Altigen Communications, Inc.

Thank you, Helleri. Hello, everyone and welcome to AltiGen Communications earnings call for the third 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 June 30, 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 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, President and CEO of AltiGen, for opening remarks. Jerry?

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

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

For our fiscal third quarter we reported revenue of $2.8 million down approximately 1% versus the same period a year ago, primarily due to the expected decrease in our legacy product revenue as we shift our focus towards a cloud-based monthly recurring revenue model. And secondly, our cloud revenue which was roughly flat this year, this quarter over same quarter last quarter due to the SMB customer churn, we experienced the result of COVID-19.

However, sequentially revenue was up by approximately 6% for both overall as well as the cloud as a result of our new cloud subscriber ads. We also reported non-GAAP EPS of $0.02 down a penny from the year ago period, there are two primary contributors to this Delta.

First, of course, was the year -over-year quarterly revenue decline. But second and probably more importantly, our operating expenses increased due to our acquisition of Blue Panda with the CoreInteract platform, plus the additional headcount we've added to as we prepare to launch our new products.

Last quarter I wanted to detail on a historical evolution from a hardware provider to a software provider to a cloud services provider. Today, I'll provide an update on our progress as we continue to build out our solutions for the next step in the evolution of the company.

And Phase 1 of that next step is to establish ourselves as an end-to-end provider of a Unified Communications as-a-service or UCaaS and Contact Center as-a-service or CCaaS Solutions are built on the Microsoft technology stack. As part of this first phase we have identified and are pursuing three avenues for growth.

The first is based on enhancing` Microsoft teams, which has quickly become the clear leader in the unified communications and collaboration space with about [150] million daily active users worldwide today and because AltiGen’s UC solutions are built on Microsoft technologies. It is a natural fit for us to align our company with Microsoft and their industry leading teams platform to take advantage of its large and growing share of the market.

Our objective here is to be the leading provider of complete end-to-end communication solutions and services for Microsoft teams. As most of you know for the better part of the last 18 months, we've been focused on building out our next generation cloud UC Solutions to extend and enhance Microsoft teams.

As a reminder, our current team's solutions portfolio includes hosting Skype for business customers, which we have been and will continue to migrate the team's, SIP, direct routing, communication services and all reporting. Now admittedly in these solutions are enough to get us started, but they're certainly not enough to drive the significant revenue growth we're looking for.

On the other hand, our new solutions for teams will dramatically expand this portfolio to include a suite of applications natively integrated into teams using Microsoft BOT Framework and Microsoft's APIs. This approach unfortunately has caused some delays as we're waiting on Microsoft to deliver their APIs in order for us to be able to perform some key functions.

However, this approach is also very different than anything else available in the market and will provide superior functioning and a more seamless user interface compared to the competition as soon as those APIs are available. The first of the new solutions is CoreInteract, which is our new enterprise customer engagement platform.

We released this last month. Next on deck is CoreAttendant, which is a team's operator council, which does what no other teams operator council can do.

And we plan to release that solution later this quarter. Now, both of these solutions through for the first time in AltiGen’s history will be offered on a freemium model, which will allow us to see the market with free applications, which deliver basic but useful functionality.

The free subscribers and then targeted to upgrade to a paid model for those users wanting or needing additional functionality in the paid versions. Now, this is the same model employed by some of the fastest growing and most successful SaaS companies including companies like Zoom and Slack.

We're still working on the release of our FrontStage contact center for teams, which is the solution most impacted by the lack of critical Microsoft API Graph APIs. Based on the current information we can gather from Microsoft, and it's not easy to get this information, we're still likely about 90 days out from having that solution available, which means 90 days out from having those Graph APIs available.

And in the meantime, we've been sharing our team's roadmap and previewing releases of our new solutions with both Microsoft partners and prospective customers. And the response from both has been extremely positive.

This demonstrates to us that we are on the right track as a matter of executing and getting the solutions out the door. From a go to market perspective, our team's solutions are delivered through two primary channels.

First is our network of certified Microsoft partners primarily work with mid-market companies and our own direct sales force who work with larger enterprise customers. Now what we're still gearing up for the restart of the solutions, we are seeing growing pipelines in both of these channels.

So we'll transition to in addition to teams a key strategic business opportunity is our partnership with Fiserv. This is a partnership that has historically been based on our legacy and hosted PBX solutions, our interactive voice response or Bank by Phone application, and our SIP Trunk communication services all of which Fiserv, Fiserv sells to their 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 are further extending this capability with the addition of voice biometrics, which will add additional incremental security against unauthorized account access by verifying callers with state-of-the-art voice print technology.

This solution the voice print technology solution will be available later this quarter. Fiserv will also be launching our new Cloud PBX and UC Solution or UCaaS as we call Max cloud.

This will be deployed in the Fiserv data centers and will be exclusively offered to Fiserv customers. The FrontStage context center is actively being integrated with Max cloud, which Fiserv will also be offering to their customers.

And this solution, the PBX along with the contact center features unique integrations that are only available to AltiGen that are sold into the Fiserv base. Now we expect these solutions Max cloud and FrontStage to be ready for sale by Fiserv in calendar Q4 of this year.

Finally we will also offer our new Max cloud platform to the SMB market through AltiGen’s legacy reseller partners. Until now, the most of the focus of these partners has been squarely on migrating their AltiGen on premise customers to the cloud same solution.

But they've had difficulty in attracting new customers because our legacy Maxis PBX just doesn't have unified communications capabilities. This dynamic should change with a new Max cloud solution, which does have complete and robust UC capabilities and much more appealing to the SMB market.

From a go-to-market perspective, we plan to initially convert AltiGen’s hosted 10,000 plus Maxis PBX cloud subscribers to our new Max cloud UC solution. We're also targeting the remaining Maxis on premises customers to upgrade them to Max cloud.

Max cloud is nearly ready to go with a scheduled release for later this quarter. So at this time, I'll turn the call over to Carolyn to review the financials in more detail, after which I'll return to provide a brief summary.

Carolyn?

Thanks, Jerry. Total revenue for the quarter was $2.8 million up 6% sequentially and down 6% on a year-over-year basis.

As we explained last quarter, our legacy products revenue continue to decline as we have moved away from perpetual software licenses and associated software assurance in favor of a cloud for a strategy. We expect this trend to continue until we start to ramp revenue from our new products in fiscal 2022.

Gross margin decreased to 70% compared to 77.4% last year. The decrease in gross margin was primarily driven by higher amortization costs for capitalized software and acquisition related costs and to a lesser extent a shift in our product mix.

GAAP net income was about $1 million or $0.04 per diluted share compared to roughly 400,000, or $0.02 per diluted share last year. GAAP net income for fiscal 2021 includes a one-time non-cash gain of approximately 800,000 related to the forgiveness of the company's PPP loan.

On a non-GAAP basis, net income was about $500,000 or $0.02 per diluted share, compared to roughly $800,000 or $0.03 per diluted share in the same quarter last year. The decrease in non-GAAP net income was primarily the result of lower revenue and higher headcount related expenses in connection with the launch of our new products.

We continue to generate cash this quarter, as we ended the quarter with $6.5 million in cash and cash equivalents up 6% compared to the preceding quarter. This now concludes the financial review.

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

Okay, thanks again, Carolyn. So in summary, to-date, we've been relying almost solely relying on our core hosted PBX solution as the primary revenue driver.

But we're finally at the point where we're beginning to release our new UCaaS and CCaaS solutions, each of which carries its own unique customer value proposition, of these CVPs include having the inside track on upgrading our own PBX customers to our new UCaaS solution, we can do it better, faster and cheaper than anybody else. We're able to drive business with Fiserv into their captive customer base based on our unique integrations only available to AltiGen.

And finally, we can capture new team’s opportunities with our unique natively integrated approach. So we're -- we do believe that these new solutions will soon start adding new incremental revenues.

Although the timing of those revenues, as we discussed in past calls is still dependent on the new product releases. However, you know, as I mentioned, we're right there on the doorstep of these releases.

Because of that, we're certainly excited about the future that these solutions hold and our revenue opportunities and business growth holds and we certainly look forward to updating you on our progress during our fiscal year-end earnings call in December. Now I'll move to Q&A.

Operator?

Hey Jerry, thanks for taking my question. On previous calls, you've referenced the volume of business that can come from having FrontStage launched.

And on the last call you referenced I believe 30 Microsoft partners and 70 new customer opportunities. I was wondering if you could refresh either of those metrics today and maybe just provide some more color on the pipeline that may be building?

Yes, absolutely. Neil.

So your question -- let me just quickly pick up the -- and answer your question and the partners and the opportunities. I don't have it right at my fingertips.

But I'll grab it quickly. The first part of your question was dealing with just the overall revenue up to the size of the prize in terms of FrontStage?

Yes, I mean [indiscernible] that talked about it on a call or two ago and I -- I'm a long term shareholder. I think it'd be interesting for people listening or people that may be referenced this in the months to come to understand the size of the opportunity ahead of you.

And maybe even just to understand a little about how you have gotten access to this technology?

Sure, okay. No FrontStage or CoreInteract or just across the board sort of just give a quick overview of the whole works here --

Yes, sure, why not? Yes.

All right. Let me first -- since I do have the data here, let me first answer your second part of your question.

So we have approximately 58 partners now up from the last call and those partners in the pipeline something over 100 opportunities that they brought to us that we're working with them. So that's part of the growing pipeline.

And some of that obviously is dependent on some of these new solutions. So in terms of -- we have two, I think, two core products, where we have a lot of products bringing to market, we've got the direct routing, we've got some machine call reporting capabilities, we have an operator council coming out, we built the operator council ourself.

So this can be quite interesting because teams itself operator council is maybe not very exciting, right as for the company operator answer calls and transfer those to employees. But it's needed in very large enterprises more so than even SMBs.

And teams, somebody doesn't have that capability. And because we built our operator council on the CoreInteract technology that also uses the Microsoft BOT Framework and apologize for getting a little technical, we can actually do stuff with the operator council at the three or four companies that have a competing solution simply can't do.

And they also charge about 75 bucks for their operator council ours is free. Why are we making it free, because we want to get into as many accounts as we can upsell them to our additional solutions.

So this one really and actually, we get one for free per company. So there will be a revenue opportunity.

But this one is really to get account access. But then with that is also CoreInteract.

And right now with CoreInteract, this is the solution that we acquired from Blue Panda. And we spent Azure, since we acquired them, took us and we started actually doing the six months, we started funding development six months before we acquired them.

So for 15 months, we've been working on this platform to get it up to where we need it to be. Because teams has its own call routing solution, which is what the base version of CoreInteract does.

We happen to do it better. Okay, but is that good enough?

Well, my view is, what, I'm going to make it simple, we're going to make it free, is better, and it's free. And now it provides the foundation to get in there with voice routing and queuing to be able to upsell, we have a whole slew of other applications that sit on top of CoreInteract, that they're anywhere from 10 to 15 bucks, but they add up to about 100 bucks collectively per user per month that we can now sell.

So we want to lower our barrier to entry with that solution and be able to upsell applications. And you say this is also a try to address how to get access to this technology.

We from the start CoreInteract was designed using the Azure microservices fabric using that technology and it's completely multi-tenant and hyper scalable within the Microsoft cloud. So fortunately, when we started building this product, Microsoft had their cloud available, we don't have to worry about any of the stuff some of the other enterprise software companies have to worry about them to develop this solution to make it scalable.

We just leverage Microsoft's cloud and focus on the feature set. So while it's not quite ready for primetime or it's just not ready for primetime, probably a better way to put it.

We expect and we expect that this is going to be quite a large opportunity for us. Today, we have the voice only out.

So we're going to be seeding the market with our freemium version. Later this quarter, we expect to have other digital media channels.

When I say digital media channels, I'm talking about e-mail, fax, SMS, webchat, social media, messaging, all the things that people do right, but aren't available in the enterprise. So I don't know if that answered your question.

I have a little bit more to say. But I've been wanting to stop.

And…

Yes, you know that….

That's answered your question. Yes.

No, that's great. Thanks.

And when you reference voice, are you are you talking about the direct -- is that direct routing?

Yes. When I say voice direct routing, and that all substitute voice for a phone call?

Yes, so phone calls can…

Okay.

Were routing to that call and make sure it gets to the right person, best available person. And because what we do, we happen to do it better than like happen to if we decided to do it better than Microsoft.

But the real key for us is building that foundation. And so we'll spend just one more minute here.

And I'll just give everyone an example. Just think of yourself on what you could do on your cell phone today right.

You can make phone calls, you can SMS. You can do a webchat.

If you're on someone's website, you can send an e-mail, you can post social media messaging. Now, the companies that you might be calling into your customer, so they can respond.

They can take a phone call, and they can take an e-mail and that's it. There's no doubt that this market is converging and these companies are going to move to digital customer engagement right now the entire -- our entire set of competition is focused on the high-end contact center where 5% to 10% of the employees say no one.

And I mean, no one is addressing the enterprise. And that's where we're moving with our solutions.

So this freemium model will open the door for us. And we will be -- I expect that we're going to have quite a nice ride once we get our other digital media out to be able to penetrate these enterprises for the users that just don't have any other technologies.

Okay, a couple of follow up.

Your third question, apologize?

No, I think it's helpful. I mean, hopefully, there's new people listening and I'm sure they maybe don't have the full context that I do.

Colliers covers the UC space and in a recent note, they said that demand for Microsoft teams, direct routing is robust, with an estimated 80% of organizations using teams selecting a third-party solution. I'm just wondering, you referenced 58 partners, 100 opportunities, is that consistent with what you're seeing in the marketplace that all of these people are using teams, but no one's really using Microsoft for the piece that you're trying to build here and then provide?

Well, I don't want to get into, let's say, a match with these carriers. But I certainly disagree with your findings.

Because the long and short of it is I think they do not understand the difference between teams and teams phone system. And I wouldn't doubt that 80% of those companies moving the team's phone system are choosing direct routing, instead of calling plans, I can guarantee you 80% of the team's customers have not moved to a phone system.

It's 20%. Right, so those are our targets right now with direct routing.

And that's great, right? And there's Microsoft does calling plans, there's a lot of direct routing competitors.

That's a nice -- I call it a nice business for us, we can make some money on it, it gives us a beachhead into the account, the real money is in the additional applications we can sell to those customers that can enhance their ability to customers.

Got it. Okay.

Okay, so then are the partners today able to sell the two new solutions we're talking about that are live or is it a bit of a holding pattern as you wait for contact center?

No, they can. So they can sell direct routing today.

And they can sell as of last month. Well, they can sell that I just mentioned, we're doing this on a freemium model, they can start deploying CoreInteract freemium voice piece of it now that's ready to go.

So but, which is fine, because we have to build up this enterprise base that we can then target to upsell to the additional applications and it can be applications on top of voice that we sell or we just are releasing or can be the other digital media channels. So but today and of course they don't have contact center because of the Graph APIs we cannot no company can deliver a native Microsoft team's contact center today, regardless what they say it's not possible.

So they just have workarounds and use a third-party PBX for that function. But resellers today, it's -- they're pretty light on what they can sell, because we don't have a lot of solutions.

And -- but they're on board with what we're doing. And they will be selling our solutions as soon as we get them out the door.

Okay, and of the 100 opportunities, what -- how should we think about the range of size?

Well, as I mentioned, in my commentary most of the resellers, I'm not going to say all, most of the resellers focus on mid-market and mid-market can be anywhere from 50 on the lower end to 500 employees, something like that, some of the resellers call on much larger enterprise accounts. But as a rule is that size and those opportunities that they bring us tend to be $300 to $500 a month range, something like that with our current solutions, right.

Right as we have additional solutions, all of our solutions tend to be for that size customer 300 to 500 bucks a month. So that will grow as we continue to release product.

Okay. All right.

Thanks so much. I appreciate it.

I will hop back in queue.

All right. Thanks, Neil.

I guess it's just you and I today Jerry?

Okay.

One more question for you. Could you maybe follow the same path as Fiserv and just update that?

I think you referenced the first engagement with them a while back. How has that progressed and maybe provide a little color on the pipeline of opportunities and timeline on the Fiserv side?

Yes, absolutely. So let's be careful, I'm not disclosing anything, let's say confidential information for Fiserv’s part but sort to give you a high level answer, so yes, we did put, we do have a very happy customer bank using the FrontStage contact center without Maxis PBX today.

And where they're pretty much using all the capabilities of solutions. Fiserv, because of their merger with FirstData is actually migrating data center.

So they have couple of 100 servers, I think of our PBX sitting in one data center is going to another so for the next several months as their primary focus is to migrate data centers. And they are dead set on moving in fact, they were one of the drivers for our new UC platform because it is multi-tenant and Geo redundant.

And so multi-tenant simply means we can put a bunch of customers on the same platform easy to administer, Geo redundant means we can deploy the same solution on multiple data centers. So if there's a problem on one data center, the system's net down, everybody's still up and running.

So they demanded that. And I did reference that solution will be available in early Q4, calendar Q4.

And so what they're doing at the moment, yes they're still -- they're actually still taking contracts. But they're not deploying at the moment, because they're going through their own data center conversion issues.

Got it? Okay.

All right, that sounds good to that. So the contact center on the Fiserv side is ready to go its implemented.

There aren't any issues with it. And in terms of extrapolating the same technology across to the teams opportunity.

Is it fair to say that really the only hurdle right now is the API, and then everything else is ready to go?

Yes. Yes, because it's the exact same platform contact center wise, that will work with the new UC platform that Fiserv will be selling and they will be selling as well.

And so the only difference is the connector on the back end, once connected to our UCaaS PBX and the others connected to teams. And there are a couple of functions that are critical to a contact center that teams Microsoft has not made the APIs available for.

And that's why -- that's the holdup. And it's just go or no-go customers not going to buy without those couple of critical features.

Right. And that's not that's specific to you that’s specific to all of the companies.

I know, it's not a long list. But there's I think, like 7 or 8 that are certified for teams already.

And there's maybe another 10 or 20. So this pertains to all of the companies that are waiting for certification.

Absolutely. And they have three levels of certification.

So those companies that are certified right now, they have their own PBX. And so they're using their own PBX to get around the limitations of teams.

And that's why I'm actually able to win some deals that way, for some customers that don't really care. You know most do some don't.

But when the native team solutions available those solutions, they're going to have a very, very difficult time to win business, because they're not doing it the Microsoft way. And so yes, we're -- I call it taking on the channel a little bit right now, but we're doing it the Microsoft way which will pay dividends in the long run.

So when this happens, I mean, do you think that it's going to get some publicity in the space need a lot of talk about UC and the opportunity. I don't see a lot about native right now.

But it sounds like it's a bit of an event, not just for you, but maybe for the space as a whole?

Well, I guess so. I say guess so because there it's a crowded space, right?

There are a tremendous number, like you said, there are approximately 20 companies right now either certified or being certified as the contact center for team. So customers got a lot of choices to make.

And yes, we will have it in our portfolio and expert to generate good revenue off of it. I don't think -- I do not believe that'll be our primary revenue generator.

I believe CoreInteract is going to be our primary revenue generator, because we're going to be playing in the enterprise space with no competition. And we will, that's where we're really focusing a lot of our energies.

I need the contact center to say yep, I've got one of my portfolio guys, I can satisfy that requirement for you to just as they can satisfy your direct routing requirements. But the real push is on enterprise customer -- enterprise digital customer engagement.

Got it. All right, thanks so much, Jerry.

Appreciate it. Looking forward to seeing how this all comes together.

Thank you, Neil.

Thank you.

Thank you everyone.