Altigen Communications, Inc.

Phil McDermott - Chief Financial Officer Jerry Fleming - President and CEO

Harris Berenholz - Carpe Diem Advisors

Yeah. Thank you, Operator.

Good afternoon, everyone. And thank you for joining us today for AltiGen Communications fourth quarter and fiscal 2014 conference call.

On line today are Jerry Fleming, President and Chief Executive Officer; and myself, Phil McDermott, Chief Financial Officer. Earlier this afternoon, AltiGen issued a news release reporting financial results for its fiscal 2014 fourth quarter ended September 30, 2014.

This release can be accessed from the Investor Relations section of AltiGen's website at www.altigen.com. We have also arranged a replay of this call, which maybe access by phone.

This replay will be available approximately one hour after the call completion and remain in effect for 90 days. These both can be accessed from the Investor Relations section of AltiGen’s website.

Before we begin, let me note that today’s call may contain forward-looking information, regarding future events and the future financial performance of the company. We wish to caution you that such statements are just predictions and actual results may differ materially as a result of risks and uncertainties that pertain to our business.

We refer you to the documents the company filed periodically with the OTCQX Over-the-Counter Market, specifically the company's audited annual report for the fiscal year ended September 30, 2013, 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 projection or forward-looking statements.

AltiGen assumes no obligation to revise any forward-looking information contained in today's call. With that said, I will now turn the call over to Jerry Fleming, President and CEO of AltiGen.

Jerry?

Thanks, Phil, and good afternoon, everyone. As Phil indicated, earlier today, we reported our fiscal 2014 fourth quarter results.

As discussed last quarter, we made the decision to write-off our China subsidiary as a discontinued operation effective March 31, 2014. For today’s results and going forward, we will be reporting results for the parent company only as continuing operations.

In the fourth quarter, we recorded $2.5 million in revenue from our continuing operations, a 10% increase, compared to the $2.2 million recorded in the third quarter. Our fourth quarter net income of $146,000 compares to the previous quarter net loss of $155,000.

The quarter-over-quarter increase in revenue is directly attributable to our growth in software revenue, a growing portion of which is delivered as software-as-a-service or SaaS. The results also reflected decrease in contribution from our hardware products as we continue to migrate to an all software recurring revenue business model.

I’ll also provide an update on the status of our transition to cloud and SaaS model and discuss how that business is ramping. AltiGen’s cloud business consists of two components.

The first is our MaxCS PBX software which is hosted by AltiGen and delivered as a multi-SaaS subscription service. The second is a new SIP Trunk Service, in which AltiGen private label and internet based phone service and delivers that service along with our PBX software.

This model provides an end-to-end communication solution for our customers while saving the money with a bundled service. In addition to AltiGen directly hosting our MaxCS PBX software, our solution is unique and that enables third-party service providers to host MaxCS in more data centers and deliver host of PBX as a monthly subscription service to their customers.

This allows us to get access to much broader base of respective customers today in U.S. but in the future internationally as well.

Currently we have more than 2500 subscribers live on the AltiGen Cloud platform, including our hosted service provider partners. At the end of the fourth quarter, we also released a new version of our software which extends our support for PolyCom phones to our MaxCS platform.

Not only, will this reduce our cost and support burden, this will also allow us to improve our margins by shifting revenue from hardware to the software licensee which enabled functionality of PolyCom phones. Working with our AltiGen business partners will continue to target our current customer base with the objective of migrating those cusomters to our MaxCS Private Cloud offering.

We will also continue to recruit new MaxCS hosting service providers in order to further expand our market reach. In addition, this quarter we are releasing a new software-as-a-service option for customers who have already built their own private cloud data centers in order to address large share enterprise opportunities.

In summary, we are working heads down towards the objective of building our recurring revenues based on our cloud and SaaS offerings. As we continue to execute, we expect to see growth in both revenue and profitability.

With that, I will now turn the call over to Phil to review the financials in more detail. Phil?

Hey. Thanks, Jerry.

As a reminder, we wrote down our China operations in the March quarter and I will report only on the continued operations. Revenue for fiscal 2014 fourth quarter was $2.5 million, compared to $2.2 million in the preceding quarter.

We recorded revenue of approximately $1 million per quarter, the same as the previous quarter for our software support program. Our deferred revenue for this recurring revenue stream as of September 30, 2014 was $2.1 million, up from $2 million in the previous quarter and up from $1.9 million in the same quarter last year.

Gross margin in the fourth quarter at 61.6% were down from 69.8% for the preceding quarter. The main reason is we reserved approximately $285,000 with excess IPs and smartphone inventory.

Without that adjustment, our gross margins would have been approximately 73%. Operating expenses were $1.7 million for this quarter, the same as the previous quarter.

Net income for the fourth quarter was $146,000, or $0.01 per fully diluted share compared to a net loss of $155,000, or $0.01 per share in the preceding quarter. These results reflect the effects of FASB 123R expensing of share-based compensation in the amounts of $28,000 and $31,000, respectively.

In the current quarter, we reversed a potential liability of $338,000 in connection with a license agreement that was never finalized. The accrual was established back in 2003 and we believe that the company’s liability is highly improbable.

This transaction was reported in interest and other income line on the P&L statement. Looking at the balance sheet, our cash position, including short-term investments, at $3.8 million on September 30, compares to $3.9 million last quarter.

Inventories at $500,000 were down from $800,000 for the preceding quarter, reflecting increase in inventory reserves, as I mentioned earlier. Net accounts receivable of $500,000 compares to $400,000 in the preceding quarter, while DSO at 17 days compares to 15 days last quarter.

As we said last quarter, going forward, we are going to report on continuing operations in our conference call. And with that, I will turn the call back to Jerry.

Okay. Thanks, Phil.

Our fourth quarter was an important milestone, as we were able to generate revenue growth, and, more importantly, we’re able to do so on a profitable basis. We are also finally at the point, in which we can deliver an all software solution in the cloud or on the customer premise, which will enable us to focus on building recurring revenue.

And as a reseller partners, we are also able to transition their businesses to recurring revenue model. We will benefit from increasing contribution from their existing base of AltiGen customers, as well as net new customers.

To address any questions, I will now turn the call back to the operator.

Yeah. Hi, guys.

After a nice report, very encouraging and return to profitability. Could you just clarify something as far as software service and you may have mentioned that you’ve been doing $1 million a quarter for software.

So how much of that is this new service, the software service, are you able to quantify that for us?

Yes, we can, Harris. So the $1 million that we indicated is our Software Assurance Program and that’s the -- lets call that software maintenance for existing customers that have purchased systems from us and they paid that on annual basis.

Right.

The software-as-a-service is a new program and instead of buying the systems upfront the customers pay us monthly, so none of the software-as-a-service numbers are included in that $1 million. That’s all incremental to that.

Okay. So can you give us an idea of how much that is so far?

I’m sure it’s very low for building. Can you give us some sense of how large it is?

It’s -- yeah, certainly, it’s less than 5% of revenues currently.

Okay.

But that is certainly growing on a quarterly basis and that’s the internal idea behind our cloud initiative to continue grow that business.

Yeah. Understood.

Okay. The write-offs, is anything else that’s a potential possible or inventory write-down or you’ve got everything cleaned up with that $300,000 write-off?

The $285,000 for the iFusion is the final piece of our iFusion inventory because we’re getting quite out-of-date with the 30-pin connector and we decided that the timing is right just to put that behind us.

Okay. So you got everything cleaned up there?

That’s correct.

Okay. Can I ask you another question?

Go ahead.

Go ahead.

Obviously, with this potential liability talk about, does that have any income statement effect or is that all the balance sheet effect?

Well, no, it goes through the income statement. And as I said, it’s reported on the other income, so it’s below the line, it’s below the operating expense.

Oh! I see it there.

Okay. You see it there.

And so if we take the two transactions, it’s about a $50,000 net gain to us in the quarter. So we had a, if you take out to 146, we had a two operating profits in the quarter without help from -- as much help from the reserves.

Okay, terrific. Well, great.

Do you want to give us, even though a wild estimate, about what revenues might be like in the coming year, any guidance on that?

Well, as you know, we don’t typically provide any guidance on topline or bottomline. Right now we went halfway through the quarter.

And we are feeling pretty good at where we are right now, but we’ve got a full half quarter to go.

Okay, terrific. Well, good luck.

Keep up the good work.

Thank you.

Thanks.

Okay, thank you. Since there are no further questions, I’ll now officially conclude the call.

Thank you for joining us today. And we look forward to updating you on our next quarterly call.