Altigen Communications, Inc. (PNK:ATGN) Q4 2023 Earnings Call Transcript

Altigen Communications, Inc. (PNK:ATGN) Q4 2023 Earnings Call Transcript December 14, 2023

Operator: Greetings. Welcome to the Altigen Communications Fourth Quarter and 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, John. Hello, everyone, and welcome to Altigen Communications earnings call for the fourth quarter of fiscal 2024. 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 September 30, 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 1 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 30, 2022, 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 is my pleasure to turn the call over to Jerry Fleming for opening remarks. Jerry?

Jeremiah Fleming: Thank you, Carolyn. Hello, everyone. Thanks for joining us on today’s call. I’m first going to review our fiscal 2023 results, and then I’ll proceed with an update on our business plans and opportunities. After that, I’ll turn the call back to Carolyn for a detailed review of our Q4 and full year FY 2023 financials. So earlier today, we reported revenue of $13.7 million for our fiscal ’23 — excuse me, 2023 year. That was a 15% increase compared to our fiscal 2022 performance. On a P&L basis, we reported a GAAP loss of approximately $3.3 million, largely due to the noncash tax-related expense of expiring NOLs. On a non-GAAP basis, we recorded a net profit of $300,000 for fiscal 2023. Our FY 2023 cloud revenues were essentially flat compared to FY ’22.

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This can primarily be attributed to the relatively late in the quarter release dates of our new solutions. As a result, we did not experience substantial revenue contribution from those solutions in FY ’23. We do expect that to change and realize a much more significant revenue contribution in FY ’24. Our FY ’23 services revenue increased by 117% versus FY ’22, which was largely a function of our acquisition of ZAACT Consulting in FY ’22 and not contributing to the Altigen full revenue picture for that year on a comparative basis. I’ll now move to a discussion of Altigen’s current state of business. Our legacy on-premises MaxCS PBX business declined year-over-year due to new releases now only available via our cloud solutions. As such, many customers not wanting to move to the cloud have opted not to continue to pay for their software assurance or software maintenance programs.

Since we no longer offer on-premise solutions, we expect to continue to experience a decline to zero in this business, but it is a business model that we can no longer profitably maintain. Moreover, we expect much, if not all, of that decline to be offset as the majority of those on-premises customers migrate to our new cloud-based UCaaS solutions. Regarding our legacy hosted MaxCS PBX business, we’ve also been facing headwinds as one of our resellers have been migrating legacy hosted MaxCS customers to a non-Altigen cloud solution. The impact of this, which has been going on for quite a few quarters, is diminishing each quarter and should largely be behind us in the next handful of quarters. As many of you know, we’ve been working on the introduction of a new UCaaS platform called MAXCloud, which will replace both the legacy MaxCS on-premises and hosted products.

While we haven’t yet gone into full launch mode, we have been actively putting initial customers on the new MAXCloud platform. To date, we have 20 customers representing approximately 600 subscribers on the new MAXCloud platform. A full launch is planned for calendar Q1 in which we’ll target initially our approximately 500 on-premises customers that still remain, which collectively have roughly 15,000 active users as that customer segment represents the largest incremental revenue opportunity for Altigen. We’ll secondarily target for migration to MAXCloud, our current 300-plus hosted MaxCS customers, will prioritize those based on their need and desire to adopt a full unified communication solution. Transitioning to Fiserv, which is our largest business partner at $17 billion in revenues in the world’s premier financial services solution provider, our cloud business with Fiserv grew approximately 10% in FY ’23 versus FY ’22, all based on customer adds for our new UCaaS solution and the FrontStage Contact Center.

Fiserv also has a base of approximately 90 legacy MaxCS customers both on-prem and in the cloud, who are targeted for migration to the new MAXCloud platform and FrontStage. However, meeting Fiserv’s restricted security requirements has proven to be quite an arduous task and it has delayed the start of that migration process. However, we are very — now very close to resolution of those issues, and this will enable Fiserv to soon begin the migration of their legacy Altigen customers to our new cloud solutions. Once this happens, we will realize additional incremental from those customers from the new MAXCloud platform. Continuing with Fiserv, the first customer has now gone live on our new secure SIP customer — pardon me, our new secure SIP service, which both authenticates the device a caller is using to access an account and uses voice biometrics to confirm the caller’s identity.

Together, these technologies are highly effective at preventing fraudulent access to customer accounts. The revenue to Altigen from the first customer is approximately $7,500 per month. This is right in line with our expectations for the average secure SIP customer to generate revenue between $5,000 and $7,500 per month. To provide some context on the revenue opportunity, Fiserv plans to target all 1,500 bank and credit union customers using our IVR with the new secure SIP service. Finally, turning to the services side of our business. We acquired a Microsoft Gold Partner ZAACT Consulting about 18 months ago. Now that we fully integrated ZAACT into the Altigen business, we’re in the position to start driving growth. On our previous earnings call, I referenced the fact that a State Department of Transportation customer recently extended our current contract with them for an additional year to the tune of $3.5 million.

That same state agency further awarded a bid to Altigen for a new long-term contract in the amount of $12 million over 5 years. Just last week, we received a contract for that bid for signature. We’re now just waiting on a countersignature from the state agency to formalize the agreement and get started work on that new agreement. To further drive our services business forward, last month, we hired a new Director of Consulting Services, who has extensive experience in software development, project management and IT consulting. He initially will be focused on managing and growing the opportunity with our State Department of Transportation customer, but will also be targeting new customer logos in targeted vertical segments in order to accelerate growth in our overall services business.

Unfortunately, due to confidentiality, I can say that requirements, I am precluded from disclosing more information at this time on that topic, but I do hope to be able to do so on our next earnings call. On that note, I’d like to spend a few minutes on Altigen’s future state. We’ve made a number of adjustments in our business model and in the organization structure to prepare for some exciting new opportunities, which will accelerate our business growth. From a practical perspective, UCaaS and CCaaS solutions are fast becoming commoditized. As an example, for Microsoft Teams alone, 38 vendors have either had their CCaaS solutions certified by Microsoft or they are currently going through that process. Of course, Altigen will continue to offer both UCaaS and CCaaS solutions as companies are still in need of those solutions, and we do have a sizable customer base to maintain.

However, in order to truly accelerate growth, we need solutions that offer a unique customer value proposition, are easily cost justified and can address markets which have a revenue potential to Altigen of a minimum of $50 million in annual revenue. With that in mind, given that our number one vertical market is financial services and our number one partner is a $17 billion market leader, we are going to focus our initial efforts on Fiserv. On top of the AI capabilities we’re adding to the IVR solution, we will fast follow with web chat-based conversational AI, leveraging Azure, OpenAI and Azure AI services, otherwise known as ChatGPT. Now unlike most vendors who position their AI solutions in this space as essentially 24/7 customer service assistance because of our back-end integration to Fiserv core banking software, Altigen will also be able to offer the ability for banks and credit union customers to increase sales of their financial products via conversion of website visitors, all based on the new AI technologies that we’ll be introducing.

We’re targeting calendar Q1 for prototypes of the new AI service with the first preview customers coming on board in calendar Q2. Since the requirements are virtually the same for all banks and credit unions as we gain traction with Fiserv customers, we will make the new AI service available to all 9,000-plus banks and credit unions in the U.S. We’re further developing plans to offer a series of interrelated but independent web-based AI analytics solutions targeted at the financial services vertical. These new applications are being designed for customer self-service, meaning bank and credit unions can sign up via the web and get started without Altigen having to go through extended sales cycles. Clearly, this model is designed for scale. Assigning context to the opportunity for these new AI fintech solutions, the price points for each unique application will be in the range of $500 to $1,000 per customer per month.

So doing the math, every 1,000 customers for each application will be expected to generate $500,000 to $1 million per month in revenue to Altigen. Now that concludes my review. At this time, I’ll hand the call back to Carolyn. Carolyn?

Carolyn David: Great. Thank you, Jerry. For our 2023 fiscal fourth quarter, we reported total revenue of $3.5 million, down roughly 2% compared to Q4 2022. Total cloud services revenue for Q4 was approximately $1.98 million compared to $1.94 million in Q4 last year. Our services revenue decreased to $1.1 million from $1.2 million in the prior year quarter. Gross margin was 62% compared to 64% in Q4 last year, representing a decrease of approximately 100 basis points. This decrease was primarily a result of a mix shift towards higher professional services revenue resulting from the ZAACT acquisition. GAAP operating expenses for the quarter totaled $2.1 million, 27% lower than the comparable period last year. The year-over-year decrease was mostly related to a onetime acquisition-related expense recorded in Q4 of the previous year.

On a non-GAAP basis, operating expenses totaled $2.1 million for Q4 compared to the prior year of $2.3 million. GAAP net losses for Q4 was approximately $2.8 million or negative $0.11 per share compared to GAAP net loss of $764,000 or negative $0.03 per share in the prior year quarter. As Jerry mentioned previously, our fourth quarter results include a noncash tax expense of approximately $2.7 million associated with the company’s income tax rate, which differs from its statutory rate, primarily due to expired NOLs. On an on-cash basis, net income was $145,000 or $0.01 per diluted share compared to non-GAAP net income of $200,000 or $0.01 per diluted share in the prior year quarter. Now let’s turn to liquidity. We ended the year with $2.6 million in cash and cash equivalents.

Our working capital was $2.1 million compared to $2.4 million in the prior year quarter. Now that concludes the financial summary. I will now turn the call over back to Jerry. Jerry?

Jeremiah Fleming: Okay. Thank you, Carolyn. Just in summary, we feel like we shored up the business and are now able to put the vast majority of our focus on execution to drive both incremental revenues and profitability for our current offerings. This applies to both our software and services lines of business. At the same time, we’ve assembled a smaller team of technical experts, who will be working to crystallize plans and products leveraging AI focused on financial services with an emphasis on new hyper growth opportunities. Initially, this focus will be on the AI fintech solutions I referenced earlier. Now our next earnings call is targeted for mid-February. At that time, I expect to be in a position to reveal further details regarding specific plan solutions and opportunities, both with respect to our services business, our software business and our new AI business. With that, I’ll now turn the call back to the operator.

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Q&A Session

Operator: [Operator Instructions] The first question comes from [Chris Tuttle], Private Investor.

Unidentified Analyst: Thanks for all that information. I apologize if I missed it, but I’m trying to understand a little bit more about some of your new initiatives. And I guess my main question is, to what extent is Fiserv sort of working with you in your existing relationship to address these additional opportunities they would be able to offer? So are they like a close working partner with you? Is this coming from them? Like what’s the relationship on the new things that you’re working with, with respect to Fiserv?

Jeremiah Fleming: Right? That’s good question, Chris. Thank you. The — and so it’s in some stages because some of these things, they just don’t have the expertise. Let me start with the conversational AI for the IVR. These are direct requirements from Fiserv, and we’re building to the requirements. So we meet with them, geez, probably daily to build up that solution. Then the extended conversational AI, the web-based AI, they’ve also fed us requirements, but they don’t have the detailed knowledge that we do regarding AI. So that’s probably, I’ll say, a little more driven by us. And then we get to the new hyper growth opportunities, this is beyond what they’re thinking, right? Because they’re worried about day-to-day sales beyond what they’re thinking, but we certainly have floated the idea conceptually past them and it is something that their customers desire.

And we haven’t just floated that by Fiserv for other banking and credit union executives as well. So it’s kind of spans the whole gambit.

Unidentified Analyst: Okay. All right. That’s helpful. And then my only other question is — and again, I apologize if I didn’t quite grasp this. But — so you had that renewal that came from, I believe it was Connecticut on the sort of government agency portal work or whatever you want to call it. I think what I was hearing you say is that you guys are going to invest in building that business. Is that — did I hear that right?

Jeremiah Fleming: We are investing in building that business. You did hear it, right? And you said state of Connecticut, I didn’t. I think that may be out there in the public domain. I was simply referencing a Department of Transportation, some question on our ability to disclose that, and that’s why I’m not trying to be coy here. So yes, we were awarded from the state agency a $3.5 million contract last July that runs through June 30. Since there was another bid in that meantime that was awarded to Altigen, but a bid award is not a contract. So last week, we got the contract for that new bid, and that’s the $12 million for 5 years. That is supposed to take effect on February 1. We’re waiting on final signature from the Attorney General for that, but we are still working on in burning down the $3.5 million contract, which will be rolled into the $12 million contract once that is officially executed on the state side.

Unidentified Analyst: I get it. That’s helpful. And I’m no genius, I think it’s on their website. That’s how I learned about it. And so my just follow-up on that is, so I — is this replicatable? Is this type of service that you’re doing for them, something that you think is — could be effectively replicatable with a reasonably — reasonable sales cycle, not…?

Jeremiah Fleming: Sure. Well, the answer is maybe. I’ll tell you, Chris, and let me try to explain that. This is actually a complex project. It’s been going on for 7 years, and hopefully, we’ll go on for 7 or more. But there are many modules. Some are probably quite specific to what this particular state agency is trying to accomplish. Some are more generic and certainly can be applied to other state agencies. So yes, we’re in the process of assessing that right now and saying, okay, guys, this is with our partner at the state, hey, you guys have really benefited. And they will tell you or they hopefully will tell us all at some point that we’re saving them over $10 million a year with what we’ve done. So yes, we would love to be able to take this out and are assessing that.

I can’t say we can guarantee. We have that we would be able to reuse all of the code, but we can certainly reuse the intellectual knowledge that we’ve gained to be able to build something similar for other state agencies in similar situations.

Unidentified Analyst: Okay. That’s encouraging. I thought it was a pure one-off. So it’s got potential, and that’s great to hear.

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

Unidentified Analyst: My question relates to the — some of the AI offerings that you’re developing with Fiserv and you’re talking about leveraging that expertise into something more broad in the financial services arena. I’d just like to know what you think your competitive advantages will be when you ultimately go to market for these — with these new services? As you referenced, competitiveness in other UCaaS areas, what would your competitive advantages be in these new AI-type offerings? And could you kind of be considered kind of a go-to solutions provider with this niche AI offerings?

Jeremiah Fleming: That would be a good plan. So yes, I think that’s a great question, Jason. And so let me try to — hopefully, I can answer it as well as you stated your question. So there are several advantages. One is that out of all the AI vendors and these guys are coming out of the woodwork these days, only one has Fiserv reselling their solution. So that gives us a decided advantage for Fiserv customers. So that’s number one. Only one, and that’s us, has integrations to all of the Fiserv cores, and you’re probably aware that Fiserv has grown through acquisition. They have 13 different core processors running at their bank and credit union customers’ sites. We’re the only one because of our long-term relationship that is integration.