Altigen Communications, Inc. (PNK:ATGN) Q3 2023 Earnings Call Transcript

Altigen Communications, Inc. (PNK:ATGN) Q3 2023 Earnings Call Transcript August 22, 2023

Operator: Greetings. Welcome to the Altigen Communications Third Quarter Fiscal Year 2023 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] Please note this conference is being recorded. I will now turn the conference over to your host, Carolyn David. You may begin.

Carolyn David: Thank you, operator. Hello, everyone, and welcome to Altigen Communications Earnings Call for the Third Quarter Fiscal 2023. Joining me on the call today is Jerry Fleming, President and Chief Executive 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 June 30th, 2023. This release can be found on our IR website at www.altigen.com. 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. Before we begin our formal remarks, we need to remind everyone 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 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 30th, 2022, as well as the Safe Harbor statement the company released in today’s press release issued today. These documents contain important risk factors that could cause actual results to differ materially from those contained in the company’s projections or forward-looking statements. Altigen assumes no obligation to revise any forward-looking information contained in today’s call.

During this call, we will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to or a replacement for the comparable GAAP measures, but we believe these measures help investors gain a more complete understanding of results. A reconciliation of GAAP to non-GAAP measures and additional disclosures regarding these measures are included in today’s press release. Now it is my pleasure to turn the call over to Jerry Fleming for opening remarks. Jerry?

Jeremiah Fleming: Thanks, Carolyn, and hello, everyone. Thanks for joining us for the call today. Let me start by first providing a brief overview of our third quarter results then I’ll follow that with an update on our business progress. After that, I’ll hand the call back to Carolyn for a detailed review of the financials. As you’ve probably seen earlier today, we reported revenue of $3.4 million for our fiscal 2023 third quarter, an increase of 11% compared to our fiscal 2022 third quarter results. On a P&L basis, we reported a GAAP loss of $183,000 with a non-GAAP net income of $40,000. Our cloud revenues increased by just over 3% quarter-over-quarter which is a positive sign given that revenues from our new solutions haven’t meaningfully contributed yet.

So at this time, I’m going to transition to providing a more in-depth update as it relates to our progress for each of our four lines of business. So I’ll start with our legacy MaxCS PBX line of business in which we target small and midsized businesses. We have historically offered MaxCS as an on-premise PBX or phone system solutions for which customers purchased software licenses on a onetime basis then paid an annual software maintenance fee for support and services. Several years back, we migrated the MaxCS platform to the cloud and began offering MaxCS as a hosted PBX service on a monthly recurring revenue model. Today, we have over 300 hosted MaxCS PBX customers, totaling approximately 11,000 cloud subscribers plus another 500 on-premise MaxCS customers that have yet to migrate, which have about 30,000 active users collectively on those platforms.

As we discussed on prior calls, MaxCS is a pure PBX solution in other words without unified communications capabilities. We’re now in the process of launching our new UCaaS platform, Unified Communications as a Service, which we call MaxCloud. The new MaxCloud UC features include real-time presence, instant messaging, desktop sharing, HD video conferencing and all new mobile UC applications, all of which are appealing to today’s modern businesses. We are now targeting our 300 MaxCS Cloud customers, the old legacy customers, PBX customers and the 500 MaxCS on-premise PBX customers for migration to our new MaxCloud UCaaS platform. As we migrate those on-premise customers to MaxCloud and add new MaxCloud customers, we expect this segment of the Altigen business will experience single-digit growth, but more importantly, we’ll continue to serve as our cash cow to fund our growth initiatives.

Our second line of business is Financial Services Solutions which currently consists of our legacy MaxCS PBX product, our new MaxCloud UCaaS platform, our interactive voice response or more commonly known as IVR solution our FrontStage Contact Center as a Service or CCaaS solution and SIP Trunk services. Our primary distribution channel for this market is Fiserv which is a $17 billion global leader in financial services technologies. Our strategic partnership with Fiserv enables them to host the Altigen solutions in their data centers and market those solutions under the Fiserv brand to their 10,000 bank and credit union customers. Fiserv currently has approximately 90 legacy MaxCS PBX customers which are targeted for conversion to our new MaxCloud UCaaS platform.

About 1/3 of those MaxCS PBX customers also utilize Altigen’s legacy contact center platform. These customers will also be targeted. These contact center customers will also be targeted for migration to our new FrontStage Contact Center or CCaaS solution. In addition, Fiserv also has approximately 1,500 customers using a white-label version of Altigen’s IVR solutions. These customers are the primary targets for additional Altigen UCaaS and CCaaS solutions. Okay. So with all that, in addition to the MaxCloud UCaaS and FrontStage CCaaS platforms, Pfizer’s 1,500 IVR customers are also being targeted with our new secure SIP solution. For those of you who may not be familiar with this service, it’s a secure VoIP phone service designed to prevent fraud by verifying both the device of the caller and the voice print of the caller who’s calling in to access their accounts and then prevents account access due to unauthorized attempts.

Because the secure service requires integration to multiple Fiserv core processing systems, we’ve been doing a phased rollout as each of these core systems are supported. Ultimately, the plan is to offer this service for all Fiserv customers. Now it is important to note that one of Fiserv’s key short-term objectives is to migrate all of their Altigen customers to a new Fiserv data center, which is targeted for completion by the end of the year, which is what they’re actively working on as we speak. I also do want to point out, in addition to all of the other initiatives we have going on with Fiserv, in what I call our day-to-day business with Fiserv, we’re working together with them now to add AI capabilities to Altigen’s solutions. Specifically, we’re in discussions with Fiserv regarding introducing a conversational AI solution built on the newly announced Azure ChatGPT service, which is a private version of ChatGPT offered by Microsoft tailored specifically for enterprise organizations.

This solution will enable bank and credit union customers to interact with their financial institutions via the web or the phone using either written or spoken natural language. The benefit to the customer is 24/7 access, while the banks and credit unions benefit from improved customer service by enabling that access and lower cost by using our AI technology. Altigen is uniquely positioned to address this market given our experience in delivering communication solutions to now thousands of financial services organizations, along with the ability to leverage our software engineering organization which has demonstrated technical expertise in building cloud-native solutions in Azure based on the Microsoft Bot Framework. All that being said, we are currently in the planning stages with Fiserv for a phased rollout of the AI technologies, which will begin with an AI chatbot service and culminate in an Azure ChatGPT managed services offering.

Burben/Shutterstock.com

Now as this progresses, I will certainly provide additional details in subsequent calls. Turning to Altigen’s third line of business. That’s our Microsoft Team Solutions. For those of you who may not be familiar with teams, it is Microsoft’s communication and collaboration platform, which is also part of Microsoft, formerly Office 365. According to Microsoft, there are now more than 300 million monthly active Teams users globally. Now Microsoft in addition to Teams offers Teams phone system as an add-on application which they now tout as the market leader in terms of PBX solutions or UCaaS solutions, while it’s growing by 45% year-over-year. Now the reason I point the Teams phone system out is the significance is that Altigen’s teams applications are all designed to enhance and extend the capabilities of Teams phone system.

So the more users Microsoft converts the Teams phone system, the greater the opportunity is for Altigen. Our Teams phone system solutions include our CoreInteract customer engagement platform, our FrontStage for Teams Contact Center as a Service platform, our direct routing SIP Trunk service and a new teams migration services offering. So let me provide a brief update on each of these as follows. FrontStage for Teams is the same contact center as a service platform that we’re delivering with our MaxCloud UCaaS platform sold by Fiserv, but it has been adapted for use with Microsoft Teams as a native Teams application. FrontStage is a complete omnichannel CCaaS platform. Omnichannel means that we can process all communications channels. Phone calls, SMS messages, web chats and e-mails in a single integrated solution.

While FrontStage for Teams has been a long time in coming, we now finally have a beta version employed in Azure and plan to launch FrontStage next quarter. FrontStage actually targets an organization’s formal contact center. Our new solution, CoreInteract has been designed to address an organization’s departmental or what’s also known as informal contact center. And managers of these departments for the informal contact center such as sales, customer support, HR, IT help desk and the like, they don’t have the needs nor the budgets for formal contact center solutions. Instead, they’re looking for a cost-effective easy-to-manage informal contact center solution to be able to deliver interactions, whether they’re phone calls, e-mails, SMS, web chats to the people in their department.

This is exactly where CoreInteract is positioned. Now a simple way to look at this from a CoreInteract perspective is that CoreInteract offers roughly 80% of formal contact center functionality at 20% of the cost. So we can target and companies can afford to deploy large numbers of enterprise users. And that’s what we’re focused on with CoreInteract. I’ve previously commented that Altigen has invested more than $7.5 million in research and development in the past two years alone, with much of that investment being in CoreInteract due to the huge market potential we see with that product. We’ve been at the forefront of developing CoreInteract as a native team solution, which has also unfortunately led us to uncover many issues with the Microsoft Teams APIs. However, we’ve been working hard to work around those issues and we believe now that those issues are largely behind us.

Under the direction of our new director of software engineering and with assistance from a highly respected outsourced Microsoft-centric software development organization, we are preparing to release a major new version of CoreInteract in October. Assume we have it right and Microsoft doesn’t make any further changes, we believe we can start building upon our current base of customers and start generating revenue momentum with CoreInteract. Our fourth and final line of business is consulting and professional services, which includes custom development projects delivered by our ZAACT Consulting division as well as product integration and migration services delivered by the legacy Altigen team. Now these services capabilities are extremely important as we target larger enterprise customers with both FrontStage and CoreInteract because those types of organizations want solutions, custom built to their specifications and they’re willing to pay for it and they also want fully integrated interoperability with their back-office applications.

Now with any services business, quarterly revenues will be somewhat lumpy due to project deliverables and associated payments not always aligning nicely with our quarter ends. We do, however, expect to see moderate growth from this line of business as we extend our customer development work and particularly as we launch new project opportunities such as the Azure ChatGPT. Now that being said, we did recently extend a contract with our largest services customer, a State Department of Transportation in the amount of $3.5 million for their current fiscal year, which began July 1st. That same state agency has also just awarded us the bid to further expand and accelerate that project based on an initial budget and a bid award of $12 million over five years.

That contracting process will get started a little bit later this calendar year. So with that, I’ll now turn the call over to Carolyn to discuss our financial results in more detail. Carolyn?

Carolyn David: Great. Thank you, Jerry. For our 2023 fiscal third quarter, we reported total revenue of $3.4 million, up 11% compared to the same period a year ago. Total cloud services revenue for Q3 was $1.96 million compared to $1.91 million in Q3 last year. Professional and other services revenue increased 80% to $1 million compared to the prior year quarter, reflecting the ZAACT acquisition. Our legacy and on-premise license and software assurance was 410,000 down approximately 28% on a year-over-year basis. As discussed during our previous calls, we expect our legacy revenue to continue to decline as we introduce our new solutions, which Jerry alluded to earlier. Gross margin was 63.3% compared to 67.8% in Q3 last year, representing a decrease of approximately 500 basis points.

This decrease was primarily the result of a mix shift towards higher professional services revenue resulting from the ZAACT acquisition. GAAP operating expenses for the quarter totaled $2.3 million, 10% higher than the comparable period last year. On a non-GAAP basis, operating expenses totaled $2.2 million for Q3 compared to $2.1 million last year representing an increase of roughly 10%. The increase in operating expenses was driven by the impact of our acquisition of ZAACT. GAAP net loss for Q3 was $183,000 or negative $0.01 per share compared to GAAP net loss of $9,000 or $0.00 per share in the prior year quarter. GAAP net loss included $194,000 in depreciation and amortization and $29,000 in stock compensation expense that was adjusted out of our non-GAAP net income of roughly $40,000 or breakeven diluted EPS.

The decrease in both our GAAP and non-GAAP net income was primarily the result of higher operating expenses and lower gross margin. Turning now to liquidity. We ended Q3 with approximately $3 million in cash and cash equivalents, down 12% compared to the preceding quarter. Our working capital was $2.4 million compared to $2.1 million in the prior quarter, representing an increase of roughly 13%. This now concludes the financial summary review. I will now turn the call back over to Jerry. Jerry?

Jeremiah Fleming: Thank you, Carolyn. Okay. To recap, we did show modest incremental cloud revenue growth in the quarter, which, as I mentioned earlier, is important because that funds our growth initiatives. Much more importantly, during the quarter, we made significant progress in both our software development efforts as well as our services business. At this point, we’re very much focused on execution to build upon our progress with the goal of driving repeatable revenue growth. We will, of course, continue to update you on our progress on our subsequent quarterly calls. At this time, I’ll turn the call back to the operator for any questions. Operator?

See also 20 Biggest Beer Brands in America and 10 Best June Dividend Stocks To Buy.

Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And the first question comes from Neil Cataldi with Blueprint Capital. Please proceed.

Neil Cataldi: Hi, Jerry. Thanks for taking a few questions today. Congrats on the contract win. Thankfully, I think some of this information is in the public domain. I’d just like to confirm a couple of details, if I can, first. So the initial contract was it $2.2 million, and I think it was five years beginning in 2017, is that correct?

Jeremiah Fleming: That’s right, Neil.

Neil Cataldi: Okay. And did they spend the whole $2.2 million during that time frame? Or was it a number different than that?

Jeremiah Fleming: Yes. Yes, that’s a good point of clarification. So that original contract was the $2.2 million. The project continued to grow. And so the total spend and actually extended beyond five years and to now roughly seven years, the total spend to date is closer to $8.7 million. No, that has also been extended, and that’s the contract extension we mentioned in the press release and I referenced on the call for another $3.5 million from the period July 1 through June 30. Now in addition to that, the Department of Transportation wants to go big and they want to accelerate and now they’ve got users wanting more applications. And of course, this happens and now they want to add more applications faster and so this is the reason for the new bid process, and this is what we have been recently awarded for the $12 million over the initially — that’s what initially $12 million over the five-year period. That contract — the bid has been awarded.

Neil Cataldi: Okay. So just real quick rough numbers, it’s been $8.7 million to around this time. There’s an additional 3.5 for the next sort of 12 months and then there’s an additional 12% above that kicks in sometime next year. Do have that right?

Jeremiah Fleming: You have it right. Yes. So as it stands that’s correct and look at the gross.

Neil Cataldi: Okay. And it could continue to grow from that number as it did in the first instance. Okay. So listen, that’s fantastic. I mean so it’s like a $25 million opportunity over, call it, a 10-year period I think I was able to find out that this is like a project management tool, right, for their Department of Transportation. Any thoughts on whether this is a product that can be maybe sold to a different state as well or if maybe just your expertise puts you in sort of the RFP process for what other states may need in the future?

Jeremiah Fleming: Yes, that’s a good question, Neil. And yes absolutely. I mean this is highly customized, obviously built to their exact specifications. So let’s say the likelihood that some — another Department of Transportation is going to want the exact same functionality probably is not great. However, we have demonstrated that this Department of Transportation has saved in what they’ve told us tens of millions of dollars in terms of eliminating various vendor applications that they no longer have to pay for and consolidate this is a major consolidation project that the concept certainly applies to all departments of transportation.

Neil Cataldi: Okay. Great. I just have two other quick ones. So in terms of Fiserv, I think you touched a little bit on the customer migrations that are — that should be coming by year-end. That’s been a topic that’s come up in the past. Should we expect to see incremental revenue growth sort of from today through year-end as those migrations take place? And is there a drop-dead sort of date at the end of the year that’s going to push these to happen over the next few months?

Jeremiah Fleming: Those are good questions. Let me address your last question first. Yes, there’s a drop dead date and the dead date is the end of the calendar year. And this time, we understand if they don’t make their date, they’re going to have to pay for the data center, all the data center costs that they do not migrate out of. Now Neil, you’ve been around for a while, so you know that there was a drop date last year, too, right? But I think this year, there’s a bigger onus. But the nice thing now because we have advanced both our UCaaS platform and our CCaaS platform when they migrate these customers from their old data center that they’re shutting down to the new data center, the plan is for them to upgrade to our new platforms and that will represent an incremental revenue opportunity for us.

So it’s not just like-for-like. When they upgrade to our new platforms, they’ll take on the additional functionality that we deliver. So even though I’d rather have them getting a whole bunch of new customers, even converting their existing customers, well, it’s expected, I should say, expected to generate additional incremental revenue for us.

Neil Cataldi: Okay. Great. Just one more. Regarding the AI commentary and the, I guess, the products and development with Fiserv, is it reasonable to expect revenue from these initiatives in, say, the next 12 months?

Jeremiah Fleming: Yes, we fully expect that, Neil, and how fast it depends how fast we can go with this rollout plan. It’s a bit of a crawl walk run. I obviously want to run as fast as I can. But yes, absolutely, that’s the idea to start getting something out — we want to get something out there that people will start nibbling — we get — it’s the Trojan horse. Let’s get them using the basic stuff, and we’ll just keep growing it. So, yes, I mean I can’t say it will be this next quarter, probably it will be some time — it will definitely be — we should see some bases definitely because I can’t control Fiserv’s sales activity, unfortunately. But we should see revenue — incremental revenue kicking in first half of ’24.

Neil Cataldi: Okay. Thanks so much, Jerry. Talk to you soon.

Jeremiah Fleming: Bye. Thanks, Neil.

Operator: [Operator Instructions] The next question comes from Jason Revland, Private Investor. Jason, please proceed.

Jason Revland: Hi, Jerry. Thanks for taking the questions today. Just got two. The first is on the AI revenue opportunity with Fiserv. That incremental revenue, would that be considered very high-margin revenue just for context on the other stuff you have as well.

Jeremiah Fleming: Yes, that’s a good question, Jason. Nice to meet you virtually here. The — our game plan is going to be a little different than as you’re probably aware and I imagine most of the folks on the call have heard of ChatGPT, right? And everybody can build ChatGPT and it does everything, but make your dinner and clean up your room after you’re done. But our focus on financial services, we’re going to leverage integrations with Fiserv. Because we’re dealing with community banks and credit unions, they do not have staff that can manage a product like that. So our incremental — so I’m going to give you a long answer, but the answer is going to be yes, okay? Long answer, right? So our plan is we’re going to build this ChatGPT for the customer, leveraging all the data they have, but things change.

Who is going to manage that and make sure it’s up to date. That’s what we’re going to do. We’re going to offer that as a managed service much like if anyone is familiar with SEO, search engine optimization, where these web companies manage your website and make sure it’s up to date and your search results are what you expect. So we’re going to do the same thing with ChatGPT and yes, that should be very nice. That should be a contributor to our gross margin, not a detractor.

Jason Revland: Great. My last question relates to your R&D spending. You’ve hinted in previous quarters and this quarter, that spending seems to be abating based on the investments — the investment phase kind of phasing out. But we didn’t see that this quarter. Is that something that we could expect next quarter to see your R&D line start to decrease?

Jeremiah Fleming: Well, we have a small decrease this quarter. And so I think most of what we’re going to do. Yes, there’s still a few adjustments we can make, Jason, in that area and that we will — shouldn’t say can. There are a few adjustments that we will make. We also had to increase investments in some areas shorter term to get some things done. But, yes, because of the path that we’re taking. Well, it’s a tough thing. If we stay on our current business model, my R&D costs will go down. If we continue to grow, of course, that they will increase, but not at the same level as our revenues. So, yes. Does that make sense?

Jason Revland: Yes, as a percentage of revenue, you would expect to see leverage on that line, meaning decreases on the percentage of revenue. Okay. Great. Thanks for taking my questions.

Jeremiah Fleming: Okay. Thank you.

Operator: Okay. It looks like we have no further questions in queue. I’d like to turn the call back to management for any closing remarks.

Jeremiah Fleming: All right. Thank you, operator, and thank you, everyone, for joining us on the call. It will be just a little while for our next call since our fiscal year-end is September 30. And by the time we go through the audit process, we will probably — and then we’ve got Thanksgiving. So we’ll probably talk to you just after Thanksgiving. So stay tuned. I hope to have some great updates for you then. Thanks, everybody.

Carolyn David: Thank you, everyone.

Operator: This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.