Edited Transcript of ATGN earnings conference call or presentation 23-…

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SAN JOSE Jul 24, 2020 (Thomson StreetEvents) — Edited Transcript of Altigen Communications Inc earnings conference call or presentation Thursday, July 23, 2020 at 9:00:00pm GMT

Altigen Communications, Inc. – VP of Finance & IR Officer

* Jeremiah J. Fleming

Altigen Communications, Inc. – Chairman, President & CEO

Good day, ladies and gentlemen, and welcome to your Altigen Communications Third Quarter Fiscal Year 2020 Financial Results Conference Call. (Operator Instructions)

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

Carolyn David, Altigen Communications, Inc. – VP of Finance & IR Officer [2]

Thank you, Karen. Hello, everyone, and welcome to Altigen Communications Earnings Call for the Third Quarter of Fiscal 2020. 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 30, 2020. This release can be found on our IR website at www.altigen.com. 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 call can also be accessed on the Investor Relations section of our website.

As a reminder, 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, 2019, 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 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?

Jeremiah J. Fleming, Altigen Communications, Inc. – Chairman, President & CEO [3]

Thank you, Carolyn, and good afternoon, everyone. Thanks for joining us for today’s call. So first, let you know, I’m pleased to report that I’m joining you from beautiful downtown Salina, Kansas, the Heartland of America.

So earlier this afternoon, we reported our fiscal 2020 third quarter results. Revenue for the third quarter was $3 million compared to $2.7 million in the same period a year ago, an increase of 14%. Revenue for the 9 months of fiscal 2020 was $8.8 million, an increase of 10% year-over-year. And our net income was $426,000 in the third quarter versus $497,000 last quarter and $612,000 in our fiscal 2019 third quarter.

Per our usual discussion, I’ll also provide the details regarding our revenues for the 4 revenue categories that we track, which include: onetime product revenue; annual recurring revenue; our services revenue; and then, of course, most importantly, our monthly recurring revenue. And as a reminder, our onetime product revenue represents license revenue that we receive from software licenses when customers purchase their on-premise — licenses for on-premise systems.

In the third quarter, our onetime product revenue was $281,000, which increased by 13% compared to the previous quarter and 47% versus the same period a year ago. Now I’ll point out that the onetime product revenue will generally demonstrate a downward trend as a result of our cloud-first business strategy. However, the impact of COVID-19, which has driven the requirement to support a new work-at-home workforce, our onetime product revenue did increase this past quarter as many of our customers required additional licenses to support their increased number of remote workers.

Our second category, annual recurring revenue, includes revenues from our annual software maintenance program, which — for which on-premises customers must pay to receive product support, bug fixes and upgrades. And because annual recurring revenue is tied to onetime product revenue, it will experience a slow decline over time as a result of our on-premise customers migrating to the cloud. In the third quarter, annual recurring revenue was $655,000 compared to $663,000 in the previous quarter and $693,000 in the year ago quarter.

Third category is services revenue, which includes revenue from our cloud deployments, support services as well as custom product development. While we expect services revenue to demonstrate an upward trend over time primarily due to cloud deployment and support contracts, we also expect to continue to see some lumpiness in quarterly revenue because a particular custom product development or deployment project may complete at different times. Services revenue in the third quarter was $106,000 compared to $175,000 in both the previous quarter, and that same number applies to the prior year quarter.

Our final category is monthly recurring revenue, which consists of our cloud service offerings, Software-as-a-Service plus SIP Trunk communication service. Monthly recurring revenue for the third quarter was $1.976 million, an increase of 7% from the second quarter and an increase of 20% on a year-over-year basis.

Regarding our Microsoft Teams solutions, new deployments have generally been delayed by COVID-19. However, the good news is that Microsoft Teams’ deployments have rapidly expanded, and I’m talking about the core Teams’ deployments, have rapidly expanded from 10 million subscribers a year ago to more than 80 million subscribers today, which represents users at more than 500,000 organizations. Now what this means is that we have a much larger pool of companies to target with our Teams solutions going forward despite the, let’s say, temporary delay due to COVID-19.

Regarding the status of our FrontStage Omni-Channel Contact Center solution, we’ve completed the integrated stage Altigen’s MaxCS PBX solution, which we did first based on our requirement to support the Fiserv MaxCS customer base. We’re now actively engaged with a number of those customers to begin planning their migrations to FrontStage based on the MaxCS platform.

By the end of this quarter, we expect to have a beta version of FrontStage available for Microsoft Teams. Now once we have this ready, we’ll submit the FrontStage product to the new connected contact center for Microsoft Teams certification program, which means once we complete that process, FrontStage will be officially certified by Microsoft in the top tier of that program. And the top tier requires that the contact center application be fully deployed in Azure, unlike many of our contact center competitors.

Now the significance is that many of our traditional contact center providers can actually be certified in this new Microsoft program, but most of them will be at the lower levels which don’t require the full use of Azure and Azure services, and thus, at least our expectation is, not as appealing to a Microsoft customer.

Finally, we’re also just about to launch our new Teams service delivery portal. And this is an online portal, which greatly simplifies the setup and configuration of Altigen’s teams direct-routing SIP service, our SIP communication service. And it also provides a single pane of glass management for customers or partners to manage their entire team’s phone system environment. And I can answer more questions on that later.

But at this time, what I’d like to do is turn the back — turn the call back, excuse me, over to Carolyn to review the financials in more detail. Carolyn?

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Carolyn David, Altigen Communications, Inc. – VP of Finance & IR Officer [4]

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Great. Thank you, Jerry. Total revenue for the third quarter was $3 million, up 3% sequentially and up 14% on a year-over-year basis. Our cloud revenue was $1.98 million in quarter 3, up 7% from $1.84 million in the preceding quarter and up 24% from $1.59 million in the same quarter last year. Third quarter revenue for software assurance decreased to $655,000 compared with $663,000 in the previous quarter and compared with $693,000 in the prior year period, representing a decrease of 1% and 5%, respectively.

Perpetual software license revenue was approximately $281,000, up 13% sequentially and up 47% from $192,000 on a year-over-year basis. As Jerry mentioned earlier, the increase in software license revenue was the impact of COVID-19 driven by the requirement to support remote workers. However, like many companies in this industry, we do not have a clear picture of how COVID-19 will impact future sales.

Professional services and other revenues was approximately $106,000 for the current quarter compared with $175,000 both in the preceding and the prior year quarters, representing a decrease of approximately 40%, respectively.

Now let’s turn to the margins. Third quarter gross margin was 77.3% versus 75.9% in the preceding quarter and 80.6% in the comparable period last year. The decrease in gross margin in comparison to the prior quarter was primarily driven by the impact of higher amortization of capitalized software and acquisition-related costs and, to a lesser extent, a shift in our product mix.

GAAP operating expenses for the quarter totaled $1.9 million compared to the previous quarter of $1.7 million and the prior year period of $1.6 million. The increase in operating expenses was primarily due to a $188,000 litigation-related expense recognized in the third quarter in connection with the pending CTI litigation.

GAAP net income was $426,000 or $0.02 per diluted share compared to $497,000 or $0.02 per diluted share in the preceding quarter and $612,000 or $0.02 per diluted share in the same period a year ago. The decrease in net GAAP income was a result of higher operating expenses primarily attributed to litigation-related expenses.

Non-GAAP net income for the quarter was approximately $767,000 or $0.03 per diluted share compared with $630,000 or $0.02 per diluted share in the prior quarter and $664,000 or $0.03 per diluted share in the same quarter last year. This represents an increase of 22% and 16%, respectively.

Now let’s turn to the balance sheet. Cash and cash equivalents increased by $1.2 million to $6.1 million during the 9 months ended June 30, 2020, as compared to the preceding quarter. Working capital was $4.1 million compared to $3.7 million at the end of Q2, representing an increase of 9%. In May 2020, the company received loan proceeds in the amount of $804,000 pursuant to the PPP or the Paycheck Protection Program under the CARES Act. The company intends to maximize the use of PPP loan proceeds for qualified expenses and intends to apply for forgiveness of the PPP loan in accordance with the terms of the CARES Act.

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

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Jeremiah J. Fleming, Altigen Communications, Inc. – Chairman, President & CEO [5]

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Okay. Thanks, Carolyn. I did want to briefly touch on the impact, once again, that we’ve seen as a result of COVID-19 given our different business model. So first of all, many of our small business customers have been hit hard by the economic shutdown as a result of COVID. And likely, a number of these organizations will not be able to survive the negative effects on their business. However, on the other hand, the dramatic growth in Microsoft Teams deployments among the larger organizations will be a positive contributing factor for overall for our Teams solutions, driving company growth. So it’s very difficult right now with — just to have the visibility based on the sort of uncertainty when the economy is going to really reopen again. But our expectation certainly is once we get back to business, that our Teams solutions will kick in and we will start seeing accelerated company growth.

And I do want to remind everybody that our focus does continue to be squarely on growing our cloud revenues, and this includes organic growth, continued development of strategic partners to drive product sales and growth and also acquisitions of companies offering interesting Teams technologies or related Teams services.

So now in order to address any questions, I’ll turn the call back to the operator. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Edward Gilmore with Little Grapevine.

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Ed Gilmore, [2]

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Just a quick question. You mentioned that COVID deferred some installs just a bit. Can you provide any insight into the size of your overall backlog and then perhaps where that stands historically to the last couple of quarters?

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Jeremiah J. Fleming, Altigen Communications, Inc. – Chairman, President & CEO [3]

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Yes. Thanks for your singular question. I appreciate that, and nice to hear from you. Yes, right now, it’s hard to say because a lot of these deployments — I think there are some interesting deployments, but the larger companies — I’ll just provide a little more color here. The larger companies had to first scramble, using their existing technologies to support the work-at-home workers. That is starting to settle down, and now they’re saying, “Okay. We have Teams deployed.” That was a big part of it. Even if we might have put Zoom in for $15 a month per user to support these people short term, we’re going to go back and reevaluate our corporate strategy because we think work-at-home is here to stay.

So I know it’s a really long-winded answer, and it’s probably not going to directly answer your question. But I can’t tell you exactly when we’re going to see, let’s say, the benefits of the backlog that’s building because the customers are also uncertain on the time lines. I can just tell you it’s going to be positive for Altigen when the floodgates open up on that.

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Operator [4]

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We’ll take our next question from Maj Soueidan with Geoinvesting.

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Maj Soueidan, Geoinvesting, LLC – Co-Founder [5]

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I missed the very beginning of the call, so maybe you answered this question. So I apologize. But regarding COVID-19 and everything going on there, I’m assuming some of the — maybe some competitors are stronger — less strong competitors may be having an issue competing if they don’t have a diversified customer base. So do you see — are you seeing an opportunity out there and maybe make some acquisitions of some competitors, maybe might not be a little bit of the storm here or maybe solution providers?

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Jeremiah J. Fleming, Altigen Communications, Inc. – Chairman, President & CEO [6]

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Yes. Good question, Maj. And yes, I would say, definitely, it’s more on the solution provider side. We’re seeing actually, we would like to acquire partners as well that have expertise in deploying Microsoft 365 and Teams with those partners. Because they’ve been delivering services, they’ve sort of been busy helping companies set up the work-at-home workforce. So they’re not really seeing a lot of stress in their business. But there are solution providers because of this bit of a slowdown. If you’re actually selling an enterprise solution, and I can — happy to explain this one-on-one with you guys what the difference is when you can go online and spend $15 a month for conferencing versus deploying truly an enterprise solution for all your employees. But when you’re deploying that enterprise solution, it does require a lot of planning, and it does slow down the vendors’ sales. And yes, there are some that we are in discussions with that have seen that situation. And I think — well, I shouldn’t say I think. We’ll see how those things pan out.

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Maj Soueidan, Geoinvesting, LLC – Co-Founder [7]

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Now I’m assuming that solution — having solutions that get you a more complete offering, which might be more favorable for your Microsoft relationship. Is that part of why you’re doing it?

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Jeremiah J. Fleming, Altigen Communications, Inc. – Chairman, President & CEO [8]

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Yes, if I understand you correctly. Can you just repeat that, Maj, just to make sure I understand that — your question?

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Maj Soueidan, Geoinvesting, LLC – Co-Founder [9]

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Yes. I mean as you layer on more solutions, does that help you with your Microsoft relationship and then getting that going?

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Jeremiah J. Fleming, Altigen Communications, Inc. – Chairman, President & CEO [10]

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Absolutely. Everything we’re doing as far as new solution development is 100% Microsoft Teams, 100% Azure. And if you’re affiliated with Microsoft in any way, they call it scorecard, and scorecard means you do everything Microsoft. It’s 100% scorecard. So yes, anything that we’re looking to do is right down that line.

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Maj Soueidan, Geoinvesting, LLC – Co-Founder [11]

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And one last question, I’m sorry. When you look at solutions, I know you’ve done some stuff already in that kind of department already. If you’re looking at top 2 or 3 types of things you’d like to wrap into what you’re doing, what would that be as part of solutions?

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Jeremiah J. Fleming, Altigen Communications, Inc. – Chairman, President & CEO [12]

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Yes. I think there’s a real opportunity, and we’ve talked a lot about collectively folks on this call and individually as one-on-one, with myself and shareholders, about contact center vendors. And there’s a lot of well-known contact center vendors that are integrating their solutions with Teams, and that was the reference I made. They’re going to be at the lower level of that certification program.

But where I think the bigger opportunity is with Microsoft Teams because it’s omnichannel, it’s got cognitive services and it really leverages so much capability to help an enterprise with their digital customer engagement strategies. We’re looking at companies that can help us in that area and really be first to market by launching an enterprise digital customer engagement platform that is much more pervasive than contact center because it applies to so many more employees.

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Operator [13]

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(Operator Instructions) And it appears that’s all the questions that we have at this time.

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Jeremiah J. Fleming, Altigen Communications, Inc. – Chairman, President & CEO [14]

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Okay. Well, thank you, operator, and thank you, everyone, for joining the call. As usual, you know where to find me if you have any post-call questions. So we look forward to updating you on our next call, which will be in November. Thank you very much.

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Carolyn David, Altigen Communications, Inc. – VP of Finance & IR Officer [15]

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Thank you, everyone.

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Operator [16]

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Thank you, ladies and gentlemen. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.

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