Altigen Communications, Inc.
Q2 2022 Earnings Call Transcript

Published: 15 May 2022

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the AltiGen Communications Second Quarter Fiscal Year 2022 Results Conference Call . At this time, all participants have been placed on a listen-only mode, but 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, Carolyn David, Vice President of Finance. Carolyn the floor is yours.

[Carolyn David:]

Thank you, operator. Hello, everyone, and welcome to AltiGen Communications Earnings Call for the second quarter fiscal 2022. Joining me on the call today is Jerry Fleming, President and Chief Executive Officer; Ryan Day, our new Chief Strategy Officer; Trent Rowley, Altigen's new Chief Operating 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 March 31, 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 matrix. We believe this will help improve transparency into our business. And we will continue to evaluate additional metrics as our new products began to contribute to our results. 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 calls can also be accessed from the Investor Relations section of our website. As a reminder, today's call may contain forward-looking information regarding the 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 OTC over-the-counter market, specifically the Company's audited annual report for the fiscal year ended September 30th, 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 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:]

Thank you, Carolyn, and good afternoon, everyone. Thanks for joining us for today's call. So we have quite a few updates for you today. And we'll begin with a brief summary of our numbers for our fiscal second quarter. Carolyn will then return a little bit later in the call to review the financials in detail after commentary from Ryan and Trent. For our fiscal 2022 second quarter, we reported revenue of $2.5 million down about 5% which was not totally unexpected compared to the year ago period. Now despite the top line performance, our non-GAAP net income increased 43% and our adjusted EBITDA was up 44%. Our total cloud service revenue for the second fiscal quarter increased by 1.3% compared to the same period a year ago. I can succinctly describe the revenue during the quarter, top line revenue during the quarter is more of the same. However, as we discussed during our investor day presentation on March 8, that is about to change. We finally started to roll out many of our new UCaas customer experience as a service and Ccaas products. As we saw, we're still in the early days because these products are sold on a monthly recurring software as a service basis it will take a few quarters for those products to ramp up and start contributing meaningful revenue streams. But we are now finally in the position in which we can start building upon our existing revenues. So let's take a few of those products and their current status. And the first is CoreInteract. The latest later version of CoreInteract contains much of the functionality their customers were requesting. And actually, when we introduced it, we wanted more functionality. Even though they said most of what they wanted, they wanted more functionality versus the initial product that we introduced. And strangely enough, they're willing to pay more for that functionality. So as a result, we had to more or less fast track two additional applications to meet those requirements that I'll briefly describe. The first was work group insights which is a real time reporting application built on top of CoreInteract. Now, work group insights is a unique enterprise application that's placed key work group and individual KPIs for managers and supervisors. This is particularly useful for the large companies we're targeting with distributed work forces to supervise business managers with a real time view of their employees activity and performance, regardless if they're in the office or working from home. Now the second application we introduced was CoreEngage. And this is a truly exciting and one of a kind, end user desktop productivity application, which is also built on CoreInteract. CoreEngage presents users with a 360 degree view of their customers, which includes all customer interaction activity in a single consolidated view. This includes things such as phone calls, voicemails, instant messages, emails, any interaction with a customer who's played that single view. CoreEngage further integrates with a company's back end systems, such as CRM, customer service systems, order management systems and the like and presents just the relevant data a user needs to see when a customer contacts them in order to best serve that customer. CoreEngage is really the cornerstone application for our strategy of taking the contact center to the enterprise. As such the CoreInteract application suite, which includes CoreInteract CoreEngage work event sites. The CoreInteract application suite both improves a company's customer engagement capabilities and increases employee productivity at a fraction of the cost of today's contact center solutions. Another new unique product is . This is an operator console from Microsoft Teams, which enables company operators and receptionists to quickly answer and transfer phone calls to an individual or department. It may not that sounds exciting, but Microsoft does not have an operator console for teams. And pretty much every company needs at least one operator console in their business. So this is a great opportunity for us to offer core attendance on our freemium model. In this case, we offer the first instance for free and then charge for additional instances to generate revenue on that side. We're doing this because there is no published list of companies that have deployed Microsoft Teams phone system, so it's very resource intensive to try to build such a list. By offering one copy free of CoreAttendant via download from the Microsoft Teams store, we can quickly identify those companies using Teams phone system, and then target those companies with our additional applications and services. Moving to the contact center, we are somewhat disappointed in the front stage omni-channel contact center for Microsoft Teams is still in customer preview stage. There have been a number of enhancement requests from our customers that need to be incorporated into the front stage product. So it will likely be next quarter when those are completed and we can truly start taking customer orders. The good news is that the version of front stage for our max cloud UCaas solution is ready to go and customer are in process. Now that our new max cloud UC app is going through their customer acceptance testing. We do expect to launch the full Max cloud UC platform with the front stage contact center over the next month. I will also provide a brief update on the status of our FinTech solutions. Our full suite of solutions consists of Altigen SIP Trunk service, that now include both caller verification and voice biometrics for secure account access, also includes our interactive voice response or bank by phone application, our new Max cloud UCaas platform, and the front stage omni-channel Ccaas solution, all integrated into Fiserv bank and Credit Union core processing platforms. As I briefly mentioned, most of these solutions are now in the customer pilot phase in revenues will be kicking in as soon as Fiserv begins to roll these products out. I'll now turn to a topic that I'm sure is in the minds of everyone. And that is our acquisition of ZAACT Consulting. To briefly recap, last year, we engaged an M&A firms specializing in the technology sector to identify Microsoft systems integration partner having deep expertise in the Microsoft technology stack, and specifically Microsoft Azure and Microsoft Teams. We weren't that interested in resellers. It was important to find a systems integration organization which had the technical skill sets required by enterprise customers, and an enterprise customer base. And we're a profitable growing company. ZAACT Consulting was the only company that met the extremely stringent requirements. We had many, many meetings with the ZAACT executive team as it worked to the potential combination, the synergies between our two companies became crystal clear, essentially addressing in which case, our company essentially address the same types of business challenges ZAACT from a custom development and services perspective Altigen from a software perspective, and all focused on Microsoft Azure and Microsoft Teams. As a result of the combination, packed along with their own product development efforts, we now uniquely have world class solutions and services which leverage Microsoft Teams and Azure. A clearly themes is an important platform for us to focus on due to the tremendous growth it has seen. And it will continue to experience. Azure is equally important, not only because all of our Team's customers rely on Azure cloud services, but also because we can support an Azure deployment anywhere in the world. In fact, our development and core teams are not only in the US, but also in UK, Taiwan, and Nepal. So we have support operations around the globe, which is really quite uncommon for a company of our size. Many of you are also aware that Altigen has historically outside of Fiserv largely focused on the SMB market. This is only because we did not have solutions suitable for enterprise customers. It has been our objective for some time to move up to the enterprise space and now we have the solutions and service capabilities enabling us to do so. I should also point out that most of the Altigen people and all of the ZAACT people come from enterprise backgrounds. So we are well versed and to sell service and support enterprise customers and the combination of Altigen and ZAACT as well positioned to become a leading provider of Teams solutions and services. Now, at this time, I'd like to turn the call over to Ryan Day founder and CEO of ZAACT Consulting and now Altigen's Chief Strategy Officer. Ryan?

[Ryan Day:]

Thank you, Jerry. And good afternoon, everyone. It's certainly my pleasure to join the call today. I'd like to spend a few minutes talking about my perspective on Altigen acquiring ZAACT Consulting as has been noted on several occasions, I was not looking for a company to acquire ZAACT. Altigen really impressed me with the type of business it was and I thought there was a great fit for existing employee base from a culture and focus perspective. After several discussions with the executive team at Altigen and doing some research on my own, I decided to move forward with the transaction. Jerry and his team's understanding of the communication side of Microsoft, and their firm grasp on where the future of Microsoft is headed which in my opinion, is Teams was a very attractive proposition. And they've been very accommodating to ensure that our team feels comfortable and that we fit in with the existing organization. Now that we are fully closed and acquired, it's time to roll up our sleeves and get to work on the integration. We are one company that can use all the information, connections, experience and abilities to move us all forward at an accelerated pace. As Chief Strategy Officer, my goals are to focus on our partnership with Microsoft and to help us work with large key clients. With Microsoft we realized that we not only need to be acquainted with the Microsoft Teams in the field, but we need to have some significant insights in relationships with leaders in Redmond and other areas. These relationships and ensuring that we are in lockstep with Microsoft, is what I have been tasked to do at Altigen. I'm currently meeting with local Microsoft context looking for introductions and advice on how to grow our partnership. I've also found that many Altigen employees have great relationships with Microsoft. And I am fine tapping into that to help our costs. One of the items we want to work on quickly is to become a managed partner with Microsoft, something that ZAACT has experienced doing. To us this is a stepping stone to becoming a larger, bigger player with Microsoft and all we need to do. As far as working with key clients, we have found great success in helping large enterprise customers utilize ZAACT Consulting depth to leverage Microsoft products for internal business process automation. When we combine this with Altigen's teams products, we feel like we can be a very strategic company and working with in both areas with the clients. Already we have had several combined demos with existing clients, and there has been significant interest in learning and engaging more with the combine offerings. Now, I'd like to introduce Trent Rowley, ZAACT's President and CEO, and Altigen's new Chief Operating Officer. Trent.

[Trent Rowley:]

Thanks, Ryan. And hello, everyone. I'm excited to be on the call today and to make everyone's acquaintance. My excitement for being here centers mostly around the main ideas that Jerry and Ryan have presented thus far specifically, the combined opportunities we can now bring to clients and our collective employee base that will drive shareholder value. Over the years, ZAACT has been successful at tackling technical business systems projects for large clients, centered mostly around Microsoft technologies, and an optimizing for customer revenue and profit. However, we have not had our own product portfolio to complement our custom development, and to offer an alternative delivery model to our clients that will generate reoccurring revenue for our company. Conversely, Altigen has a highly successful reoccurring revenue based product offering, which has served clients focused on a specific need, but they have lacked the customization capabilities that ZAACT brings to the table. Today and together, we will be able to maximize per customer revenue, and profit potential, bring a higher level of service to our customers, provide a desirable company for current and potential employees, and an attractive opportunity for investors. As the president and COO of ZAACT I focused on driving company efficiency to ensure a competitive and desirable offering in the marketplace to maximize company value and stability and to ensure our ability to hire and retain top talent in a competitive employment market. As the Chief Operating Officer of Altigen, my focus will be similar, with an initial efforts being focused on the following; integrating the two companies systems; people and processes, keeping the best and essential parts of both companies and ensuring current activities continue successfully. This includes identifying and improving areas of inefficiency and/or ambiguity to drive more revenue per employee, to better our ability to exceed customer expectations and to allow for the information to drive management decisions. If we execute on this successfully, we can drive company growth and profitability by setting definable, reachable and measurable contribution targets across the company and provide employees the support to succeed while holding them accountable to these targets. Ultimately, my efforts are designed to increase shareholder value by ensuring Altigen delivers sustainable growth and profits. Thank you for your time today. Now I'll turn the time back over to Carolyn David Altigen, VP of Finance. Carolyn?

[Carolyn David:]

Thank you Trent. Total revenue for the quarter was $2.5 million down approximately 5% on a year-over-year basis. This decline in total revenue was driven primarily by decrease of roughly 26% in our legacy products revenue. Legacy products are primarily comprised of perpetual software licenses, and software assurance revenue. As discussed on our previous calls, we expect this trend to continue until we start to ramp revenue from our new product lines in the coming quarters. Gross margin was 70% compared to 73% in Q2 last year, representing a decrease of approximately 300 basis points. The decrease in gross margin was primarily driven by higher amortization costs, capitalized software and a shift in our product mix. GAAP net income and EPS for the current quarter was $65,000 and breakeven compared to GAAP net loss of $336,000 or negative $0.01 per diluted share in the prior year quarter. On a non-GAAP basis, net income increased 43% to $300,000, or $0.01 per diluted share, and adjusted EBITDA increased 43.7% to roughly $300,000. Turning to the balance sheet, we continue to generate cash this quarter. We ended the quarter with $7.2 million in cash and cash equivalents up 6% compared to the preceding quarter. Working capital was $6.1 million compared to $5.8 million in the prior year quarter representing an increase of approximately 4%. This concludes the financial overview summary, I will now turn the call back over to Jerry. Jerry?

[Jerry Fleming:]

Thank you, Carolyn. I guess I have two messages I'd like to make sure I impart today. One, we finally have a very significant number of new solutions that are finally come into fruition of focusing enterprise market. And number two, those new products combined with our new enterprise services capability with ZAACT puts us in a great position to start really gaining traction in the market. And stay tuned on future earnings calls where we can update you further. So at this point, I'm going to turn the call back to the operator for questions. Operator?

[Operator:]

Thank you. Ladies and gentlemen, the floor is now open for questions. And your first question, say it's coming from Neil Cataldi. Neil your line is live. Please announce your affiliation and then pose your question.

[Neil Cataldi:]

Hey Jerry, thanks for taking a few questions here. Great to see the product finally out the door in March. Can you talk a little bit about the pipeline today? What is the early response been? And maybe what are the range of opportunities you're seeing in terms of seats?

[Jerry Fleming:]

Yes, thanks for the question, Neil, and thanks for joining us. That's a good question. Well, I'm going to really focus on CoreInteract. CoreInteract as I mentioned is the cornerstone of our growth strategy. As you know, that's a fairly new product with the new application. So we have right now in our pipeline for CoreInteract. And I'll just round it off to around 30 customer opportunities that are when I say opportunities, these are the customers evaluating our product, moving to a pilot phase, moving to some sort of a proof of concept, but in some sort of evaluation process. The total seats represented by those customers is in excess of 4500. So now, can I give you a forecast and say, How many are we going to close? How quickly they're going to close? No, but I think this certainly signifies this let's say the reception in the market, we're getting with CoreInteract. There's nothing else like it. There's not nothing like CoreEngage. And I think it will serve as a good benchmark, right for future revenues to come.

[Neil Cataldi:]

Alright, thanks. I know you've talked in the past about some of these opportunities being I don't know, as small as like 100 seats, but as large as is several 1000 seats. You mentioned 30 opportunities, 4500 seats, is there a bit of a like land and expand dynamic here? How should we think about the seat number you gave? And what we might see from you starting to get engagements with some of these entities?

[Jerry Fleming:]

That's a good question. Some of these companies are let's say, small to midsize companies 200, 300 employees, something like that, and some are over by 5 thousand, 10 thousand 20 thousand employees. And so we have seen the numbers. I gave us a fairly broad range. Now, for those very large companies have given you sort of the early forecast, because we do expect to have a land and expand and hard to say right now Neil that given some numbers on prior calls and investor days, I think that anybody using a CRM product in one of these companies is a target for us. And that's lots and lots of users in excess, typically 20% of the employees. Now, can we hit that? We're going to find out, but I think that's the realistic potential. We're looking at a total number of employees and our total opportunity. But we've got to prove our ROI first and work it up from there.

[Neil Cataldi:]

Okay. 30 opportunities. Have you guys had any bookings yet? And if so, can you maybe quantify what you expect the sales cycle to look like and what the number of bookings have been?

[Jerry Fleming:]

I'll have to refer to Carolyn on bookings. I know, it's probably some small bookings at this point where most of the people are proof of concept because they've been waiting for the CoreEngage and work Group insights applications. So it's probably not if there is much it's not much, which is why I don't know what it is or but so it was a second party question on that Neil?

[Neil Cataldi:]

The second part was how long you expect the sales cycle to be you've got 30 opportunities moving into pilot proof of concept. How long might that pilot phase need to be?

[Jerry Fleming:]

Sure. That's kind of a tricky question because it really depends on where you catch the customer in the sales cycle. And some don't do anything. So I don't know how to calculate that number. But normally, what we'd expect to see with a CoreInteract is if there's really an active project not to exceed 90 days start to finish, some can be a lot quicker. It's kind of tough to do faster than 30 days just because of corporate paperwork. But I think you could say 60, but it'd be more critical thing as a probably 90 is a little safer number.

[Neil Cataldi:]

Okay. So it's a minimal bookings as far which isn't a surprise the product launched in March. But you're seeing great traction. And it sounds like it's fair to say that when you report next, you'll probably be able to talk in much greater detail about the bookings behavior in the current quarter, is that fair?

[Jerry Fleming:]

I think so, yes, it is fair, and just maybe provide a little more color. So we're coming out the base CoreInteract is $15, a user, it's additional 15 bucks for CoreEngage, that's for voice. And the next phase, and you've heard Mark Allen give us phase one, two, and three, we get to the next phase will be adding SMS and email and some of the capabilities in those are all 15 bucks per user. So we're going to be at this range somewhere between the very base license of 15 bucks up to probably a whole bundle around $60, or $75, depending how deep somebody goes in. So what we'll see over time is not only increased number of users, but we should also see ARPU going up. So early on they don't start with the base stuff, we only have two licenses out right now. But over time that we're going to be able to grow up both ways. So I think at least will be an indicator of how we're doing at the end of this quarter when we can report some numbers for you guys.

[Neil Cataldi:]

Okay and then one quick question about ZAACT and their customer base. What is the opportunity? Or what might the opportunity be with the companies they're already working with? Can you tell us anything about those companies or the profile of them? And is that something that may be some, I don't know, low hanging fruit for you guys?

[Jerry Fleming:]

I can. I'm going to defer to either Trent or Ryan. I do know the answer to that. But I'm going to refer to the experts here because they have been involved with the introductions of Altigen to some of their larger customers. And I think they can probably give you a better picture. Trent or Ryan if you guys could jump in on that one.

[Trent Rowley:]

Sure. I can jump in. So no problem at all. So generally speaking, we work with a enterprise level, midsized enterprise level clients. We've actually already introduced Altigen into a very large nonprofit agency. We've introduced them into one of the largest credit unions in the in the country, and then as well as some of our other clients. So that process of integration is already happening as far as the clientele that we have currently. I don't know if we want to go into any more detail than that. I will say that our client base because we do focus on the larger clients. It's not as many clients but each client has the potential of larger and more complex projects and needs.

[Neil Cataldi:]

Thanks, that's helpful color. I'll step back and let some others ask. But I appreciate everyone's time. Thank you.

[Jerry Fleming:]

Thanks Neil.

[Operator:]

Thank you. And there are no further questions in queue at this time. I would like to pass the floor back to management for closing remarks.

[Jerry Fleming:]

Okay, I'd like to thank everyone for joining our call. It was a busy week this week with some folks at investor conferences. We certainly appreciate your participation. And we look forward to updating you on our next quarterly call. 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.