Altigen (ATGN) Virtual Presentation with CEO Jerry Fleming

Ed Gilmore:  Good afternoon, everybody. My name is Ed Gilmore. I just want to thank everybody for joining the Grapevine Virtual Conference. Our featured company today is AltiGen Communications. AltiGen trades under the ticker symbol of ATGN.

A little bit of background on AltiGen. AltiGen is a leading Microsoft cloud solutions provider, delivering fully managed unified communication services, combining hosted Skype for Business, advanced Cloud PBX, cloud contact center applications with seamless integration into Office 365 for small and medium businesses and mid to large-sized enterprises.

On today’s call we’re pleased to welcome Mr. Jerry Fleming. Jerry is the CEO of AltiGen and Jerry will be providing a presentation and overview of the company’s business and more about his leadership in turning AltiGen around into a successful software as a service company.

At the end of the presentation there’ll be an opportunity to ask questions via the chat functionality of the webcast. To access the chat, please make sure to download and join the webcast via Microsoft Teams application or on your web browser. The URL for that, if you don’t have it, is available in the email invitation that was sent out by Grapevine. Once you have access to chat, kindly type your question during the Q&A portion of today’s call and your question will be read.

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With that said, it’s my pleasure to introduce to CEO Jerry Fleming. Jerry, before we get started, I thought it might be helpful to have you give a little bit of your background and history with the company and maybe touch on some of the early challenges that AltiGen has faced prior to now.

Altigen Safe Harbor Statement

This presentation contains forward looking information. The statements are based on reasonable assumptions, beliefs and expectations of management and the Company provides no assurance that actual events will meet management’s expectations. Furthermore, the forward looking statements contained here in are based on the Company’s views of future events and financial performances which are subject to known and unknown risks and uncertainties, many of which are outside of the Company’s control. There can be no assurances that the Company will achieve expected results, and actual results may be materially different than expectations and from those stated or implied in forward looking statements. Please refer to the Company’s most recent Annual Report filed with the OTCQB over the counter market for a further discussion of risks and uncertainties. Any forward looking statement made by us in this presentation is based only on information currently available to us and speaks only as of the date on which it is made. The Company does not undertake any obligation to update any forward looking statements.

Jerimiah (Jerry) Fleming:  Yeah, sure. And thank you, Ed.

Altigen CEO Jerry Fleming – Company Presentation

Hello, everyone. Thanks for joining the virtual conference today. My name is Jerry Fleming. I’m CEO of AltiGen. And I was informed and prefer to work this way. So, if anybody has any questions, please let me know. I don’t want to be one way talking at you for a whole long time.

So, just a little background on myself. After I got out of school, I basically decided that I wanted to get into the computer business. So, I started working for a small company locally in St. Louis where I’m from and did that for a couple of years and then started getting into larger companies. So, after that I spent five years at Computer Associates really when they were just getting started when Charles Wang, if anybody knows CA or CAI now, just when he was ramping that business up. Then from there really focused on enterprise software companies.

So fast forward So, don’t give you guys the TMI. I’ve been an AltiGen now for about 12 years. And for the 10 years prior, I think, we’ll call this really relevant experience. I was at a company by the name of Interactive Intelligence, generally doing the same things that AltiGen was doing, but on a much larger scale targeting larger enterprises. And for those of you who might have heard of Interactive Intelligence or ININ, they were sold for about a billion dollars to Genesis just about a year or So, ago, but when I came over to AltiGen, and both companies started at the same time and I was running sales from the start at Interactive Intelligence, AltiGen was a little under $20 million in revenue and at Interactive Intelligence we were approaching $100 million. So, there’s certainly a reason why one company sort of doing the same thing, being in business about the same amount of time, why was there such a gap in the performance? And that’s really what I was focusing on in the early years. And I can tell you what the issues were primarily is that at Interactive Intelligence we focused on much larger enterprises, companies actually having budgets and willing to spend money versus AltiGen focusing on various small businesses, and I’ll call, generally speaking perpetually small businesses, which to me is not a good business model.

So one of the things I wanted to get started on right way I came over to AltiGen was to get rid of the technology constraints that forced us into a small business environment. And I’ll talk about this in the presentation a little bit. So, I don’t want to talk too much about the same things. So, I’ll defer the details there, but we got rid of a lot of technology requirements. And then I found out that, and many of you who have been in business probably know what’s much more important than the technology constraints are the people constraints, and we had a founder that was … Well, I don’t have anything good to say about him, So, I’ll try to stay away from that, but a real blocker to the business. And unfortunately, it took me about five years or So, to get him ushered out of the business So, we could start executing on our business plan.

So that really slowed us down quite a bit, but once I was finally able to get the founder of the business, which wasn’t easy because he was founder, CEO, and chairman of the board, So, that’s why it took So, long, to finally get in charge and get some people in here that can execute and understand the strategy and can execute on the vision. Then we started moving, pretty much immediately started… once we got rid of all of our hardware technology constraints, we said “Look, it’s pretty obvious at the time,” and this was about 2014, I think, “the world is moving to the cloud” which the founder did not understand “And I think even companies like ShoreTel and Toshiba and other companies that were manually manufacturing PBX systems, even Avaya, were just late to the game, didn’t get that part. And now they’re either out of business or in chapter 11 or some other underperforming capacity.” So, our job was to get our product into the cloud, start a recurring revenue business, and, more importantly, monthly recurring revenue business, doing the same thing essentially, selling business phone systems.

So, all the nice fancy lead-in that Ed gave on that description of AltiGen, we sell business phone systems and we sell them from the cloud. And what that means simply is rather than packaging up a bunch of equipment and things like that and that I have to drive a truck out to and deliver to some company’s office, we simply make our solution available as a cloud service. The only thing they need to do is get some telephones, and we use Polycom phones, get some telephones and subscribe to our service and they’re up and running. So, their costs are much lower. No CAPEX, virtually no CAPEX other than the telephones. No hardware purchases, no electrical and cooling in a data center, all that business. So, we did that with our PBX and we’re still doing that with our PBX where a lot of our cloud revenue is coming from. And started then working on the Microsoft platform. And I think it might be better when I’m up working on the Microsoft one. I think it might be better when I talk about our strategy on the Microsoft platform to get into the slide deck because it gets a little complicated. And the reason for that is it’s not just as easy as saying “We’re Microsoft and we work with Microsoft” because a lot of companies say that. We have a unique way we’re doing this in order to be successful.

So, I’ll just pause now for any questions before I get into the PowerPoint presentation.

Gilmore:   Hey, Jerry, this is Ed. Would you like people to ask questions via audio or via chat? What’s your preference?

Fleming:   I don’t know how many folks we have on here, but I think it’s easier via audio, but when we have the Q&A session, audio is good. If it’s during the presentation, chat might be better and we can address them at a stopping point, if that works for everybody.

Gilmore:   Sounds good. We’ve got about 30 people on the line right now. And I don’t see any questions in the chat So, far.

Fleming:   Okay. All right. Let me then go ahead and do the screen share mode.

So, Ed, I’ll let you be the spokesperson. Can you see the desktop?

Gilmore:  Yes, looks good.

Fleming:  Okay. So, I’ll just go ahead and just roll into the company background and our current positioning. So, today we’ve come from this small business selling phone systems for small companies on premise, we’re evolving and have evolved and will continue to do So, as a provider of unified communications as a service solutions based on the Microsoft platform. Really what that fancy tagline means is, and I think everyone’s aware of this just with their mobile phones, is communication is not just about voice anymore. It’s about web chats and SMS and email and all sorts of other communications, social media, that are not just voice, but still come into organizations that need to be dealt with. So, that’s what Unified Communications, that’s what that fancy title stands for, to be able to capture those things.

So, we are headquartered in Silicon Valley, just outside of San Jose. We’ve been in business for just about 25 years now. We have about 2500 current customers, many of them still on premises. I’ll talk about that a little bit as we’re sort of migrating those organizations to cloud platform.

Okay. So, I’ve been asked by some of the shareholders just to point out the sort of the stock ownership construction. We don’t have much in terms of institutional ownership at the moment, but we have a lot of private investors. And I would say, unless So, some of the folks now as private investors coming on, other organizations are considered institutional, but I’ll say private right now for the most part. I own 15%. My management team has another 12%. And then AltiGen employees have 6% of the stock.

So, we finished last year, which is September of 2018, So, we’re coming up on our year end this year as well, finished just over 10 million dollars in revenue, bringing just over $1.1 net income and our cash balance to 3 million at that time. So, we still are pretty heavily engineering oriented to build products that we can be selling. So, we have nearly half of our employees that are in engineering. Nine people are in support to obviously respond once we deliver a product and make sure that it is working and dealing with any customer issues that crop up. And then the final 19 folks are in Accounting, Sales and Marketing and those roles are mostly customer facing roles.

Okay. So, from a summary perspective, a lot of numbers are here. I’ll try to focus on a couple of them and really the left most numerical column, which is the nine months ending June 30, for us, in FY2019. And as you guys can see, and we can compare that to FY2018 how we’re tracking, we’re certainly tracking in all categories last year, but it’s just about $8.0 million in the first three quarters versus $10.0 last year. Our costs and revenues are pretty consistent. Our gross margins, I can talk about, in the present moment those are slightly down and but this is not a concern because it’s a product mix that’s driving that. Our operating expenses, as everyone’s seen online, our EBITDA is in good shape. We’re continuing to make money and we’re building our cash position. So, I think those are sort of the highlights.

There are a couple of things that stand out that people have questions about, particular not from our company. One will be this big $9.84 million in net income in FY ’18. So, that’s an anomaly because we had a lot of net operating loss carried forward, that our accounting firm said that it needed to be consolidated and we had to actually report that as net income and then sort of amortize that as we use that to offset our income taxes going forward. So, I’ll take that to the bottom line here where we have NOLs of over $52 million on a federal basis and nearly $23 million on the state basis. And we actually got some R&D tax credits to go along with that. And those will last us for a little while, but some of my friendly shareholders tell us why the faster you make the money, the faster you can use those tax credits and the operating loss, that carry-forward numbers that you’ve built up to not pay as much in income tax, of course.

So, I’ll just pause here for a moment since there are a lot of numbers here and see if there are any questions. Perhaps it is easier. I can no longer, as I’m doing the desktop sharing, I’m not able to see the chat window. It might be easier if folks have a request via chat that Ed could then prompt it for us with that workout.

Gilmore:  Sure, Jerry, that sounds good.

Fleming:  Okay. So, If anybody have any questions going forward and doesn’t sound like we have any.

Okay. So, I’ll go ahead and proceed, but if you have any, please ask Ed anytime and, Ed, you can notify that way. I don’t mean to be very disruptive for the folks here in the conference.

So, I do want to point out that now that we’re making money, one of the pieces of our capital allocation strategy is how we can actually invest our cash to generate greater returns. So, on August 7 we acquired or at least announced the acquisition of the customer base of a company called Workspace Communications who’s very much like AltiGen in terms of offering hosted Microsoft unified communications solutions, primarily focusing on Skype for Business. So, it’s pretty much of a performance-based acquisition. And the terms of this transaction is that we are going to pay Workspace 1.6 times the annual revenue we receive only upon having the customer sign a contract with AltiGen. So, to give you an idea, someone’s doing, let’s call it, a little over $8000 a month, that would work out to be $100K a year, and we would sign them to a three-year contract, we would pay Workspace about 160K and then we’re done with that now that the customers are on our platform with us and we continue to generate the revenue and the returns off that customer. Now they’re all not at $8000. A lot of them are smaller, but it’s the same metrics. And the same requirements apply that the customer needs to sign contract with AltiGen.

This is kind of a dicey slide, but it talks really about … I say dicey because I get in trouble for this sometimes with some of the shareholders. It’s too much detail, but I’m just going to go over it just So, you guys understand and I think it is important. Why is AltiGen interesting now? You’ve been around for 25 years. You’ve been public for 19 years. Why should I care now? Because we are really quite a bit of a different company. And I certainly understand why somebody would think that. I think it’s perfectly investigated. Why should they get these guys now? What’s the difference?

So, on the left, just a bunch of stuff up here, a bunch of stuff we used to sell. So, all those items, we used to sell those. And the big giant thing that looks like an oversized computer server, yep, we used to sell that. And those telephones, we used to sell those. That was our solution. And we packaged that all up , our software was running on the server. That’s {inaudible}. To give you an example of a 30-person company, I would sell that pile of stuff to that 30-person company for about $15,000 or $20,000 dollars upfront. That was the only option. And the original AltiGen business model was … By the way, we don’t actually want them to pay us any maintenance. So, we just do a one-time sale. We’ll never collect another dime from that customer. That’s before I got here, just want to make sure we’re clear on that one. So, I certainly changed that, but as we went forward, as you can see, I mean, that’s a horrible business model, right? I don’t even think it’s 20:  20 hindsight. It should have been evident from the time, but that’s not what we’re doing anymore.

So, going forward and what we do today and what we’ve done for the last several years, we said “Look, this is a whole new world. People don’t want to buy that kind of stuff. They want everything in the cloud. They don’t want CAPEX.” So, we deploy all of our solutions in a data center, whether it’s our software or the Microsoft software that we support, we bring in our own internet-based telephony service which is referred to in our industry of SIP Trunks. And a SIP trunk, you’ll see on my little glossary here, is nothing more than being able to bring telephone service into your internet connection just like anybody at home might have a triple play with their TV, their phone and their internet all coming across that same wire. It’s the same concept, except we’re doing this in the business environment. Now we don’t wire anything. We ride on top of whatever internet service they have, whether it’s AT&T or Target or Comcast or what have you. We don’t have to worry about that. We just worry about delivering the service over a high-speed internet connection. So, the only thing the customer, within our solution, in any cloud solution, honestly, for a phone system, they just need to put phones on the desktops. And I’d say in today’s world half of the customers don’t do that because of headsets. So, that has changed as well. Where historically everybody had a phone to desktop today, you’ll see about half of the people with phones and about half the people with headsets.

So, in addition to our all software solutions, as Ed was talking about at the top of the call, we also have advanced contact center solutions that we deliver. And just as maybe a quick explanation of contact center for those that may not be familiar, everyone has called into a hotel or airlines reservation or when you call in, you’re not going to connect to somebody right away. So, your call will be connected to the next agent. If it’s a decent system, you have an estimated wait time of 3 minutes or 5 minutes. And if you want us to call you back instead, you won’t need to get in line, we can do that if you put your number in. That’s what a call center product does. That’s all the call center software’s managing, that sort of thing, in determining who the next agent is, best agent to get the call. And that’s what AltiGen does with our contact center. And our contact center sits on top of our PBX. It also works with Microsoft’s Skype for Business and it works with Microsoft Teams. And if you guys aren’t familiar with Skype and Teams, I have a slide. A little bit later I’ll talk about those and how significant it is to be able to integrate with those platforms.

Okay. I guess I didn’t realize I had some other bullet points, but I’ll just let you guys see here. I think I’ve talked to all these things, but the most important thing is the old model was hardware revenue well in excess of 90% and the new model is currently as we’re transitioning out of those on-premise customers, recurring revenue is now in excess of 90%. So, it’s quite a shift and it’ll continue and the recurring revenue will be 100%. And that’s what we get there and that’s certainly what we’re trying to do

Now, are there any questions at the moment?

Gilmore:  So far, Jerry, there’s no questions.

Fleming:  Okay. So, I’ve just going to give an explanation to you guys and how this gets a little complicated, but also we do have a unique position in the marketplace because we deliver an IPPBX. Sorry, I’ll throw another term out here. An IPPBX is nothing more than a business phone system. And the IP is Internet Protocol. So, it simply means that business phone system that allows calls to be made or received through the internet like everybody does today pretty much. With our phone system, now this is the one that I showed you all that hardware that we had cobble together that now is delivered in the cloud.

Okay. So, with our PBX we target the SMB market. I’m going to define this. This will be companies of 10 to 100 employees. And why is that? Because I think larger companies are going to go with the name brand players. They’re going to go with a Microsoft or a Cisco or something like that, and I’ll talk about that in a moment, but in addition, we’re hosting the PBX in our own data center, we have two partners that host that same PBX, same software in their data centers and they integrate with this vertical application and they go out and sell a business solution to their customers. So, in the case of ATS, they sell home services verticals to pretty much any company that’s doing home services – heating and cooling, plumbing, pest control, lawn service, that sort of thing – and they integrate with that company’s back office system. So, they have a completely unique solution. In the case of Fiserv, the figure is $18 billion, and they do the same sort of thing, but they integrate the AltiGen software with all their banking applications and go out and sell it to their customers things like bank by phone that’s still out there, our call center and other integrations directly in device or solutions to streamline the call processing.

So, what we also do on top of that is we’ve taken all the interesting capabilities that we’ve built into our PBX. What I mean by interesting capabilities is generally advanced call routing capabilities in the context I was talking about and we’ve integrated those with Skype and with Teams, with being able to support the Microsoft solutions. And Skype for Business is used by very large enterprise teams and you see Teams phone system here. Teams is now integrated with Office 365 almost every Office 360 plan, in fact, all of the enterprise plans and most of the business plans. So, it’s very easy now for customers using Office 365 to upgrade to the Microsoft phone system. Now, we could do that as a competitor if we were dumb or we could do this as an opportunity and let Microsoft take the PBX business and we’ll take all the applications that a company really needs to run their business and integrate it with Microsoft. And that’s the path we’re taking. And, So, you can see, not only it’s larger number of employees, it’s a much bigger market. Unless somebody thinks AltiGen can outsell Microsoft, then I think it’s pretty safe that, I don’t happen to think so, I think Microsoft is going to outsell everybody and that’s why we’re riding their coattails with our solutions.

Okay. So, just to give you guys an idea. And how am I doing on time as I start winding this down?

Gilmore:  Yeah, you’ve got about seven more minutes on the presentation. Then we’ll take some questions.

Fleming:  Okay. So, just real quick, that slide is simply designed to say … Okay, this is for the AltiGen PBX – “What have you done So, far and what’s the remaining opportunity.” So, I tried to quantify that. We can see that AltiGen, on our platform we have about 9000 subscribers. We have a whole bunch more subscribers out there that are still using our system on premise that we’re trying to convert to the cloud. Same thing with ATS. They’re sitting at about 7200 subscribers. And based on the partnerships they have with those homes services verticals that I had talked about, they’ve got about 50,000 targeted on their base. And the big gorilla, if you will, Fiserv, and you can see what they have installed already in the cloud, about 20 customers, 1700 subs and 2500 IVR, which is bank by phone, they have another 13,000 members using a core software system. That means it runs the entire business bank or credit union. And that represents another 500,000 endpoints. So, obviously, Fiserv has the biggest opportunity and they’re also the biggest player in the game and we’re the only product that they sell.

So, again with Teams, I’m sure many of the folks on this call use Office 365 in their day-to-day jobs. So, two of the components of Office 365, which I’ve highlighted in circles in the bottom, are Skype for Business and Teams. So, Microsoft started with just Skype for Business. Now they’re sort of replacing Skype for Business with Teams, but we’re able to integrate with both. And, interestingly, the Twitter post from Microsoft is that Teams is the fastest growing business app in Microsoft’s history. And we know they’ve grown pretty quickly with lots of different applications. So, I think that is certainly something to be said for Teams and is indicative of the market opportunity. So, already with Teams, it’s only been out for a couple of years. They have more than 500,000 companies using Teams because they built it into 365. And they have over, I think this other maybe very interesting stat, there’s 155 million commercial Office 365 subscribers. Those are the folks that are going to be using Teams and is delivered free of charge, but now they can upgrade to the phone system that we can now integrate into. And they have another 80 million customers, subscribers using Skype for Business Online that’s going to be replaced with Teams. So, everything’s really coming together with their growth and the evolution of it including Teams in Office, and enabling Teams with the phone system to create an opportunity for AltiGen to leverage with companies using the solution.

I get a lot of questions about the competitive landscape. And So, I’ll take a look at UCAS which is Unified Communications As A Service. I hope you guys can see this. If you look at that, it’s pretty much … I mean, these are some of the last largest technology companies in the world in a lot of respects. So, it’s a pretty tough to compete with them. So, it would be foolish, and I think we’ll see some of the other from this list start to drop off over time as Microsoft has more successful Teams as a phone system, it’d be foolish for us to try to compete with any one of these companies. So, instead, we’re taking the opportunity to integrate with Microsoft. We view Microsoft as a partner, not a competitor, creating a fat opportunity for us with Microsoft Teams that we can go leverage to up sell our application and services to. So, this market is very much in infancy. Microsoft is just getting out of the gates. So, I think we’re going to have not only first mover advantage as Microsoft continues to get Teams to deployed, but we’re quite unique in that we’re one of the few service providers, when I say service provider, I’m talking about delivering SIP Trunks, that also builds our own applications. So, as small as Altigen is at $10 million dollars, we actually have more we can bring to the table than any company that I’m aware of to be able to support Microsoft Teams initiative.

I’ll just wind down here and just do a quick review on our historical revenue model. Now, we talked about how we’ve moved from hardware to software to the cloud. And these numbers represent that.

So, you can see that starting in FY ‘15 we had very little cloud revenue. And of course, hardware revenue, we’re out of that business now, we killed it, that that was going to cost me, it did cost me on the top line revenue side, but it wasn’t profitable revenue. The other two categories are SA which is our annual recurring maintenance plan. That’s 100% linked to our on-premise or when people buy our PBX system, they buy software, they pay maintenance. That’s sort of the old model. So, we’ll continue to see a slower decline in the SA, in the software and services, and soon that will be overtaken completely by cloud. As you look at the cloud side, we’re growing our cloud at about 25% a year and that’s really what we’re focused on is to get that growing and get that growing even faster.

This slide might be maybe on the TMI category, once again. I think I just want to give you an idea about how many customers we have overall in the cloud, how many subscribers we have. So, at least at the end of September, of course we’re beyond this now, we had nearly 600 customers, average revenue 700 bucks, nearly 20,000 subscribers, and our average revenue per subscriber is 21 bucks. And you can see these numbers have grown every year in terms of every category. So, these are all good signs. We’re looking at metrics going forward about health and also the future of the business.

Okay, this is my final slide. So, as you look at some of the key metrics and compare those two other competing companies out there, not just phone companies, but let’s say SaaS companies, SaaS is simply software as a service, So, our gross churn rate for the past year, again this is all based on 2018 data, 4.5% which puts at, with our gross margins and our average revenue per subscriber along with our churn rate, the lifetime value of a subscriber is just over 3900 dollars for us. In our long-term value calculation it stands at 15.7 dollars.

Now, how does that compare to some of the players that you guys might have seen? And So, we just picked out for the last fiscal year, for instance, Ring Central, 8×8 and Five9 and how they’re growing and what their enterprise value to last 12-month sales are? And as you can see, we don’t have the same cache necessarily as those companies that have been out there for a while, but we also don’t have the same valuation. So, we think we’re quite undervalued. And as we continue to execute, we expect to see that change.

Okay. So, this, I think, everyone can read the key strategies as well as I can. I’m just going to stop here, Ed, and open it up for questions then.

Gilmore:  Thank you, Jerry, for that. It’s very insightful overview of the business.

Question & Answer

We do have a question from Maj Soueidan of GEOInvesting. So, Maj is asking “Competitors have described the market that AltiGen is in as a land grab. Can you talk a little bit about how the pricing environment has changed and maybe where you see that going?”

Pricing Environment

Fleming:  Yeah, I’ll have to a little bit granular here, I apologize. I think what’s happened for the last five years in the PBX business is not reflective of what’s going to happen going forward. And I think everybody knows it’s very difficult to map out. We’re going to be looking into the rearview mirror. All of the stats up to up to now don’t include Microsoft in the marketplace. So, the game has completely changed. And for those folks out there that aren’t smart enough to see that right now, they’ll see it sooner or later. And so, yeah, Microsoft, they own the desktop, let’s face it. And unless anybody sees that changing, they might have a different opinion than me. I don’t see it changing and that’s where they’re continuing … Google was at some point maybe seen as a threat. I’m sure they’re still seen as a threat. And we used to hear about Google Office overtaking Microsoft. And we can see over the last few years it’s just not true. In fact, Microsoft, their market share’s going up versus Google. So, with Microsoft in the game, they look to go out and sell their PBX, they sell it for 8 bucks. And if you want audio conferencing, it’s 4 bucks and your phone service on top of that. So, the companies … Yeah, I can see why RingCentral and 8×8 would say yeah and it’s going to get a little more competitive.” No doubt because you guys are going head to head with Microsoft and that is a losing strategy, in my opinion. So, our job is to stay tight with Microsoft. They will get deployment after deployment after deployment. There are 155 million office 365 subscribers. I don’t know what their internal forecast is for how many they’re going to convert it to their phone system. I’m pretty sure when they sit around in their boardroom, it’s a pretty high number. And that’s what our job is to be able to capture that because once a company makes a decision to go with Microsoft, yeah, they’re all the competitors, I’ll just use RingCentral and 8×8 as examples, they are out, they have nothing else to sell. And we are in. And we’ve got everything we’ve got to sell. So, I think it’s just going to be a complete change in landscape going forward.

On Sales Growth

Gilmore:  Okay, good. Thank you. Our next question comes from Matthew and Matthew is asking about the sales organization. So, Matthew says “Could you talk a little bit about the ability to build a high performance sales organization? What’s your experience there? Where’s that growth coming from?” And Matthew kind of goes on to express that he has some concerns that most of the growth may be coming from low-hanging conversions and that greenfield requires competing against more well-capitalized peers that have focused on the sales process. And Matthew continues, he thinks the customer acquisition costs would increase while revenue growth would slow. And he thinks that LTV to CAC ratio would drop when the conversions slow. Do you have a sense of how much and do you think you can continue to grow revenues at 20% after the conversions slow?”

Fleming:  Yeah, I think those are good questions. Matthew, obviously didn’t believe my competitive landscape slide because we don’t compete with those companies. So, right now what we’re doing, and he’s right, we are converting on-premise customers to the cloud, the low-hanging fruit. It’s a lot of work to do that. And the average customer has 33 users in our cloud. And so, yeah, that one is, I think, we can see that. There’s only So, many customers that we have on premise, right? So, that’s not our hard growth strategy. That’s one that’s “Let’s make as much money as we can see.” If you guys are familiar with the Boston Consulting Group and their matrix, that’s our cash cow. The growth is going to be coming from Microsoft solutions. And we don’t compete with RingCentral. I don’t know how many times I can say that. I don’t compete with RingCentral. Microsoft does. So, I don’t care what RingCentral does or an 8×8 or anybody else doing hosted telephony. They’ve got a go figure out how they’re going to beat Microsoft and Microsoft already has the desktop. What we do is leverage that desktop. So, if we’re betting that we’re not going to be effective leveraging the desktop, I wouldn’t invest in our company. If we’re betting that Microsoft is going to be able to beat RingCentral and AltiGen continues to do what we do, that’s a different story. So, I guess that’s just an assessment. I don’t think that’s where the market’s going, but everyone’s entitled to their opinion.

On Competition

Gilmore:  Okay, thank you, Matthew, for the question. Our next question comes from Ralph. And Ralph is asking “Jerry, who are you competing against or with in the Teams/Office 365 space?”

Fleming:  So right now Microsoft doesn’t have their API’s available. So, there are some service providers. And I can’t get into all the things that we’re doing because we’re under NDA with So, many different companies right now with what we are doing, but we have sort of two categories of competition, if you will. One is what other companies are delivering services in the Teams. So, those could be typically the regional players that most companies in, [inaudible][38:  15] most folks wouldn’t have heard of. Then on the other side we have the contact center vendors that have been out there for a while and Five9 falls into that category, Genesis falls into that category, yeah, in the very large companies. So, I think companies might say “Yeah, I’m using that” or “I’ll still purchase those products. They have global reach. That’s really my main requirement.” So, we could see both of those, but neither one of them on the one, the telcos, they don’t have applications; the contact center guys, they don’t have any SIP Trunk services and nobody has anything deployed in Azure where our solutions are deployed which is Microsoft’s data center. That’s our unique niche to be able to work with the partners to be able to deploy exactly in line with what Microsoft’s looking to do. That’s how you get their support. So. I won’t say there’s no competition because there’s always competition and it’d be a foolish thing for me to say, but we’re looking to attack the competition at their weak points, not go head to head with them at their strengths.

Gilmore:  Okay, thank you, Ralph, for that question. And we do have time for a couple more questions. So, if you have a question, please feel free to send it in via the chat.

In the meantime, Jerry, I’ll go ahead and ask a question. I know that AltiGen has a direct sales focus and also channel sales focus, but with this Teams opportunity and with the Microsoft opportunity, is there a concept of a Microsoft marketplace or app store where a small medium business could go into Teams and kind of find the AltiGen solution on their own without having to have a high touch sales process or contact with AltiGen sales?

Is Altigen in an Online Marketplace?

Fleming:  That’s a good question. Yes, there is. We don’t have anything in there now, but this is exactly where we’re going with our SIP Trunk offering for starters and then our applications to just sort of bolt on to that. This is one of the things. I can’t really give you guys any more details because  NDAs in place as we’re working on that, but let me just say this. We’re certainly looking at actively pursuing a strategy with products to get to that very high-volume low-touch model in addition to, let’s say, the more sophisticated contact center applications where we certainly have to consult the customer as a process, but our direct source will be focused on the larger, more consultative opportunities or just a little bit of a mix of both. That’s where the Microsoft partners really add value. And then at the low end where there’s no touch, this is where we plan to release something in that area, I will say, probably in 2020.

Gilmore:  Okay, thank you for that. Our next question comes from Ian Castle. Ian’s asking “Do you see any catalyst or change in the tactic to accelerate transitioning your on-premise customers to cloud?”

Catalysts for On-Premise

Fleming:  Good question. We do. I don’t think we’ve formally announced something, but we do have some programs that we’re implementing right now to do that because there is a limited lifespan and they’re not always going to be on premise customers, right? They’re either going to go to cloud or maybe some do nothing, but for the most part we’re interested in those that will move to cloud and get on our cloud. So, we do have some programs. They will be highly incentive to migrate to the AltiGen cloud versus just nothing and staying on premise or looking at one of our competitors in that space.

Gilmore:  Okay and thank you, Ian, for that question. If anyone else has a final question, please feel free to submit that.

Lifetime Value to Customer Acquisition

Now, Jerry, I’ll ask also ask another question. Your lifetime value to customer acquisition cost ratio was around 15.7, if I remember from the slide, and that’s good. It’s a sign of a healthy business. Typically, though, when that number goes above 5 for some industries, that can indicate a need to invest more in sales. Could you add some just color commentary on that and, I guess, what are your thoughts on that ratio where it’s at right now?

Fleming:  Yeah. Well, I think Matthew is right on with his comments on this one. Fishing from the stock pond, converting a base certainly contributes to that, right? That is easiest low cost for sure. Going forward we will expand our sales organization, but Microsoft’s right at the tip of the iceberg with their solutions. They don’t have their API out for me to go spend a bunch of money on salespeople right now to be able to not sell something for six months because Microsoft doesn’t have their API. It doesn’t make sense. You’ll see it’ll start ramping up when you can start going.

On Becoming SEC Filer

Gilmore:  Okay, sounds good. And then the last question was, again, from Ian Castle – “Could you comment on your plan or timing to become SEC filing?”

Fleming:  No, I can’t. And I don’t mean to be coy about that. I mean, if we’re ramping things up, I know, a lot of shareholders are concerned and some have mentioned to me they don’t even invest in OTC companies. We need to make sure that we’re not going to be falling back, that we’re viable, getting my growth rate to where I want it to be and we’ll hit those internal metrics, then we’ll certainly look to make that move to NASDAQ, but I don’t have a timeline for you on when we do that.

Gilmore:  Okay, great. And thank you, Ian, for that question.

Run-Rate Growth After On-premise Conversions

Right, Jerry. Well, this has been a very productive call. We appreciate it. We actually got one more question your slide from Matthew. Matthew is asking “How do we think about the run rate growth when we’re through your on-premise conversion? Will it slow? Can it accelerate? Is it dictated by Microsoft’s uptake with Office 360?” And Matthew said he’s not really sure how to think about how you’re going to grow going forward.

Fleming:  No, we’ll call it the great unknown. I do agree with your assessment on that. I don’t really give forecast, guys. I would say stay tuned as we get closer to Microsoft delivering their solutions. I will say this. I’m expecting Microsoft’s initiative to be a key growth accelerator for AltiGen, but I can’t give you a timeline because I don’t know when their solutions are going to be available. They say the end of this year. We’ll see, but when this happens and we’re ready to roll with our solutions. I’m not going to guarantee this is going to happen because we still have to go execute but, yeah, I mean, I’m not counting on our PBX business to take us to the next level. I’m counting on our PBX business to pay the bill and then the Microsoft-centric strategy along with the integrated omni-channel contact center to take us to the next level of output, and I will put Fiserv into that category as well. Even they’re getting closer to Microsoft. They’re actually quite a large Microsoft partner, but they’re actually doing some things as well that I can’t disclose that are tighter with Microsoft. So, as these things kick in, my objective is that to make the full conversion from where AltiGen used to be to where I think we should be over the over the course of the next couple years at the longest.

Concluding Comments

Gilmore:  All right. Well, Jerry, thank you for your time this afternoon on the call. It’s exciting to hear the growth and change in AltiGen’s business. I also want to thank all the Grapevine members and participants that have called in and for your questions today. We appreciate that. I think these type of sessions are very valuable. It gives investors a chance to speak directly with you the CEO of the company and ask their questions and hear some more candid perspectives on the company. We look forward to doing these types of calls again in the future. And just a reminder to everyone, if you enjoyed this call today, we plan to make an archive available as soon as possible on the Little Grapevine website. And if you have any further questions for Jerry or for us, please feel free to send those in via email.

And with that, Jerry, I’ll thank you again and we’ll look forward to talking again in the future.

Fleming:  Thank you, Ed. And thank you everyone for participating. Bye, bye.

Gilmore:  Bye.

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