Altigen Communications, Inc. (ATGN) CEO Jerry Fleming on Q1 2020 Results – Earnings Call Transcript

Altigen Communications, Inc. (OTCQB:ATGN) Q1 2020 Earnings Conference Call January 22, 2019 5:00 PM ET

Company Participants

Jerry Fleming – President and Chief Executive Officer

Carolyn David – VP of Finance

Conference Call Participants

Ian Cassel – MicroCapClub

Maj Soueidan – GeoInvesting

Operator

Good day, ladies and gentlemen and welcome to your AltiGen Communications First Quarter Fiscal Year 2020 Results Call. [Operator Instructions].

At this time, it is my pleasure to turn the floor over to Carolyn David. Ma’am, the floor is yours.

Carolyn David

Thank you, Kasey. Good afternoon, everyone and welcome to AltiGen Communications’ earnings call for the first quarter fiscal 2020. With me on the call today is Jerry Fleming, President and Chief Executive Officer; and I’m Carolyn David, VP of Finance. Our earnings press release was issued today after the market closed and maybe downloaded from the Investor Relations section of the Company’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 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 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 may 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 statements 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 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

Thanks, Carolyn, and good afternoon, everyone. Thank you for joining us for today’s call. As Carolyn mentioned, earlier this afternoon we’ve reported our fiscal 2020 first quarter results. Revenue for the first quarter was $2.84 million compared to $2.66 million in the preceding quarter and $2.78 million in the same period a year-ago. Net income was $502,000 in the first quarter versus $290,000 last quarter and $612,000 in our fiscal 2019 first quarter.

For our usual discussion, I will also provide details regarding our revenues for the four revenue categories we track, which include one-time product revenue, annual recurring revenue, services revenue, and monthly recurring revenue.

One-time product revenue represents licensed revenue we receive from software licenses, from customers who purchase licenses from us for their legacy on-premises AltiGen PBX systems. That revenue stream continues on a downward trend as a result of our shift to a cloud based monthly recurring revenue model.

In the first quarter one-time product revenue of $205,000 declined 23% from the previous quarter and 55% compared to the same period a year-ago. This is clearly a drag on our overall growth rate, but it is an inevitable byproduct of moving to a monthly recurring model.

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 one-time product revenue, it will experience a slow decline over time as a result of migrating our on-premises customers to the AltiGen cloud. In the first quarter, annual recurring revenue of $722,000 actually show the small 1.5% increase versus the fourth quarter of FY ’19 and a 7% decline compared to the prior-year quarter.

Services revenue, the third category, includes revenue from cloud deployments, technical support, and product customizations. While we expect services revenue to demonstrate an upward trend over time, in a given quarter it may be up or down from the previous quarter based on lumpiness of those transactions. For the first quarter, our services revenue was $214,000, which was up 145% increase over the previous quarter and a 139% increase over the prior-year quarter.

The final and most important category is monthly recurring revenue, which is comprised of our hosted software plus SIP trunk service. In the first quarter, we recorded just over $1.7 million in monthly recurring revenue, which increased by 7% compared to the preceding quarter and 17% on a year-over-year basis.

Approximately 90% of our cloud revenue was attributable to our hosted MaxCS PBX, Skype for Business and Teams accounted for the remaining 10% of those revenues. We are beginning to see some traction with Microsoft Teams phone system with approximately 10 customers now in production as the end of — as of the end of December and dozens more in our sales pipeline.

We also successfully migrated the workspace customers we acquired in August on to our hosted Skype for Business platform during the first quarter. However, due to deployment times and billing cycles, we recorded only about $15,000 in associated cloud revenue during the first quarter from that transaction.

Regarding the status of our FrontStage omni-channel contact center solution, we are continuing to work with our business partner Atlantis Telecom to integrate FrontStage to our MaxCS PBX and Skype for Business. And when the Microsoft Teams APIs are finally available, we will be integrating with Teams as well. We are currently looking to launch FrontStage as a managed cloud service in calendar Q2.

At this time, I will turn the call back to Carolyn to review the financials in more detail. Carolyn?

Carolyn David

Great. Thank you, Jerry. Total revenue for the first quarter was $8 million — pardon, $2.8 million, up 7% from $2.7 million in the previous quarter, compared to the prior year period total revenue was the same. Cloud revenue for the first quarter was $1.7 million, up 7% from $1.6 million in the preceding quarter and up 17% from $1.5 million in the same period a year-ago.

For the current quarter, we recorded approximately $204,000 in perpetual software licensed revenue compared with $265,000 in the previous quarter and compared with $450,000 in the prior year quarter, representing a decrease of approximately 23% and 55%, respectively.

Software Assurance revenue for the first quarter of 2020 increased slightly to $722,000 compared with $712,000 in the previous quarter. Compared to the same period a year-ago, Software Assurance revenue decreased at approximately 7% from $778,000. Professional services and other revenue was approximately $214,000 for the current quarter compared with $87,000 and $89,000 in the preceding quarter as well as the prior year quarter, representing an increase of 145% and 139%, respectively.

Turning to the margins. First quarter margin was 77.6% versus 80.3% in the preceding quarter and 82.9% 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.

GAAP operating expenses for the quarter totaled $1.7 million, a slight increase of $130,000 or 8% from $1.6 million in the previous quarter compared with the prior year quarter, GAAP operating expenses were the same.

GAAP net income was $502,000 or $0.02 per diluted share compared to $290,000 or $0.01 per diluted share in the preceding quarter, and $612,000 or $0.02 per diluted share in the same period a year-ago. As discussed on our previous call, our fourth quarter fiscal 2019 financial results include a non-cash tax expense of approximately $285,000. The tax expense differs from the federal statutory rate of 21% primarily due to an increase in the amount of net operating losses expected to be utilized before expiration.

On a non-GAAP basis, net income for the quarter was approximately $621,000, or $0.02 per diluted share, compared with $635,000, or $0.02 per diluted share in the previous quarter, and $736,000, or $0.03 per diluted share in the same quarter last year, representing a slight decrease of 2% and 16%, respectively.

Moving to the balance sheet, we ended the quarter with $4.4 million in cash and cash equivalents, the same as the preceding quarter. Working capital was $3.4 million compared to $3.2 million at the end of the preceding quarter.

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

Jerry Fleming

Thanks again, Carolyn. To summarize my comments, we are continuing to focus on growing our cloud revenues, while keeping of course eye on expenses. And in fact I should point out that this quarter represented our best cloud order ever in terms of revenues, and in fact it was our best overall revenue quarter in more than five years. So I think we’re on the right track. And we are certainly encouraged by the momentum we are seeing with our first Microsoft Teams offering, which is our direct routing SIP trunk telephone service. We also have plans to extend our offering with additional services, which I will discuss more on our next call. And most importantly we’re excited about the potential with FrontStage omni-channel contact center, and we are seeing quite a bit of interest from both current and prospective customers through Microsoft Teams integrated contact center solution. And I will certainly keep you posted on our progress here.

Now in order to address any questions, I will turn the call back to the operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Edward Gilmore with Little Grapevine [ph]. Please go ahead.

Unidentified Analyst

Hey, Jerry and good afternoon and congrats on the solid progress in the cloud revenue. I just had a question on the Atlantis Telecom partnership. Can you give any additional color on what impact do you expect that to have for the top line in fiscal year 2020.

Jerry Fleming

Yes, I will try, Ed. As you know, we are not providing forward-looking projections, but as I mentioned in my commentary that we’re looking to launch that in — that solution in calendar Q2, which is fiscal Q3 for us. So we do expect some revenue contribution in this fiscal year. But I think we will see the lion share of that starting to materialize and actually become a material component of our revenue in FY ’21.

Unidentified Analyst

Okay, great. And just a couple more questions. For professional services, is that — how much of that is attributed to revenue that ultimately is kind of cloud revenue. And I guess a follow-up to that would be do you expect that to be lumpy quarter-to-quarter or is it something that you see kind of keeping pace with the cloud group.

Jerry Fleming

Yes ,good questions. So, Carolyn, you may have to jump in and say exactly how much revenue was cloud based. I will tell you what — my response would be it’s a good chunk yet of that services revenue. So there are — as I mentioned that’s three components, a big chunk of that is the deployment services. This is somewhat lumpy, one of their customers. just as an example that we turned up live this current quarter, it was a $30,000 of professional services to set up their Teams direct to routing system. And so that’s why it’s a little bit lumpy, some other customers might be 3 or 4K. Customers could be larger than that and other transaction was cloud based, having to do with our SIP Trunk services. And that’s the extended offering that was 60, that I will discuss next quarter with $60,000 in revenue. So we will get those and again that’s why we get a little bit lumpy because they could be a few thousand, up to tens of thousands, but the lion share is certainly related to our cloud solutions.

Unidentified Analyst

Okay, great. And then just last question. On the Team’s API I know that — that’s not available yet, but do you — have they communicated to any of the partners of more of a concrete timeline and do you have a sense yet, I guess of how long that would take your team to ultimately integrate and then start to be able to offer to the marketplace?

Jerry Fleming

Yes, Microsoft has publicy stated that it will be first quarter of 2020, which is this current quarter and we’ve had communications and we are in. And just to clarify, we’re in the Microsoft TAP program, which is that stands for technology adoption partners that we get early information on — there’s only, say, a handful maybe a large handful, but a handful of companies that are in this technology adoption program they could assess to Microsoft code early. And — but the latest word is March 31, so yes it is technically first quarter, but we expect that will probably be more of a beta version. It will be Q2 before calendar Q2 before we really see production versions. I do want to point out — I don’t expect this to be the flood gates opening once this API is available, the significance is that it opens up a brand new opportunity that we are going to be all over and we do — because we get the early code will be ready to go when Microsoft is ready to go. And we will have a unique positioning to be able to sell our contact center solution and other solutions into Teams customers that. Let’s say some of the — maybe more well known competitors just aren’t going to be able to do.

Unidentified Analyst

Okay. Thanks for talking Jerry and I appreciate you taking the question.

Jerry Fleming

You bet. Thanks, Ed.

Operator

[Operator Instructions] Our next question comes from Ian Cassel with MicroCapClub. Please go ahead.

Ian Cassel

Hi, Jerry. I just have one question. I was wondering if you could provide any color on Fiserv relationship and how that’s progressing?

Jerry Fleming

Yes, hi. Yes, I — well, I can disclose what gets us as much as possible since we’re under NDA with Fiserv. I will just say that its progressing very well. And the FrontStage is a critical component of that relationship and a lot of the work we are doing as mentioned, we are doing integration to our MaxCS IP-PBX with the FrontStage platform. Although as I’ve mostly been talking about we’re going to be selling this with teams. And the reason we are doing the markets. CS integration which is AltiGen PBX, because that’s what Fiserv sells as their core PBX platform. So that may give you some idea that we are heading down the path for the Fiserv and thank you. I can’t. This is a big shift. More than a $10 billion company so it takes little time to get the oars in the water. But once it takes off and its quite large, and certainly moving in the right direction.

Ian Cassel

Okay. Thank you.

Jerry Fleming

Yup. You’re welcomed.

Operator

And our next question comes from Maj Soueidan with GeoInvesting. Please go ahead.

Maj Soueidan

Hello, Jerry.

Jerry Fleming

Hey, Mach.

Maj Soueidan

A quick question. It’s been three months now since RingCentral and Avaya announced their partnership. And I’m wondering what you’re seeing right now and how in terms of the industry, what’s going on? How are your customers are reacting maybe that we are on a Avaya’s platform, maybe the on-premise platform? And I guess when I have up trying to dealt their own cloud platform and that’s what it is going to be RingCentral. So maybe you can describe and talk about how that — what they’re doing in the industry and maybe are you seeing any fallout from some of these customers to be out there without a solution right now?

Jerry Fleming

Well, that’s a good question. I probably don’t have a real clear answer for you and it’s no better than what I’ve — [indiscernible] I will give a little while ago. I’ve heard completely different views of how successful this is going to be. On one hand, we hear from RingCentral and they get access to all the Avaya customers. On the other hand, I hear from Avaya, let’s say from Avaya related people, not from Avaya themselves. So I want to clarify that. They are just viewing this as simply a simple way to sell SMB solutions without incurring the cost on their side. But with those diverging views, my view is this. Giving RingCentral access to the via customers, this is going to create a situation in the marketplace where the customers that they’ve been long time of Avaya customers, now they’re going to say I have to switch platforms, I’m going to go take a look. To me that’s a really good thing for AltiGen, when they go take a look because a lot of those customers and many customers are Office 365 customer, the Microsoft is making it easier and easier for 365 customer team. So I view that as — just a positive move, generally speaking for AltiGen going forward.

Maj Soueidan

Okay. Are you seeing any of that kind of communication with some of the customers?

Jerry Fleming

We’ve seen some. I can’t really say that it’s like a major breakthrough that all of the sudden customers are revolting and bolting but we can’t say that because we’ve a number of Avaya customers that switch over to our platform and the Team’s platform. So I can’t say that’s because of the RingCentral arrangement or not, but anytime that you’re going to force the customer to change, you’re going to create opportunities for more than just that matter involved that’s looking — that’s forcing the customer change.

Maj Soueidan

Right. Thanks, Jerry.

Jerry Fleming

Yes. You bet.

Operator

[Operator Instructions] And it appears we’ve no further questions from the telephone line. So I will turn the call back over to management for any closing remarks.

Jerry Fleming

Thanks. Thanks, operator, and thank you everyone for joining our call and thanks for the questions guys. Certainly appreciate you joining and look forward to updating you on our next call in April. Thanks again.

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