Altigen Communications, Inc.

Thank you, Omar. Hello, everyone, and welcome to AltiGen Communications earnings call for the second quarter of fiscal 2021.

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 March 31, 2021.

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 from 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, 2020, 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 financial 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?

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

I want to start the call today by providing a high-level overview of our quarterly results, and then I'll follow that with a discussion of our business strategy and expectations. After that, Carolyn is going to provide a detailed review of the quarterly numbers.

For fiscal 2021 second quarter, we reported revenue of $2.7 million, down approximately $200,000 versus the same period a year ago. The majority of this drop was due to a decline in legacy product revenue.

As we said on prior calls, this was expected as our focus has shifted to a cloud-based monthly recurring revenue model, and our cloud revenue actually increased by 1%. It was an increase versus the prior year quarter.

The majority of the revenue and the impact in the quarter largely comes from our small business customers, which have clearly been impacted by COVID due to the challenges many small businesses have faced over the past year. In the second quarter, we also reported non-GAAP earnings per share of $0.01 per share versus $0.02 per share in the year ago period.

This was due initially to -- or primarily due to our quarterly revenue decline, but also increased operating expenses due to our acquisition of Blue Panda as well as additional head count expenses as we expanded to prepare for a launch of our new products. Now I'll shift and talk about why I believe our future continues to be bright and provide an update on our progress towards our strategic business plan.

In order to provide the proper context for what we're doing and why we're doing it, I do think it's important to first explain the starting point. AltiGen has been in business for approximately 25 years, initially launching a Microsoft windows-based business phone system, or PBX, which was quite revolutionary at the time.

Of course, things have changed considerably since that time, most notably with the advent of Voice over IP, which enabled the business phone system to be deployed on the corporate data network, utilizing the Internet for external phone calls. These on-premise Voice over IP systems have now evolved to the cloud, in which the PBX is delivered as a managed cloud service.

Many of these systems have also expanded our capabilities to include processing of digital media and what I mean by that is things such as instant messaging, web chat, SMS, video calls and the like. While the market had already been transitioning to Internet-based technologies as well as cloud solutions, this move has been accelerated by the work-from-home trend related to COVID.

At the same time, AltiGen has been continually upgrading and expanding our solutions to take advantage of these trends and drive revenue growth. This included our initial transformation from our hardware-based communications company to all software solutions, followed by migrating our PBX from an on-premise solution to the cloud and more recently, integrating our solutions with Microsoft business and unified communications applications.

During this time, Microsoft also continued to evolve their solutions, ultimately launching Microsoft Teams as part of the Microsoft 365 cloud-based business productivity suite. Teams has quickly become the clear leader in unified communications and collaboration space, closing in on 150 million active daily users worldwide, up from 20 million users just two years ago.

Because AltiGen's UC solutions are built on Microsoft Technologies, it's a natural fit for us to align our company with Microsoft and their industry-leading Teams platform, which enables us to take advantage of that large and growing share of the market. Our objective is to be the leading provider of complete end-to-end communications solutions and services for Microsoft Teams.

To this point, we've been working for some time on our next-generation cloud-based UC solutions, which both extend and enhance Teams' UC capabilities. We've been sharing this road map and previewing releases of these solutions with both our Microsoft partners and prospective customers, and response from both has been extremely positive.

As a reminder, our current solutions portfolio includes SIP Trunk communication services, call reporting and call recording, just this three. Our new solutions for Teams will dramatically expand our portfolio to include our new CoreInteract, digital customer engagement platform, which comes as a result of our acquisition of Blue Panda last September; our new Teams operator console; and our new Teams management and provisioning portal.

Additionally, once Microsoft delivers its final version of the Graph APIs, we will introduce our new contact center application FrontStage. Our plan is to have all of these solutions available for release later this quarter, which will finally put us in a position to begin accelerating our cloud revenue growth as we move into fiscal 2022.

From a go-to-market perspective, our Teams solutions are primarily delivered through our network of certified Microsoft partners. In the past year, despite COVID, we've signed on more than 30 new Microsoft partners.

While these companies are getting ramped up on our solutions, they have already brought us in on over 70 new customer opportunities. Of course, we can't expect to win each and every one of these deals, but the sheer activity bodes well for our new solutions.

In addition to our partner relationships, we also directly engage with larger customers, targeting companies of 500 to 5,000 employees. Overall, we are actively building both pipelines in anticipation of the release of our new Teams solutions.

Outside of Teams, we also continue to offer our cloud PBX to the SMB market, primarily via AltiGen's reseller partners, which are made up of computer networking and IT service companies. For most of these partners, their focus has been squarely on migrating their legacy AltiGen on-premise PBX customers to the cloud.

We've historically seen solid growth in our PBX cloud revenues, but the market opportunity and associated cloud revenue has been limited by the fact that our legacy PBX does not have any unified communications capabilities. So to address this gap, we will also soon be launching a new scalable geo-redundant, cloud-based PBX and unified communications platform, which will enable us to convert more on-premise customers to the cloud as well as attract net new customers.

Finally, we also have a long-standing partnership with Fiserv, a partnership which has historically been based in our legacy and hosted PBX solutions, along with our interactive voice response application or Bank by Phone. In addition, Fiserv sells our SIP Trunk communication services, which enable our customers to replace more costly traditional phone service.

And all of these solutions are sold to Fiserv's bank and credit union customers. More recently, we've expanded our solution set with Fiserv to include color authentication, which is a fraud-prevention application, and we're actively working to further extend this capability with voice biometrics which will add incremental security against unauthorized account access by verifying callers with state-of-the-art voice print technology.

Fiserv will also be launching our new cloud PBX and UC solution which we call Max cloud, which will be deployed in Fiserv's geo-redundant data centers. Fiserv does plan to offer Max cloud in conjunction with our FrontStage contact center in order to deliver complete unified communications and contact center capabilities to their customers, all fully integrated with Fiserv's own applications.

I should also point out that we have successfully completed our first contact center project with a large Fiserv banking customer, and have a number of additional contracts in the works. Now given that Fiserv generates $15 billion in annual revenue and has more than 10,000 bank and credit union customers, this business opportunity is very significant, although it is somewhat difficult to forecast as Fiserv is driving the overall strategy and the sales engagements.

At this time, I'm going to turn the call back to Carolyn to review the financials in more detail, after which I'll provide a brief summary. Carolyn?

Great. Thank you, Jerry.

Total revenue for the second quarter decreased 8% to $2.7 million despite a 1% increase in cloud revenue. Our legacy products revenue continued to decline as we have moved away from perpetual software licenses and associated software assurance revenue in favor of a cloud-first strategy.

We expect our legacy revenue to continue to decrease going forward as we introduce our new Unified Communications as-a-service and Contact Center as-a-service products for Microsoft Teams in the months to come. Second quarter gross margin decreased to 72.8% compared to 75.9% in Q2 last year.

The decrease in gross margin was primarily driven by higher amortization costs for capitalized software and to a lesser extent, a shift in our product mix. GAAP net loss for the current quarter was $336,000 or $0.01 per diluted share compared to GAAP net income of $498,000 or $0.01 per diluted share for the same period a year ago.

Our Q2 results include a onetime litigation expense of $313,000 related to the settlement of our lawsuit in connection with the CTI claim. On a non-GAAP basis, net income totaled $239,000 or $0.01 per diluted share compared to $630,000 or $0.02 per diluted share in the same period last year.

The decrease in non-GAAP income was primarily the result of reduced revenue and higher head count related expenses, which Jerry alluded to earlier. Now let's turn to the balance sheet.

We ended the quarter with $6.1 million in cash and cash equivalents, roughly flat in comparison to the preceding quarter. And our working capital was $4 million, down 6% compared to the preceding quarter.

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

Jerry?

Thanks, again, Carolyn. So to sum up today's call, we are continuing to transition our business away from our legacy software license model to a cloud-first model.

As discussed, we have a dual-pronged strategy to drive business growth. First, we plan to take advantage of the tremendous growth in Microsoft Teams with both our current and new end-to-end Teams solutions and services.

Second, we are looking to accelerate our business with Fiserv based on many of the same solutions we discussed with Teams, plus several new solutions and services, which will be exclusively sold by Fiserv. I also should point out that anticipation of our business returning to, and in fact, accelerating our growth over the next few quarters, we have retained the services of Hayden IR to assist us in our investor outreach and look forward to continuing to provide updates as our business and strategy evolves.

At this time, we can move to Q&A. Operator?

All right. Thank you, Omar.

And thank you, everyone, for participating. We'll be back in touch same time next quarter, and deliver our business update and results.

So thank you very much.

Thank you, everyone.