotes for another dozen contracts with their customers. So, there is truly movement from Fiserv with a new fintech solutions as we’re seeing good progress here. In summary, the opportunity with Fiserv is tremendous and we believe that as Fiserv transitions existing MaxCS customers to the MaxCloud and FrontStage platforms, as well as adds net new customers, the partnership will drive mid to long-term revenue growth opportunities for both Fiserv and Altigen.
The next sales channel that I’d like to address is our legacy MaxCS customer base, many of which have been sold to and are supported by our long-time channel partners, which we tend to call legacy channel partners. Today, we have roughly 500 on-premises customers that have not yet migrated to a cloud solution, which are our initial targets to upgrade to MaxCloud since they represent the greatest risk. We also have another 350 or so MaxCS cloud customers, which we plan to migrate to the new cloud MaxCloud platform.
In total, these two customer bases, one on-premise, one in the cloud, have about 32,000 potential subscribers and certainly weighted a little bit more heavily on the on-premise customers, but we’re targeting all of them to convert to MaxCloud. I should also point out that converting our on-premises customers brings the biggest bang for our buck as we estimate the incremental revenue per customer on on-premises customer — I’m talking about to be about $400 per month from what they’re currently spending. As a secondary benefit, these customers will help us scale a more efficient cloud architecture, essentially lowering our cost per customer as we bring them on to the platform.
Additionally, given that our existing hosted MaxCS customers already cloud customers, we really don’t expect a significant revenue boost here, but the opportunity with these customers is really about the margin enhancements by moving them on to our newer much more cost effective architecture, which is MaxCloud.
To date, we have signed seven contracts for MaxCloud with early adopters including five existing customers that will transition from MaxCS on-premise to the cloud and two net new customers. A typical small business customer for Altigen has between 20 and 50 seats or subscribers, while the average size is, of course, a little bit toward the higher end of that range. Two of the seven customers that I just mentioned are fully deployed, two are in the deployment process and the remaining customers will deploy fairly soon. Overall, we do expect it will take somewhere around 18 months, perhaps 24 months to migrate all of our current MaxCS customers onto the new MaxCloud platform. But that being said, clearly now the MaxCloud train has left the station and the momentum is building. So with things progressing nicely with our UCaaS platform, which is MaxCloud; and our CCaaS platform, which is FrontStage, let me now provide an update on our Microsoft Teams solutions.
So, I’m first going to discuss the overall market opportunity with Microsoft Teams. The most recent data we have from Microsoft is that there are approximately 275 million monthly active Teams users. Microsoft has further reported that more than 100 organizations have more than 100,000 Teams users and nearly 3,000 companies have more than 10,000 Teams users. Now interestingly, these numbers have tripled just since 2019.
The specific opportunity for Altigen is with Microsoft Teams Phone System, which we enhance and extend with our suite of Teams applications. As I previously mentioned, as it still stands today, we believe Altigen has the most comprehensive suite of Teams Phone System solutions on the market anywhere. While Microsoft does not publish the number of Teams Phone System users, there was a very informative article published by No Jitter this past June entitled, why 80 million Microsoft Teams users is just the beginning. In the article, the author extrapolated the number of Teams Phone System users based on the various data presented by Microsoft. The number he came out with equates to between 27 million and 54 million Teams Phone Systems licenses which were with in line with our own internal estimates and certainly demonstrate the massive potentials of the team — the Teams market opportunity. Let me just repeat those numbers. 27 million to 54 million Teams Phone System licenses, those are organizations using Teams as their phone system or users using Teams as their phone system compared to the 275 monthly active users. So, we’ll call it anywhere from 10% to 20% of those users now have probably migrated to Teams Phone System giving us the market opportunity.
And as we discussed previously, the real home run opportunity for Altigen is CoreInteract, which is our digital customer engagement platform for Teams Phone System. Now to briefly review, CoreInteract is actually comprised of 3 integrated applications. First is the base CoreInteract product, which includes the engine for routing and queuing customer requests along with a systems administration module.
Second, a tightly integrated application is Workgroup Insights, which is a desktop reporting application for line of business managers and supervisors, which displays real time performance statistics for either a workgroup or an individual in-network group for the supervisor. This is actually particularly important in a distributed workforce and work-from-home environment as Workgroup Insights provides managers and supervisors with critical KPI information that something isn’t available otherwise.
The third application is CoreEngage. Now this is a new application that integrates with CoreInteract on the back end and presents users with a 360-degree view of their customers in a single consolidated screen. CoreEngage also integrates with the company’s CRM or other business applications to display relevant customer data from those systems along in phone — excuse me — when a phone call is answered. So, I want to take a moment to explain the significance of this.
Virtually every midsize to large organization has deployed some type of CRM solution. CRM, by the way, stands for customer relationship management. And every such organization has deployed a business phone system, which we can consider to be both an internal and customer communications platform, obviously, is used for both. Today, outside of a contact center, there is typically little integration between the company’s customer relationship management platform, or CRM, and the company’s customer communications platform or phone system. Now why is that? The primary reason is that organizations are simply not willing to pay the $200 to $500 per user per month charged by the contact center vendors to integrate the communications platform for a company’s dozens or hundreds or even thousands of CRM users, just doesn’t — isn’t going to happen.
CoreEngage, along with CoreInteract, integrates these two platforms so that every communication with a customer is inextricably linked to the customer CRM record, all accessed and displayed within the CoreEngage application, which, by the way, is a native Teams application. This is all accomplished for $30 to $60 per user per month, which depends on the customers’ requirements compared to the $200 to $500 a month that a customer would spend for a contact center solution. This creates the opportunity for Altigen in the enterprise.
Now there are tens of millions of users of customer relationship management systems and as discussed tens of millions of Teams Phone System users available for us to target to deliver our integrated solution on a highly effective — excuse me — highly cost effective basis.
Regarding our progress with the CoreInteract solutions suite, to date, we have about a dozen paying customers. We’ve also provided approximately 50 new quotations to prospective customers, which generally range in side — in size from 10 users to 250 users. While we don’t have enough empirical data yet to project our quotation to close ratio, we do expect that a reasonable percentage of these quotations will result in close business.
Over time, we also plan to execute a land-and-expand strategy to add new departments with an existing CoreInteract customer to drive further revenue opportunities. And we’ll certainly keep you posted on our progress on each of these quarterly calls.
Moving to FrontStage for Teams. As I discussed earlier, we are building momentum with FrontStage on the MaxCloud platform. However, the Teams version is still not quite ready for general release and realistically it will be available sometime in calendar Q4 before we can truly start selling the product.
Now before I turn the call over to Trent to discuss our consulting and professional services business, I do want to remind everyone that we did not acquire ZAACT for the current business, which is large project oriented custom development services, but instead for their broad technical expertise on the Microsoft platform. These skills are absolutely required to deploy Altigen’s new enterprise solutions.
I’m sure Trent will talk about this more. So, Trent?
Trent Rowley
Thanks Jerry. As Jerry mentioned earlier, virtually every prospective enterprise customer we’ve engaged is interested in integration between products like CoreEngage and one or more of their back-end systems.
Historically, Altigen has not been able to complete these nor have they had the skills or resources necessary to provide the custom integration services that large customers require. By combining Altigen’s products with ZAACT’s technical prowess, enterprise level system integration is now a core strength for the company. ZAACT’s success as a Microsoft-focused system integrator, which includes deep employee experience and capabilities, aligns very well with Altigen’s Microsoft centric software applications.
As Altigen’s products penetrate the market, we believe that there are significant synergies to exploit that will create incremental value to our customers, partners and shareholders. As the shared business model develops, we expect to see fewer legacy ZAACT professional services projects as our emphasis shifts towards providing professional services to enhance Altigen’s customer experience solutions. This will result in a greater number of services projects and should create more stickiness with our products.
Also by offering high-level professional services, our customers will be able to tailor integrations to their specific business needs, ultimately leading to cross-selling opportunities and additional SaaS licensing and product sales.
It is worth noting, due to the nature of project based professional services, we don’t always produce smooth and linear revenue growth. We have and will continue to see unevenness in quarterly results as revenue is recognized based on our ability to perform and build project work.
For example, in the fiscal third quarter, we completed significant work towards a customer project, but we will recognize the revenue for that work in the current quarter. As the two companies consolidate business models and our reoccurring revenue from products increases, we expect all revenue to smooth out over time.
Moving onto company integration process. We are integrating systematically to realize synergies as we consolidate systems and cultures. We have fully integrated our services and project management teams under shared management, as well as our accounting systems with more operational and administrative integrations underway. As a result, we expect to see material cost savings as well as improved product and project delivery as we head into 2023.
Thank you for your time today. I’ll now turn the call over to Carolyn to discuss our third quarter results. Carolyn?
Carolyn David
Great. Thank you, Trent. Moving to our third quarter results, we reported total revenue of $3 million compared to $2.8 million in Q3 2021. Total cloud services revenue for quarter 3 was $1.91 million compared to $1.96 million in quarter 3 last year. Our professional and other services revenue increased approximately $344,000 or 163% compared to the same period a year ago. This increase was primarily attributable to the contributions from acquisition of ZAACT.
Our gross margins decreased 200 basis points to 68% from last year. This decrease was a result of a mix shift towards higher professional services revenue resulting from the ZAACT acquisition.
GAAP net loss for the current quarter was roughly breakeven or negative $0.00 per diluted share compared to GAAP net income of roughly $1 million or $0.04 per diluted share in the prior year quarter.
I would like to note that our fiscal 2021 results include a onetime non-cash gain of roughly $800,000 related to the forgiveness of the company’s PPP loan. On a non-GAAP basis, net income decreased 51% to $200,000 or $0.01 per diluted share. The decrease in non-GAAP net income was primarily the result of higher headcount related expenses in connection with the launch of our new products.
Now, let’s turn to liquidity. We ended the quarter with $3.4 million in cash and cash equivalents, down 52% compared to the preceding quarter. However, cash flow from operations increased 84% to roughly $1 million. As previously announced, in May, we closed the acquisition of ZAACT and paid approximately $3.9 million towards the purchase price and acquisition related costs.
This now concludes the financial summary. I will now turn the call back to Jerry. Jerry?
Jeremiah Fleming
Thank you, Carolyn. Just a few closing comments. It is important to note that the majority of Altigen’s fiscal third quarter revenue was based on Altigen’s legacy solutions with a partial quarter contribution from the ZAACT business. But that situation is now starting to change, moving forward, as we get full quarter revenue contribution from our ZAACT business unit and increasing contribution from our new customer experience solutions, we do expect to see accelerating profitable growth.
With that being said, one of my primary objectives for today’s call was to provide additional insights regarding our progress on multiple fronts. Hopefully, with the information we provided on the call today, the picture is becoming more clear as it relates to both our progress as well as our business outlook.
Understandably, we still have a lot of work to do, not the least of which is adding the many new capabilities to our products that we’ve identified in our internal product road map. The positive news is that our new products are gaining traction in the market and our business momentum is building as evidenced by our growing list of new and prospective customers.
On a final comment, I would ask everybody to please keep in mind that this is just the tip of the iceberg as we’re truly just getting started.
With that, I’m now going to turn the call back to the operator for Q&A. Operator?
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions]
The first question is coming from Neil Cataldi with Blueprint Capital. Your line is live.
Neil Cataldi
Hi. Thanks Jerry. Great job guys so far. You mentioned customer interest has been substantial across all three of your opportunities. You signed your first customers during the quarter. Regarding CoreInteract, I was wondering if you could shed a little light on the sales cycle, what you’re seeing in the early innings. It seems like maybe 90 days might be the lower end of the range for you to run through proof-of-concept and get through contracting. Is that fair?
Jeremiah Fleming
Yeah. I think realistically, Neil, 90 is about as fast as you can go, but the time you get — particularly for enterprise customers, by the time you get to your proof-of-concept and the purchasing process.
Neil Cataldi
Okay. And then, are there any resellers that are maybe moving quicker than others? Or maybe even the same question in terms of a geographic perspective and what you’re seeing with the initial traction?
Jeremiah Fleming
We do. I mean it’s not — certainly not linear for the number of research. Some are generating far more opportunities than others. We do have one that’s really brought quite a truckload of opportunities to us. I can’t share that with you because — just for competitive reasons, we don’t want to get them targeted. And in fact, in that particular reseller, we are targeting replacing some other products that they’re currently selling as well in addition to CoreInteract. So, I don’t want to — not tell you this information, but just for competitive reasons, I can’t really discuss that at the moment.
Neil Cataldi
Okay. On the Fiserv front, this is an opportunity you’ve been talking about for a long time. It sounds like the MaxCloud [ph] starting to move, one deployed. I think you referenced 12 other opportunities. Has anything changed on their end, which may be signaling that things are going to be moving faster?
Jeremiah Fleming
Well, that’s a good question. We don’t like them to move faster, of course. But we have gotten everything solidified. So, what Fiserv has had to do just — and as I discussed, let’s say, probably at this time last year even as they were moving data centers, right, there was a bit of — I’ll call it — maybe a moratorium on selling new customers as we’re looking to migrate those customers to the new data centers, which by the way, hasn’t happened. But that more “moratorium” and I’m using that word and that’s not their word, has been lifted, and we are identifying new customers. But we had to go through quite some time with Fiserv in the new data center, because they are hosting both MaxCloud and they’re hosting FrontStage as well. It was quite uncommon, right? Because most of the campaigning solutions are only available from that vendor in their cloud. So, it took us a long time to get through the security. Issues with Fiserv to get all the integrations completed. And now that those are completed and we’re selling customers, I’m sure there’ll be a few additional hassle [ph] requests as we have our first couple of customers on board. But yeah, we do expect to see that business to start to accelerate. I just can’t give you an exact timeline since we’re not in control of the sales cycle.
Neil Cataldi
Got it. Okay. Two other quick ones. You announced earlier this week preferred status with Microsoft. I don’t know how did you guys get that? Or was that — like is that a difficult status to obtain?
Jeremiah Fleming
Yeah. We had to work with the Microsoft team in Redmond to get that. And it is — I think, it’s quite notable, because it really gives us a lot of credibility from the customer perspective because I don’t know the percentage of applications in the app source in the market are certified as preferred solution, but it’s not a great number, right? So that certainly gives us credibility. It also opens up the door for Microsoft reps and their own internal playbook, if you will, to recommend Altigen for their customers because we are a preferred solution.
So, I wouldn’t call it dam-breaking type of stuff, but it certainly in — but it certainly creates additional opportunities for us and also paves the way for additional things that we’re trying to do with Microsoft that will become even more strategic that — again, due to the nature of those discussions, I can’t disclose that now, but it’s certainly on that path.
Neil Cataldi
Okay. All right. And then my last one, just a quick one. How many weeks of contribution from ZAACT did you guys have in the quarter?
Jeremiah Fleming
It was — we closed on May 7, so about seven weeks.
Neil Cataldi
Okay. All right. Jerry, thank you. I will get back in queue.
Jeremiah Fleming
Okay. Thank you, Neil.
Neil Cataldi
Yeah.
Operator
[Operator Instructions]
Okay. We currently have no questions in queue. I’d like to turn the floor back to Jerry for any closing remarks.
Jeremiah Fleming
Okay. Well, thank you, operator and thank you everyone for joining us today. It will be a little while before our next call since it is our year-end so that it will probably occur toward the end of November. But we’re certainly looking forward on that call to updating you on our progress. So, thank you very much.
Carolyn David
Thank you, everyone.
Operator
Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
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