Altigen Communications, Inc.

Thank you, Christy. Good afternoon, everyone.

And welcome to AltiGen Communications’ earnings call for the fourth quarter fiscal 2019. With me on the call today is Jerry Fleming, President and Chief Executive Officer.

And I’m Carolyn David, VP of Finance. Our earnings press release was issued today after the market closed and maybe downloaded from the Investor Relations section of the Company's Web site at www.altigen.com.

We have also arranged a taped 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 AltiGen’s Web site. As usual, before I commence the review, I would remind all participants 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 from those contained from -- pardon me, differ 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 OTCQX over-the-counter market, specifically the Company’s audited Report for the fiscal year ended September 30, 2018, as well as the Safe Harbor statements 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 refer 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 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?

Thank you, Carolyn, and good afternoon, everyone. Thanks for joining us for today’s call.

Earlier this afternoon, we reported our fourth quarter and full year results for fiscal 2019. I'll provide a summary of the full fiscal year, while Carolyn will report on both the fourth quarter and full fiscal year.

Revenue for fiscal 2019 was $10.6 million, a 6% increase over fiscal 2018. In fiscal 2019, our cloud revenue increased by 24% to $6.2 million.

Operating income of $2.1 million represented 87% increase and our cash balance increased 41% to $4.4 million. All comparisons were made to AltiGen's fiscal 2018 results.

I'll also now provide additional details regarding the composition of our revenues based on the following four revenue categories. One-time product revenue, first of all, licensed revenue we receive from customers purchasing our software for use under on-premises as opposed to our cloud systems, which is the carryover from our legacy business model.

As most of you are aware, product revenue has been declining as we are leading with our cloud based monthly recurring revenue solutions. In fiscal 2019, onetime product revenue declined by approximately 31%, which had quite an impact on our overall company growth rate.

However, this is to be expected as we continue our conversion to a monthly recurring revenue model. Our second category is annual recurring revenue, which represents the annual software maintenance revenue paid by customers using our on-premises solutions.

Like onetime product revenue, annual recurring revenue will continue to decline over time, although, at a much slower rate, as we migrate on-premises customers to the AltiGen cloud. In fiscal 2019, annual recurring revenue declined by approximately 9%.

Now the positive news is that as customers migrate to the cloud from their on-premises PBX systems, AltiGen receives anywhere from 5 to 10 times more cloud revenue compared to the annual recurring revenue. Our third category, services revenue, was previously included in the onetime revenue category.

However, because services revenue has been growing, we broke this out into its own distinct category. In fiscal 2019, services revenue increased by approximately 130% over fiscal 2018.

Final category is monthly recurring revenue comprised of our hosted software plus our SIP trunk telephone service. As I indicated at the top of the call, our monthly recurring revenue increased by 24% in fiscal 2019 compared to fiscal 2018, and now accounts for 58% of our overall company revenue.

I should also point out that our hosted MaxCS IP-PBX business represented approximately 95% of our cloud revenues with our Skype for Business and Teams revenue at approximately 5%. It's also important to note that we expect a much greater contribution to cloud revenues from Skype and Teams in the fiscal 2020 year.

Since it's been a while since our last conference call, I also wanted to update everyone regarding other interesting developments, which have occurred over the past few months. In July, we announced the availability of our new Teams' Direct Routing service, which is a Microsoft Certified IP-based phone service for Microsoft Teams phone system.

To-date, we have contracted with approximately 10 customers who are in various stages of deployment through production. Due to billing cycles, there was very little contribution to revenue in our fiscal 2019 fourth quarter, but we will start seeing the impact of Direct Routing in the current quarter, which we expect to continue to grow throughout fiscal 2020 and beyond.

In August, we entered into a definitive agreement with WorkSpace Communications to acquire their hosted Skype for Business customer base. Since that time, we've migrated approximately 40 customers to either our Skype for Business platform or the Teams' platform, which collectively represents approximately 1,400 subscribers.

Given the migration times, none of the associated revenue was recognized in fiscal 2019. However, we will report partial quarter revenue for most of these customers in the current quarter with the full impact of that revenue being realized in the second fiscal quarter of 2020.

And earlier today, we issued a press release announcing the strategic partnership between AltiGen and Atlantis Telecom, based in the Czech Republic. We selected Atlantis and their industry-leading omni-channel contact center solution, called FrontStage, due to its comprehensive functionality, alignment of vision between our companies regarding the market opportunities and the ability for AltiGen to exclusively distribute FrontStage in both the U.S.

and UK markets. We still have some work to do innovate FrontStage with our MaxCS IP-PBX, Skype for Business and the Microsoft API available Teams phone system.

That being said, we do expect for FrontStage to start contributing to our cloud revenue stream over the next couple of quarters. I'll step aside for a moment to turn the call back to Carolyn to review the financials in more detail.

Carolyn?

Thank you, Jerry. Before we get started, I would like to remind everyone that we have adopted the new revenue recognition accounting standard ASC 606 effective October 1, 2019.

The adoption of ASC 606 did not have a material impact on our financial results. Accordingly, the comparative financial results being reported have been prepared in accordance with ASC 606.

Let me now summarize our fourth quarter and full year 2019 results. Total revenue for the fourth quarter was $2.7 million, the same as the prior year period, while the full year total revenue grew 6% to $10.6 million over fiscal 2018.

Cloud revenue for the fourth quarter was $1.6 million, up 15% from $1.4 million in the comparable period last year and up 24% for the full 12-months compared to fiscal 2018. Product and services revenue for the quarter was $352,000 compared to $526,000 in the prior year quarter, representing a decrease of 33%.

On a 12-month basis, product and services revenues decreased approximately 14% to $1.5 million in fiscal 2019 compared to $1.8 million in fiscal 2018. Software Assurance revenue for the fourth quarter was $712,000 compared to the $760,000 in the comparable period last year, representing a 6% decrease, while year-over-year Software Assurance revenue decreased by 9% to $2.9 million in comparison to $3.2 million in fiscal 2018.

Turning to margins. Our fourth quarter gross margin was 80.3% versus 83.1% in the comparable period last year.

Year-over-year, gross margin was 81.4% for fiscal 2019 compared to 83.5% for fiscal 2018. The decrease in gross margin was primarily driven by a shift in our product mix and to a lesser extent, higher amortization and capitalized software and acquisition related costs.

GAAP operating expenses for the quarter totaled $1.6 million, down $306,000 or 16% from $1.9 million in the comparable period last year. For the full-year 2019, GAAP operating expenses decreased 10% to $6.5 million compared to $7.2 million for the fiscal year 2018.

The decrease in operating expenses was primarily driven by litigation related costs. On a non-GAAP basis, operating expenses totaled $1.6 million for the fourth quarter of fiscal 2019, the same as the prior year quarter.

On a 12-month basis, non-GAAP operating expenses totaled $6.3 million for fiscal 2019 compared with $6.5 million over fiscal 2018. Fourth quarter GAAP net income was $290,000 or $0.01 per diluted share compared to $9 million or $0.36 per diluted share in the comparable period last year.

GAAP net income for the 12 months of 2019 totaled $1.9 million or $0.07 per diluted share compare to $9.8 million or $0.40 per diluted share in fiscal year of 2018. It should be noted that our fourth quarter fiscal 2019 financial results includes a non-cash tax expense of approximately $260,000.

The tax expense defers from the federal statutory rate of 21%, primarily due to an increase in the amount of net operating losses expected to be utilized before expiration. Also, as discussed on prior calls, fiscal 2018 financial results include a onetime non-cash income tax benefit of approximately $8.7 million related to the release of the tax valuation allowance, previously recorded against a significant portion of the Company's deferred tax assets.

Non-GAAP net income for the quarter was approximately $635,000 or $0.02 per diluted share compared with $616,000 or $0.02 per diluted share in the same quarter last year. Year-over-year, non-GAAP net income was $2.5 million compared with $1.8 million in fiscal 2018.

Moving to the balance sheet. We ended the quarter with $4.4 million in cash and cash equivalents compared to 4.6 million at the end of the preceding quarter.

Working capital was $3.3 million compared to $3.4 million of the end of the preceding quarter. This concludes the financial review.

I will now turn the call over to Jerry to close out the call. Jerry?

Thanks again, Carolyn. From our perspective, fiscal 2019 was a productive year for us.

Overall, we positively grew our total recurring revenue to now more than 85% of overall revenues, primarily driven by 24% growth in our cloud revenues. In addition, we've either introduced or will introduce several new cloud solutions that will have a very positive impact on our fiscal 2020 revenues.

Now at this time, I'd like to address any questions and turn the call back over to the operator. Operator?

Could you talk about gross margins? You talked about it in the press release.

I'm wondering if you're expecting them to stabilize at around here to 81.5% since you did make mention of about some non-recurring items that were a factor.

Hello Harris, and thanks for the question. I think I will let Carolyn address that.

Yes. We do expect the margins to fluctuate in the future quarters, and that's primarily due to -- we are expecting to take in some capitalized amortization with respect to cap software and that will happen in the future quarter.

So that will -- we expect that to affect our margins by a few basis points.

So my purpose is trying to guess what your earnings will be. I should be using the 81.5% rather than 83.5%, that's really the thrust of the question.

Yes, that's correct that would, yes.

Jerry, congrats on the solid quarter and recurring revenue growth, really excited to see that. My question is around the new partnership announcement with Atlantis Telecom.

And I was just wondering should we look at this type of partnership as a template for additional partnerships going forward into 2020? And then maybe if you could comment too, it also seems like the strategy might be to partner with some of the long tail companies or more regional companies and continue to grow and kind of let the RingCentral of the world trade each other?

Thank you.

I think it's a compound question, so I'll pick these off one at a time. The partnership with Atlantis Telecom, I think I'll definitely put that into the strategic category.

I don't think there are a lot out there like that given the strength of their product and the importance of having an omni-channel contact center solution in our portfolio. However, let's say less strategically, yes, we will look and we are looking at additional partnerships and forging additional partnerships that we can add to our cloud portfolio rather than build the product, in a lot of cases, just as we did with Atlantis.

It's something less expensive to pay the royalties and build the product ourselves. And of course, we get the time to market.

So I think those are -- both of the above are important considerations in our strategy going forward. And honestly, regarding the RingCentral's of the world.

As companies move more and more of the teams and I know you've heard me say this before. They're simply not going to be participating in the deals that we're participating in, because Microsoft -- with Microsoft Teams phone system, they are the voice platform, there is nobody else that gets to be the voice platform.

So companies like RingCentral that also have a voice platform and that's what they're built on, they're out of the game. So we're not -- that's why I'm not really worried about them.

Our job is to be the best provider for the Microsoft Teams phone system, which is the fastest growing application in the history of Microsoft and leverage that to the hilt.

Okay. Well, thank you everyone for participating in the call.

It was quite a long time since our last call. And because of that, we're going to have our next call fairly quickly in about 45 days.

So we certainly look forward to updating you on our -- on what will be our fiscal first quarter performance in probably the third week of January. Thanks again.

Thank you everyone.