Altigen Communs Inc

Good afternoon, ladies and gentlemen, and welcome to the Altogen Communications fourth quarter and fiscal year 2022 results. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Brian Kriegel. Sir, the floor is yours.

Hello, everyone, and welcome to Altogen's earnings call for the fourth quarter of fiscal 2022. Joining me on the call today is Jerry Fleming, President and CEO, and Carolyn David, VP of Finance. Earlier this afternoon, we issued an earnings release reporting financial results for the period ended September 30th, 2022. This release can be found on our IR website at altagym.com. Please note that we have added some supplementary tables with new revenue breakouts and metrics. We believe this will help improve transparency into our business and we will continue to evaluate additional metrics as our new products begin to contribute to our results. We've also arranged the 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 IR section of the website. As a reminder, today's call may contain forward-looking information regarding future events and the future financial performance of the company. 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 30th, 2021, as well as a 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 and forward statements. All of this 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. measures are not superior to or replacement for comparable GAAP measures, but we believe these measures help investors gain a more complete understanding of results. The reconciliation of GAAP to non-GAAP measures and additional disclosures regarding these measures are included in today's press release. Now I'd like to turn the call over to Jerry Fleming for opening remarks. Jerry?

Thanks, Brian, and good afternoon, everyone, and thank you for joining us on today's call. So I'm going to begin the call today with a State of the Union update on our business. Following this, I will turn the call over to Carolyn to review the financials. Our fiscal 2022 was marked by significant advancements in our new products, the acquisition of ZACT Consulting, subsequent enhancements to our organizational structure, and the implementation of new business systems. So all in all, as I mentioned in the press release, FY22 has been a year of monumental change for Altagents. For the business update, I will start with our legacy PBX business. Altogen has historically been a developer of business PBX systems targeting the SMB market. Over the years, we morphed the product from a hardware-centric to a software-centric solution, which we call MaxCS. Not only did that allow us to exit the proprietary hardware business, it also enabled us to deploy MaxCS in the cloud, offering that PBX platform as a hosted managed service. We then worked to migrate our on-premises MaxCS customers to the cloud, which of course is a much more profitable business model. Today, we have about 300 MaxCS customers deployed in the cloud with another 600 or so still on-premise. Because the feature sets of the MaxCS cloud and the MaxCS on-premise versions were virtually identical, many customers elected to continue using the on-premises version since they had no compelling reason to migrate to the cloud. In response to this dynamic and shifting market requirements towards integrated unified communications, in the fourth quarter of fiscal 2022, we introduced the first version of our new UCaaS solution, MaxCloud. The benefits are twofold. For customers, MaxCloud adds much-needed unified communications capabilities on a scalable, high-availability, and redundant platform. The benefit to Altogen is that we receive approximately eight times the revenue from a MaxCS Cloud customer versus a MaxCS on-premises customer. Our new MaxCloud platform will continue to be sold through our third-party reseller channel and through Fiserv. Version 1 of that platform includes a number of new enhanced features compared to MaxCS. And as a new solution with many enhancements, we first rolled out MaxCloud on a limited release basis to ensure that all of the kinks were worked out before moving full steam ahead. That being said, in fiscal 2022, we deployed more than 30 customers representing over 1,000 subscribers. Roughly half of these customers migrated from on-premises Mac CS, with the remainder being net new. We plan to release version two, which includes new mobile apps, soon. which will then allow us to more aggressively target the approximately 600 or so remaining on-premises customers that we will migrate to the cloud. Of course, we also plan to move existing MaxCS Cloud customers to the new MaxCloud UCaaS platform to ensure that we retain this valuable cloud customer base. In addition, MaxCloud has also now been fully deployed in Fiserv's data centers. Fiserv will be targeting their base of approximately 100 legacy MaxCS customers, of which about one-third are using the cloud version of MaxCS and the remaining two-thirds using the on-premises version of MaxCS, in total representing approximately 3,500 subscribers that Fiserv will migrate to the new MaxCloud platform. In FY22, Fiserv deployed three MaxCloud customers representing about 200 subscribers All of these customers were net new to Altogen. The majority of Fiserv's customers also have a requirement for our new front stage contact center as a service platform. In FY22, we deployed front stage for the first two Fiserv customers, representing an average revenue per customer of approximately $10,000 per month. Based on Fiserv's stringent security and network requirements, we've had to invest quite a bit of time and resources to meet their requirements. With most of that work now behind us, we expect to see a much more robust contribution from Fiserv in FY23. Additionally, to address the heightened security issues for banks and credit unions, we introduced our new secure access SIP service for Fiserv, which authenticates callers by their caller ID and registered device, as well as by our new voice biometrics technologies. Together, these virtually eliminate fraud by callers attempting to impersonate an actual customer. This service became available right at the end of fiscal 2022 and is now being piloted by the first few customers. Just to give you an idea, the revenue to Altagen for the secure access SIP service, we expect to range from approximately $2,500 to $7,500 per month per customer that take that platform. I should also point out that while Fiserv is targeting their base of 100 or so MaxCS customers to upgrade them to both MaxCloud and FrontStage, they are also going after the more than 2,000 customers that use Altogen's IVR or interactive voice response platform. Over the years, Altogen has developed integrations between our IVR platform and more than a dozen of Fiserv's core processing platforms. These integrations can be heavily leveraged for both the front stage contact center solution as well as our new secure SIP access service. In addition to this, Fiserv has about 3,000 existing customers which are not currently using an Altagen solution that will provide a very nice pipeline to go after for additional business. Overall, the opportunity with both the legacy Altagen customer base and Fiserv remains significant and unchanged from our prior calls. With things now starting to progress on both our UCaaS and CCaaS platforms, I'll turn to an update on our Microsoft Teams solutions. As Microsoft has been reporting, Microsoft Teams is continuing to grow, particularly in the mid-market and enterprise spaces, which are the areas we're targeting. We've also heard reports from quite a few UCaaS providers that Teams is very much negatively impacting their businesses. On the other hand, the growth of Microsoft Teams is a very good situation for Altogen, given our business strategy of enhancing and extending the capabilities of Teams with what we believe is the most comprehensive suite of Teams phone system solutions on the market. Now, reviewing our solutions for Teams, our SIP direct routing solution has been growing by about 50% annually and is our number one revenue contributor today. However, I believe the most significant opportunity going forward lies in CornerAct, our digital customer engagement platform for Teams phone system. As many of you know, we initially released CornerAct several quarters ago, and after gaining experience in deploying CornerAct, we came away with solid feedback and recommendations from most customers for new and upgraded capabilities. We rolled out phase one of these enhancements just this past September, which were largely centered on improved performance and ease of use capabilities. Phase two, which adds significant new functionality for users, managers, and administrators, is scheduled for release in early January. These two significant updates dramatically upgrade the value proposition of this product line for our customers and will allow us to more fully engage with enterprises, especially when combined with professional service capabilities we acquired through ZAC Consulting. Just as a reminder, Core Interact is now comprised of four integrated applications. First is the base Core Interact product, which includes the engine for routing and queuing customer requests along with a new systems administration module that runs natively within Teams. Second is Workgroup Insights. This displays real-time performance statistics for both a workgroup and each individual in that workgroup. With Workgroup Insights, departmental supervisors can now easily manage the performance of their individual departments, which is particularly useful in today's distributed workforce environment where employees are not sitting in cubicles under direct supervision. Our third application is Core Engage, which is a new application allowing Core Interact users to interact with their customers via any communications channel, those being phone, SMS, web chat, and emails, and we deliver all of these capabilities into a single desktop application. Fourth and final, is Core Attendant, which is our operator council for Microsoft Teams. While we expect Core Attendant to generate revenue, we are offering this product on a freemium basis with a limit of one per customer so that we can seed the market not only for additional Core Attendant modules, but also for our entire suite of Teams solutions. Now, the reason our customers and business partners are so excited about Core Interact is that it allows an organization's customer-facing employees to interact with their customers using their customers' preferred communications channel. This is unique for the enterprise users. This capability has been historically limited to the contact center, which, due to cost and complexities, simply cannot be deployed for enterprise users. Core Interact completely changes that paradigm. Regarding our progress with the Corner Act solution suite, in FY22, we licensed 18 new customers, having a total of approximately 200 users, many of which will go into larger deployments as more departments are brought on. Our pipeline continues to grow and includes quite a few opportunities with customers, a single customer, having more than 200 users for Corner Act. We also signed approximately 15 new partners during FY22 who came on board to be selling the Core Interact solution. I think it's safe to say that we are beginning to see real traction with Core Interact. So with that, I'll now turn the call over to Carolyn to discuss our financial results. Carolyn?

Thanks, Jerry, and hello, everyone. For our 2022 fiscal fourth quarter, we reported total revenue of 3.6 million, up approximately 28% compared to Q4 2021. Total cloud services revenue for Q4 was approximately 1.94 million compared to 1.97 million in Q4 last year. Our professional and other services revenue increased approximately 700% to 1.2 million compared to the same period a year ago. The increase was driven in part by revenue contribution from the acquisition of ZACT. Gross margin was 64% compared to 71% in Q4 last year, representing a decrease of approximately 800 basis points. This decrease was primarily the result of a mixed shift towards higher professional services revenue resulting from the ZACT acquisition. Gross margin was also impacted by higher amortization costs for the acquired customer relationships in Q4. I'm going to talk about operating expenses including the acquisition or highlighting the differences, but as always, please review the tables in the earnings release for a reconciliation of GAAP to non-GAAP results. GAAP operating expenses for the quarter totaled $2.9 million, 53% higher than the comparable period last year. On a non-GAAP basis, operating expenses totaled $2.3 million for Q4 compared to the prior year quarter of $1.8 million. Excluding the impact of ZACT, our non-cash operating expenses would have been slightly lower when compared to Q4 last year. Gap net loss for Q4 was approximately $764,000 or negative three cents per diluted share compared to gap net loss of $1.2 million or negative five cents per diluted share in the prior year quarter. Our Q4 results included approximately $590,000 in acquisition related expenses as well as a non-cash tax expense of approximately $100,000. On a non-GAAP basis, net income decreased 43% to $200,000 or $0.01 per diluted share. The decrease in non-GAAP net income was primarily the result of higher headcount-related expenses as a result of the aforementioned acquisition. Turning now to liquidity, we ended the year with $3.2 million in cash and cash equivalents, down 6% compared to the preceding quarter. Working capital was $2.3 million compared to $1.5 million in the prior quarter, representing an increase of roughly 56%. This concludes the financial summary. I will now turn the call back over to Jerry. Jerry?

Yes, thank you, Carolyn. So I'd like to conclude my remarks by saying that Altogen is focused on building shareholder value by driving profitable revenue growth. Despite our new products taking much longer than expected to hit the market, all of our new products are now in production at customer sites, and we are continuing to add new subscribers each month. So based on this market acceptance and our progress with the products, I believe our strategy is sound, and now it's about execution to drive the business forward. So let me now turn the call back to the operator for Q&A. Operator?

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while we poll for questions. Your first question is coming from Neil Cataldi from Blueprint Capital. Your line is live.

Hey, Jerry. A couple questions, if I may. First, regarding the contribution from Daxton this quarter, would you deem it a normal quarter? Is this what we should be expecting going forward?

Yes. Well, I don't know if that's what you should be expecting, but yes, Neil, I would call it a normal quarter. I mean, there are ups and downs. So next quarter's subsequent quarters could be higher, excuse me, higher, could be lower, but I think at least it's an accurate reflection. I'll put it that way.

Okay. Yeah. I asked because the prior quarter you had discussed how the contribution was atypical and So just trying to gauge what expectations should be going forward. Moving on, a second question. You talked a lot about on the call Fiserv and the opportunity with them, how they've started to deploy more customers. Could you speak a little bit about how scalable the deployments are? In other words, like how much do you have to do when they decide to onboard new customers? And if they theoretically were to come to you one quarter and wanna deploy five or 10, would you be able to handle that?

That's a good question, Neil. So right now, because Front Stage is much newer, we are still participating in the deployments for the Front Stage Contact Center. For the MaxCloud PBX, Fiserv actually, well, it was this quarter, so it's not included in the numbers gave in my discussion on the call here. But they deployed their first customer. It was PBX only. They didn't require a contact center by themselves. We didn't touch it. So they're in pretty good shape. And they do have a number of people there that used to work at Altagen. And their deployment team is much larger than ours. So I'm not anticipating any issues with too much overload on being able to deploy the solutions.

OK, great. So that's interesting. So if they want to move a little bit faster, there's really nothing holding them back. Okay. And then my third question, given where the current valuation is, the company has cash, is typically generating cash, what is the temperature from you and or the board regarding possibly doing a share repurchase program?

That's a good question, Neil. You know, it's been, we just had a board meeting right before this call, and the stock has dropped a little bit since then, so we didn't discuss that. I'm sure that will be a topic of conversation at our January board meeting where we review our first fiscal first quarter results. My attitude, I can speak for myself here, is that if we believe the stock is significantly undervalued, the company should participate in some sort of a buyback program. But this has to be, as you know, has to be a board decision. I think it kind of depends on where the stock price is. And it's also, as you know, a bit of a volume question as well. If the company did participate, can we buy enough shares to make it worthwhile? But I can tell you that will be a topic at our next meeting.

Okay, well, you were buying stock in the spring at similar levels, so I imagine you probably feel it's undervalued here.

I was buying a buck and a quarter, just to confirm that, yeah. But now I'm locked out. Yep.

All right, great. Thanks. I'll let somebody else jump in. Thanks.

Okay. Thank you, Neil.

Thank you. Your next question is coming from Maz Suedin from GeoInvesting. Your line is live.

All right, Jerry. Not a hard question here, just really more of a bird's-eye view thing here. I think you talked about when you were going through the numbers, I think I caught the tail on it because I got a little late a couple charges in the quarter. I guess it was relevant to the act, maybe totally about $600,000. Was that right? Yes. Did I hear that right?

Yes. You did, Maj, and Carolyn can provide more detail if you'd like, and it is related to the exact acquisition. It's a one-time charge.

Okay, cool. So I'm just wondering, just from a, you know, not to sound like I'm nitpicking here or causing any point of view, I'm just wondering why you wouldn't include that as a non-GAAP number, and I don't think I saw that in the press release. Unless it was somewhere hidden. I took a quick look at it. It's a non-GAAP charge one time, I'm assuming. It's You know, and I just wonder why you wouldn't break that out as a non-GAAP number and adjust the number to let people know that this is, you know, that's why the non-GAAP numbers are down a little bit. I don't mean to, like, you know, to... Sure.

No, that's fair. Carolyn, can you jump in on that?

I mean, you know, big cap, mid-cap companies do it all the time. It's all GAAP. That's a very common thing. And I don't think it would have been an abusive kind of portrayal of what you're doing based on this one-time thing. So I think it was a little bit...

maybe not the right tack to take if you're trying to get people the true earnings power of the company right now so maybe i'm sorry i i my apologies i heard bits and pieces of it uh part of it uh got cut off are you referring to the acquisition related expenses of roughly around 590 000 okay yes and i think they were not cash charges i heard is that was that correct This was a cash impact, and it was related to ZACT. The non-cash impact was related to our deferred income tax, the tax provision of roughly around $100,000.

Okay, so $100,000 of cash, a real expense, a non-charge, non-cash charge, and about $500 and change, a one-time expense related to the acquisition is what I'm hearing. So I think For clarity and color, I mean, you're going to hopefully make snapshots moving forward. It's not inappropriate to let investors know that that was the case. I don't think I saw that kind of delineation in the press release, and there's nothing wrong with reporting a non-GAAP number based on that. We're dealing in a really tough nano-cap environment right now, and anything you can do to provide color for investors is really important and not taking things for granted that they're going to go look at the filings and figure these things out. or even go listen to a conference call. You know, your stock is down here at 80 cents or so, and I think you'd want to do everything possible to make sure investors understand the true earnings power of the company. So I'm hoping moving forward you take that into maybe some advisement and, you know, think about that, especially if this happens again. It's not common for companies of all sizes to make that type of adjustment. If you want to talk about it in the conference call, why not put it in a press release and have a true non-GAAP number? Yeah, that's my thought.

It is in the – okay, thank you so much. I just lost comment.

Yeah, go ahead.

No, please, please.

No, no, go ahead. I interrupted you. I'm sorry.

In the press release, it is in the tables. If you look at the gap to non-gap reconciliation, we did make reference and we did highlight that in the table.

So your non-gap number that you report takes that into account?

Yes, it is.

I didn't see that. My apology, that's the case. I didn't see that.

No, no, it's okay. That's perfectly fine. But there is a reconciliation of gap to non gap table and it should reflect this item it is it is specifically called out.

Okay, because in the when you were saying in the rare which here in the conference call, you had said the reason for the decrease in non gap numbers that was not mentioned as a as a reason. So that's, that's why I was kind of mentioning that. So All right, well, my apologies. That's okay. I'll go take a closer look at that.

No, no, absolutely. Yeah.

Okay. Thank you.

You're welcome.

Bye-bye.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star then one on your phone at this time. Please hold while we poll for questions. Thank you. That concludes our Q&A session. I will now hand the conference back to Jeremiah Fleming, Chief Executive Officer, for closing remarks. Please go ahead.

Okay. Thank you, Operator, and thanks, everyone. We look forward to reporting our results in about five weeks and hope to see you on the call. Thanks again.

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.