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Edited Transcript of ATGN earnings conference call or presentation 18-Apr-19 9:00pm GMT

Q2 2019 Altigen Communications Inc Earnings Call

SAN JOSE Apr 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Altigen Communications Inc earnings conference call or presentation Thursday, April 18, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carolyn David

Altigen Communications, Inc. - VP of Finance & IR Officer

* Jeremiah J. Fleming

Altigen Communications, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Andy Preikschat

* Harris Berenholz

* Ian Cassel

MicroCapClub LLC - Founder

* Maj Soueidan

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Altigen Communications, Inc. Second Quarter Fiscal Year 2019 Results Call.

(Operator Instructions) At this time, it's my pleasure to turn the call over to Ms. Carolyn David.

Ma'am, the floor is yours.

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Carolyn David, Altigen Communications, Inc. - VP of Finance & IR Officer [2]

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Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us today for Altigen Communications' conference call for the second quarter fiscal 2019.

On today's call will be Jerry Fleming, President and Chief Executive Officer. And I'm Carolyn David, Vice President of Finance.

Earlier this afternoon, Altigen issued a news release reporting financial results for its fiscal 2019 second quarter ended March 31, 2019. This release can be accessed from the Investor Relations section of Altigen's website at www.altigen.com. We have also arranged a taped replay of this call which may be accessed by phone. This replay will be available approximately 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 Altigen's website.

As usual, before I commence the review, I would remind all participants that today's call may contain forward-looking information regarding future events and future financial performance of the company. We wish to caution you that such statements are just predictions, and actual results may differ materially 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, 2018, 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.

I would also like to note that during this call, we will provide financial information that have not been prepared in accordance with generally accepted accounting principles in addition to our GAAP results. Management uses these non-GAAP financial measures internally to analyze our financial results and believe they are useful to investors as supplement to GAAP measures in evaluating the company's ongoing operational performance. Please refer to today's press release for a reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures.

Now it is my pleasure to turn the call over to Jerry Fleming, President and CEO of Altigen.

Jerry?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [3]

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

Earlier this afternoon, we reported our fiscal 2019 second quarter results. Revenue for the second quarter was $2.54 million compared to $2.78 million in the previous quarter and $2.46 million in the same period a year ago. GAAP net income for the quarter was $403,000 compared to $612,000 in the previous quarter and compared to $383,000 for the same quarter for the prior year.

At this time, I'd like to provide a bit more detail regarding the revenue numbers. As we discussed in prior calls, we track revenues by the following categories: first, products and services or onetime revenue; second, software assurance, our annual recurring revenue program; third, cloud services, which is our monthly recurring revenue plan. Our focus is squarely on number three, cloud services revenue, which is based on monthly subscribers on our PBX and Skype for Business platforms, along with our SIP-based telephony services. Focusing on cloud revenue means that we are essentially trading lower upfront revenues for higher revenues over the life of a particular customer. And because we're still transitioning from our historical onetime revenue model, there will be an impact on product revenue or onetime revenue as more and more product revenue opportunities are converted to cloud or monthly recurring revenue opportunities. For example, total revenue for the quarter ended March 31 was approximately $240,000 less than total revenue for the prior quarter and $84,000 higher than the same period a year ago. To give you an example of the impact of product revenue, I'll compare our second fiscal quarter of 2019 to the same period for the prior year.

For the second quarter of fiscal '18, product revenue was just over $400,000 compared to product revenue of just over $200,000 for the second quarter of fiscal '19 or $200,000 less in product revenue year-over-year, which is not unexpected given our cloud focus. On the other hand, cloud revenue in the second quarter of fiscal '18 was approximately $1.2 million compared to more than $1.5 million in this second quarter fiscal '19. So while we reported overall revenue growth of less than $100,000 year-over-year, we actually grew our cloud revenue by over $300,000 or 28% in a year-over-year period.

We will continue to face a bit of headwind as we fully transition from an upfront product revenue model to a monthly recurring cloud revenue model, an issue which will diminish over time. That being said, from time to time, customers do want to purchase on an upfront licensing basis versus paying on an ongoing subscription model. While we're happy to recognize the upfront licensing revenue, that will likely create some lumpiness over the course of the next several quarters. In spite of these issues, our focus remains on growing our cloud revenue. Our short-term target is cloud profitability, which for us means achieving profitability solely on our cloud revenue. Based on our run rate of approximately $1.6 million in expenses and using a conservative 80% gross margin figure, we'll achieve cloud profitability at approximately $2 million in cloud revenue, which is about $350,000 more in our second quarter fiscal '19 cloud revenue. Our objective is to close that gap as quickly as possible to achieve cloud profitability.

Of course, we still have a significant amount of annual recurring revenue as a result of our software assurance program. Combined with our cloud revenue, our total recurring revenue now stands at 84% of overall revenues as we continue to drive toward our goal of 100% recurring revenue.

With that, I'll now turn the call over to Carolyn to review the financials in more detail.

Carolyn?

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Carolyn David, Altigen Communications, Inc. - VP of Finance & IR Officer [4]

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Thank you, Jerry.

Overall revenue for the second quarter was $2.5 million compared to $2.8 million in the previous quarter and compared to $2.5 million in the same period a year ago.

Our cloud revenue for the quarter was $1.5 million, the same as in the previous quarter and up 28% from $1.2 million in the same period a year ago. Software assurance revenue for the quarter was approximately $702,000 compared to $778,000 in the preceding quarter and compared to $805,000 in the comparable period last year. Product and services revenue for the second quarter 2019 was $296,000 compared to $540,000 in the previous quarter and compared to $444,000 in the prior year quarter.

Turning to the margins. Second quarter gross margin was 81.7% compared to 82.9% in the preceding quarter (inaudible) to 84.3% in the comparable period last year. The decrease in gross margin was primarily driven by a shift in our product mix.

GAAP operating expenses for the quarter totaled $1.7 million, the same as in the preceding quarter and the comparable period last year. Non-GAAP operating expenses totaled $1.6 million, the same as in the previous quarter and compared to $1.7 million in the prior year quarter.

Net income on a GAAP basis was $403,000 or $0.02 per diluted share versus $612,000 or $0.02 per diluted share in the preceding quarter and $383,000 or $0.02 per diluted share in the comparable period last year. On a non-GAAP basis, net income was $444,000 or $0.02 per diluted share compared to $713,000 or $0.03 per diluted share in the previous quarter and compared to $401,000 or $0.02 per diluted share in the same quarter last year.

Note the difference between GAAP and non-GAAP results is the elimination of depreciation and amortization expenses, stock-based compensation expense and other nonrecurring charges that may arise from time to time that we do not consider to be directly related to core operating performance.

Turning to the balance sheet. We ended the quarter with $4.7 million in cash, cash equivalents and restricted cash compared to $4.8 million at the end of the preceding quarter. Working capital was $2.9 million compared to $2.8 million at the end of the preceding quarter, representing a 7% increase.

This concludes the financial review. Now I will turn the call over to Jerry Fleming.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [5]

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Thanks, Carolyn.

So I also want to provide a brief update on our cloud strategy. As we've been discussing, phase 1 of that strategy was to launch our own PBX as a hosted solution, which we've now successfully done and have approximately 19,000 cloud subscribers on our PBX platform. Phase 2 was to launch Hosted Skype for Business, which targets the larger mid-market customers. We've now surpassed 1,000 subscribers on that platform as we continue to build. And while we still have work to do for both our hosted PBX and Hosted Skype for Business platforms, we will soon move to phase 3 of our cloud strategy, which is to launch a complete cloud-based omnichannel contact center. This solution, which we expect to launch next quarter, will support both our hosted PBX and Hosted Skype for Business platforms and which should drive additional subscriber and ARPU growth.

So at this time, in order to address any questions, I'll turn the call back to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we do have a question coming through from Harris Berenholz with Carpe Diem Advisors.

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Harris Berenholz, [2]

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Making tremendous success in the cloud business. I'm very happy to see that. I am only a little concerned why sequentially there was no growth. Was anything -- from the first quarter to the second quarter in the cloud business. Was there anything specific that accounted for it?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [3]

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Yes. We had -- Harris, we had some, I'll call it, moderate growth in cloud sequentially of just under $100,000, but again in this quarter what I'll say is that as we continue to push toward our Hosted Skype for Business platform -- and I think we've mentioned the -- that the typical customer is much larger than on our hosted PBX platform, approximately 5x more subscribers on a per-customer basis, which also means it takes longer to deploy. So there's a longer sort of time between the time we get a contract and we get those customers deployed on that platforms. So we probably -- well, I think we probably did a better job of contracting subscribers on that platform than getting them into billing mode, but as we continue to [build] on that platform, those things level out. And I think you'll see smoother growth on that one in the future.

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Operator [4]

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(Operator Instructions) We'll go next to Maj Soueidan with GeoInvesting.

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Maj Soueidan, [5]

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I have a quick question. On -- or actually 2 questions actually related. So in terms of how -- I think you addressed it before in the past. Of your legacy customers that still have to -- that still will maybe come over to the cloud platform that -- or maybe on your -- I guess, your -- on your product side, where we stand on that? Where do we stand on that?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [6]

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Where do we stand as in terms of number of customers, number of subscribers that are still on premise...

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Maj Soueidan, [7]

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Well, what inning are you on in the on premise in terms of what -- how much -- how many in terms of percent of your current customer base are still on the legacy (inaudible) on premise?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [8]

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Got you, [okay]. I guess I'm in the bottom of the third, Maj, because we're about 1/3 of the way through. We have about 1/3 of them on the cloud, and about 1/3 is still -- 2/3, I'm sorry, is still on prem.

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Maj Soueidan, [9]

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Okay. That's okay, interesting, cool. And could you explain (inaudible) the on-premise to the cloud platform? Is there a onetime upfront fee and then a recurring? Or is it just go to a recurring type -- I'm sorry, yes, recurring type of stream that's less than the upfront of a product revenue?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [10]

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Yes, absolutely, yes, because they are -- there is a small (inaudible) for a setup fee. We don't charge any sort of license fee, but because there is a migration path, it's essentially the same platform in the cloud as on premise. There is a direct migration path that we can migrate the customers' data over. If they want to reuse their existing phones, they can use those. And then the biggest issue typically for the customer is they get rid of their expensive telephony service, and they move to ours. They transfer at the same time that you set that up. And once we do that, they're ready to go. So it really is pretty much minimal disruption on the part of the customer.

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Maj Soueidan, [11]

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Great. Is it fair to assume that a good deal of the product revenue that was maybe [much eased] or lost in the quarter came back through the cloud platform?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [12]

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Yes. Most the -- yes. I mean most of, almost all of the -- so go back to some of our prior calls, right, where I guess I didn't provide, I think, a percentage for you guys. Still over 90% of our cloud revenue is coming from that PBX base, if you will. It's not all converting customers, but it's all on the PBX platform. And yes, in the past several quarters, most of the product revenue that we didn't see this quarter came from onetime licensing. Now some came on the Skype platform, but most of it came on the PBX platform. And then yes, so people, instead of going upfront, they're migrating to the cloud, so we're just not going to see that revenue. It takes me about 30 months to -- and I think we've talked about that, of roughly 30 months to break even, and then after that we are far more profitable.

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Maj Soueidan, [13]

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Great, great. I just wanted to clarify that these are customers are still -- they're still staying with you, just converting. They're going from the product revenue to the cloud revenue kind of category.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [14]

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Yes, that's, I guess, on -- that is the one drawback. As you migrate a customer from on prem to the cloud, you're basically telling that customer, "We don't want your upfront revenue. We prefer in the cloud." And as I said, people still take it. We're not going to turn you away, but the impact is the product revenue now at 16% or so -- actually it's product and services. Our product is -- well, for this quarter, it's probably less than 10% of our total revenues. Then that piece is still subject to the ups and downs if a particular customer decides to expand on premises or move to the cloud.

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Operator [15]

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(Operator Instructions) We'll go next to Ian Cassel with MicroCapClub.

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Ian Cassel, MicroCapClub LLC - Founder [16]

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Jerry, I have a question about the relationship with Fiserv. I was wondering if you could explain a little bit about the relation with Fiserv, how that is progressing and if there is any more plans for advancement with that opportunity and how big that opportunity could potentially be for the company moving forward.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [17]

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Yes. No, it's a good question, Ian. As -- I'm going to have to answer it a little bit more historically because we do have some things in the works and I'm not able to disclose on that one. But we have had a long-standing relationship with Fiserv. We are their -- well, I can't say their only. They might have some other things floating around, but we are their -- let's say, the bank-by-phone platform of choice which is hosted in their cloud and from which they leverage both PBX and contact center into their customer base. So we -- yes, we do have some expansion plans, but we're in the process of working with Fiserv to crystallize those plans. And therefore, I can't announce those, but hopefully, on the next call, I can provide some more color on that front. Sorry for not giving a more complete answer.

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Operator [18]

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We do have a question from Andy Preikschat with Edgebrook Partners.

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Andy Preikschat, [19]

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I was wondering about the overall company head count. I believe it's about 50 people. I'm wondering where you foresee hiring and what areas over the next year.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [20]

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Yes. It's a good question, yes. Well, we measure head count a little bit differently. You might see something different in an annual report because we do have the number of folks that are actually full-time consultants that I consider in the head count. And the reason I do that is those folks are -- typically they're on a consultant basis because perhaps their spouse is working, taking an insurance plan somewhere else. Or perhaps they're international where we don't have formal business operations set up. But if I look at what I will consider full-time equivalents, we're sitting at 50...

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Carolyn David, Altigen Communications, Inc. - VP of Finance & IR Officer [21]

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59.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [22]

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59. Carolyn just corrected me on that. 59. And so yes, our plans going forward, where we see hiring additional folks are both on the software engineering side, as we have new products planned; on the cloud operations side as we continue to build our subscriber base; and on the sales side as we continue to expand our presence in market. So really across the board.

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Andy Preikschat, [23]

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Okay, great. And could you quantify for us the revenue opportunity for the Skype for Business? I think you mentioned there was like potentially 5,000 customers that could come online.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [24]

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There are -- yes, there are -- I don't know the exact number of Microsoft, of Skype for Business customers. There are certainly a boatload of them. One of the opportunities is a customer that is presently utilizing Skype for Business on premise is to migrate their installation to our cloud. That's one of them. There are just other companies that are perhaps on a different telephony platform, and I'll just throw a name out that people would know, like Cisco, that could migrate to the cloud as well on Skype for Business, as opposed to some other competing platforms. So they're really -- or then we have others that are using [and impeding] one of the well-known "hosted" providers out there that are well known, that people aren't happy with their service and they migrate to our cloud. So there's really no way to quantify the opportunity, but it's very large. There's kind of no end in sight into the market opportunity presently.

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Andy Preikschat, [25]

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And would there be a recurring revenue stream? And what would that be per customer potentially?

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [26]

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Well, on our Skype platform, yes, it depends on a couple different options. So there are 3 -- really 3 components when a customer comes onto our Skype platform. There's the price they pay for the hosted Skype; the price they pay for the additional applications Altigen brings to the table, which principally are contact center. And then there's the price they pay for the SIP telephony services. So it varies, depending on usage, depending on if it's a contact center or not, but a Skype subscriber is typically going to fall into the range of $25 to $40 or so per month on average, per user.

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Andy Preikschat, [27]

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Per user. So there could be many users in one company. Is that -- or...

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [28]

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That's correct, yes. We don't really target the small customers. Our typical Skype customer today or typical target pipeline on average -- and of course, it varies from large to small, but it's about 150 users at a particular company.

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Andy Preikschat, [29]

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150 users, okay. Great.

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Operator [30]

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(Operator Instructions) We'll go next to [Chris Plan] with [Toplines Capital].

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Unidentified Analyst, [31]

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Say there are 2 quick questions. Could you give us a quick update on the partnership overseas that you announced a couple months ago? And then also how we should look at OpEx in the coming quarters.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [32]

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Yes, I'll comment on the partnership and then Carolyn can comment on the OpEx. Or she may want a little bit of a clarification on that one. But yes, in fact, I was just over in Europe last month and met with that partner. And I believe you're referring to Cisilion, the partner that we did the press release on. And they are one of Cisco's largest partners in the U.K. They're also one of Microsoft's largest partners in the U.K., which means they're very knowledgeable about both platforms. So they are -- I have to tell you we'll -- you'll know when we close our first deal. They help us propose on some very nice opportunities. We are their platform of choice for contact center and Hosted Skype for Business, and we're working very closely with them. I think we have something maybe somewhere around 10 proposals out right now in front of some pretty nice customers that they are chasing down.

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Unidentified Analyst, [33]

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Okay. Great.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [34]

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Now on your OpEx question, [Chris], can you provide a little more color on that? And Carolyn would be happy to answer that for you.

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Unidentified Analyst, [35]

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So do you guys think OpEx can stay level for the next remaining quarters? Or how should we look at it?

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Carolyn David, Altigen Communications, Inc. - VP of Finance & IR Officer [36]

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Well, this, we can look at it. And historically, it's going to trend on a 6 -- $1.6 million probably by rate.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [37]

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And some of it does depend, [Chris], on the kind of opportunities we knock down, if we need to hire more personnel based on where things are going, but I think we're -- I think we can pretty confidently say that that's not going to increase as higher than the current percentage of revenues.

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Operator [38]

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And Mr. Fleming, there appear to be no further questions at this time. I'd like to turn the call back over to you for any additional closing -- or closing comments.

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Jeremiah J. Fleming, Altigen Communications, Inc. - Chairman, President & CEO [39]

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Okay. Well, thank you very much, everybody, for joining our call.

We -- I do get a lot of questions about when Altigen is going to be at various conferences. I do want to let you know that we'll be at the LD Micro conference coming up in Southern California in June and then also at the [SEMA] conference later in June in New York. So if you would like to contact us and find any more details on those. Or just visit their websites, SEMA or LD Micro. You can find more info there.

Thanks again for joining our call. We look forward to talking to you next time.

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Carolyn David, Altigen Communications, Inc. - VP of Finance & IR Officer [40]

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Thank you, everyone.

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Operator [41]

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And ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.