Crexendo, Inc. Q2 FY2020 Earnings Call

Good day, everyone, and welcome to the Crexendo Second Quarter 2020 Earnings Call. All lines have been muted for listening purposes, and we will open the floor for questions and comments after the presentation. It is now my pleasure to hand it over to our CEO and Chairman of the Board, Steve Mihaylo. Please go ahead, Steve.

Thank you, Karen. Good afternoon, everyone. I’m Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to Crexendo’s second quarter 2020 conference call. With me today are Doug Gaylor, our President and COO, Ron Vincent, our CFO and Jeff Korn, our General Counsel. The call today is completely virtual, as Crexendo is following CDC’s guidelines. I’m going to ask Jeff to read the Safe Harbor statement. After that, I will give some brief general comments about the quarter. Ron will then provide more detail on the numbers. Doug will provide a business and sales update, and then we will open the call up to questions. Jeff, would you please give the Safe Harbor statement.

Thank you, Steve and thank you. I want to take this opportunity to remind listeners that this call will contain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. All statements made in this conference call, other than statements of historical fact, are forward-looking statements. Forward-looking statements include, but are not limited to words like believe, expect, anticipate, estimate, will and other similar statements of expectation identifying forward-looking statements. Investors should be aware that any forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the Company’s filings with the Securities and Exchange Commission, including the Form 10-K for the fiscal year ended December 31, 2019 and the Form 10-Q’s as filed. Crexendo does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, further events or any other reason. I would now like to turn the call back to Steve. Steve.

Thank you, Jeff. Welcome, everyone. This is now our second conference call under the new COVID-19 normal and the digital transformation that is taking place throughout the world, especially in the developed world. We hope everyone is healthy and safe. Our company and our customers have been adapting to doing business in this environment. And I have always talked about the functionality of our phone service. We built the Crexendo, the cloud, adaptable, to move from the office to a remote location and back again. And while making the move seamless, our functionality is one of the core parts of our business. That functionality has literally been a lifesaver for our customers. They have been able to continue their business, moving their telephones and apps, while not skipping a beat. While we did not build a service with COVID-19 in mind, we built it knowing that it had the adaptability to allow business to work from remote locations. Business has been transitioning to the cloud, and this digital transformation has just accelerated the process - aimed at customers who are on legacy systems are going to need to move to the cloud to survive in the new world of business. We also believe that Crexendo is the perfect solution for almost all businesses. We have won many awards for our service, including recently receiving the TMC Communication Solutions Service of the Year award. In addition to our core, award-winning service, we work with our customers to tailor specific solutions to their needs. We are convinced that our solutions products, people, and service are the best in the industry. I’m very pleased with the results of the second quarter. It shows our steady growth. Service revenue increased 16% year-over-year to 3.5 million, GAAP consolidated revenue for the second quarter improved 15% year-over-year, net income of 508,000 improved year-over-year and we earned a solid GAAP profit of $0.03 per basic and diluted share. All of these results are very impressive. We believe these results are a testament. When we built the cloud services, we wanted to make sure we had the best solution available. And I believe we accomplished that. We then worked to keep costs under control, and we accomplished that. After that, we worked to achieve non-GAAP earnings, then followed by GAAP earnings, which we also accomplished. I think you are getting the picture. This quarter, we accomplished a NASDAQ up listing, which we did by organically growing the business. We now believe the time is right to grow the business both organically and through creative acquisitions. We believe the efforts we saw due to COVID-19 in the first quarter, and the beginning of the second quarter have started to be mitigated. It appears we are now seeing less COVID-19 related downgrades and business terminations. The effort of our taking the keep America connected pledge seems to be yielding trends. We obviously manage the business very carefully and we take appropriate action. I continue to believe that Crexendo is in a unique position to capitalize on the post-COVID-19 world. We will work aggressively to meet the demand of customers who need the flexibility of the Crexendo cloud to survive the pandemic and post-pandemic world. We continue to invest in the business, but we still watch every penny, and we work every day in attempting to increase shareholder value. With that, I will turn the call over to Ron.

Thanks, Steve. Financial highlights for the second quarter of 2020 are as follows. Consolidated revenue for the second quarter increased 12% to 4.1 million, compared to 3.6 million for the second quarter of the prior year. Our service revenue for the second quarter increased 15% to 3.6 million compared to 3.1 million reported for the second quarter of the prior year. Our Cloud-telecommunications segment service revenue for the quarter increased 16% or 487,000 to 3.5 million compared to 3 million reported for the second quarter of the prior year, offset by an 18% decrease or 29,000 decrease in our web service segment revenue for the quarter. Product revenue for the second quarter decreased 4% or 18,000 to 449,000, compared to 467,000 for the second quarter of the prior year. Our gross margin for the second quarter increased 2% to 71% compared to 69% for the second quarter of the prior year. Our consolidated operating expenses for the second quarter increased 8% to 3.5 million compared to 3.3 million for the second quarter of the prior year. Net income for the second quarter was 508,000 or $0.03 per basic and diluted common share compared to 338,000 or $0.02 per basic and diluted common share for the second quarter of the prior year. Our non-GAAP net income for the second quarter was 660,000 or $0.04 per basic and diluted common share, as compared to 447,000, or $0.03 per basic and diluted common share for the same period of the prior year. EBITDA for the second quarter was 568,000 compared to 362,000 for the same period of the prior year. Adjusted EBITDA for the second quarter was 704,000 compared to 457,000 for the same period of the prior year. So, highlights for the six months ended June 30th are as follows. The six-month period consolidated revenue increased 11% to 7.99 million as compared to 7.1 million for the same periods of our year. Service revenue for the six-month period increased 15% to 7.1 million, compared to 6.2 million for the same period of the prior year. Our Cloud-telecommunications service segment revenue for the six-month period increased 17% for 989,000 to 6.8 million, compared to 5.8 million reported for the same period of the prior year, offset by a 15% or 51,000 decrease in web service segment service revenue for the six-month period. Product revenue for the six-month period decreased 13% to 828,000 compared to 951,000 for the same period of the prior year. Our gross margin for the six-month period increased 2% to 70% compared to 68% for the same period of the prior year. Consolidated operating expenses for the six-month increased 10% to 7.2 million, compared to 6.5 million for the same period of the prior year. Our net income for the six-month period was 648,000 or $0.04 per basic and diluted common share as compared to 577,000 or $0.04 per basic and diluted common share for the same period of the prior year. Our non-GAAP net income for the six-month period is 935,000, or $0.06 per basic and diluted common share, as compared to 790,000 or $0.05 per basic and diluted common share for the same period of the prior year. EBITDA for the six-month period was 852,000 compared to 625,000 for the same period of the prior year. Adjusted EBITDA for the six-month period was 1.1 million compared to 811,000 for the same period of the prior year. Our cash, cash equivalents and restricted cash balance at June 30, 2020, was 5.1 million as compared to 4.3 million at December 31, 2019. Operating activities provided 91,000 of cash, cash equivalents and restricted cash, and investing activities utilized 704,000 of our cash, cash equivalents and restricted cash to purchase property, equipment, and intangible asset acquisitions. Financing activity provided 1.4 million of cash, cash equivalents, and restricted cash. I will now turn it over to Doug Gaylor, our President and COO for additional comments on sales and operations.

Thanks, Ron. I’m extremely pleased with our results for Q2 and how Crexendo was able to quickly react and adapt to the changes brought about by the COVID-19 pandemic. I will give a quick recap on the quarter from a sales perspective, and what impact we saw from COVID. I will also provide an update on our marketing efforts as well as our research and development efforts and finish with an overall assessment on our current environment. At the beginning of the quarter, we saw a dramatic slowdown in sales bookings as businesses struggled with adapting to the stay-at-home orders initiated in most of the country. Since our award-winning technology allows businesses to quickly migrate to a remote worker environment, we started seeing sales rebound quickly in April and May and June, with a much higher sense of urgency from customers needing our technology during the digital transformation that the world is currently experiencing. Crexendo immediately rolled out programs for new customers to rapidly migrate to our platform with no activation fees, deferred payments, and free collaboration tools to assist in their transition to remote workers. The migration of businesses from premise-based equipment to the cloud was already in full swing prior to the pandemic. The new normal businesses now find themselves in will only hasten that migration in the future. Despite the dramatic slowdown that we witnessed in April, we saw a rapid rebound that helped us increase our Unified Communications As a Service (UCaaS) service revenue by 16% year-over-year. The increase in revenue, along with cost management, led to a GAAP net income of 508,000 or $0.03 per share for the quarter. This is our sixth consecutive quarter posting positive GAAP net income. I’m very pleased that we are continuing that trend, while most of our competitors in the industry struggle to reach or maintain profitability. Despite all of the headwinds in the economy, I expect our success and momentum to continue. Our revenue and sales growth for the quarter helped increase our sales backlog by 750,000 to 27.4 million. This was a healthy increase considering the initial slowdown experienced at the beginning of the quarter related to COVID. Our telecom sector gross margin was strong at 71% for the quarter; we are able to consistently sustain a healthy gross margin since we have a very stable cost structure and since we own our intellectual property that is the foundation of our offering. Our continual focus on cost management within the organization helps us maintain profitability. This is a core message within our organization that has every employee focused on productivity and efficiency. Our strong results for the quarter helped increase our cash position to 5.1 million at the end of the quarter. As we have discussed on our previous calls, we are reinvesting back into the business, including marketing initiatives, adding new hires, and creating new incentives to generate more sales as well as additional R&D to further enhance our offerings. In April, we hired a new Director of Marketing and have been busy updating our messaging and imaging for our partners, our customers, our prospects, and our shareholders. We have updated all of our sales and marketing collateral; we have refined our email campaigns and we will be launching our new corporate website later this month. Our uniformed look will be consistent across the board, whether we are presenting to an investor, prospect, or partner; our message will be clear and consistent. We are also focused on increasing our lead generation efforts, and our revised marketing campaigns have had a positive impact. We are continuously investing in research and development and saw an increase in our Q2 R&D spend. As we continue to enhance the Crexendo platform with new features and capabilities. Our new phones with Bluetooth and WiFi capabilities have been a tremendous benefit in the remote work environment where people may not have the proper cabling infrastructure in their home. Our WiFi functionality allows them to perform flawlessly. Our texting, our video, our collaboration tools are also providing great benefits to our customers. Those capabilities were recognized last month by the industry authority TMT as their communication solution products of the year for 2020. I think we can all agree that the first six months of 2020 have changed the business world forever. I don’t think anyone could have predicted how quickly our country’s economy would shift and how quickly the business world would transform. We believe that we have positioned ourselves extremely well to weather this storm and emerge stronger than ever. Our strong balance sheet combined with greater reliance on businesses to have communication infrastructure that will support their needs indicates a very bright future for Crexendo. Crexendo is one of the leaders in the UCaaS industry, and we are ideally suited to help businesses make the transition to the cloud. We are extremely excited about the second half of the year and the opportunities that exist as businesses continue to adapt to the new normal of remote workforces. I’m confident that we will continue to execute on our plans for revenue and income growth and that we are in a strong position to deliver. I will now turn the call back over to Steve.

Thank you, Doug. Karen, I think we are in a position to open this up to questions.

Thank you. We will take our first question from Andrew King with Dougherty & Company. Please go ahead.

Hey guys, thanks for taking my question, good quarter. Just want to dig into the operating expenses a little bit. It looks like you had some declining quarter-over-quarter in operating expenses. I want to get an idea of how much that was driven by COVID versus fundamental changes due to the quarter? And then I have a follow-up as well. Thanks.

Ron Vincent is going to take that.

Thanks, Andrew for the question; I appreciate that. We have definitely continued to run our business as smart as we possibly can with laser focus on our expenses. As we continue to see some increases year-over-year, we actually had less operating expenses in Q1 of this year. Some of that was related to some one-time expenses in the first quarter. But overall, it's just our continued focus on managing our business and expenses.

Alright, great. And then could also dig into a little bit into the changes that you saw in the selling motion or sales cycle through the quarter as you start to see demand return? That would be great. Thanks.

Yes, absolutely. Thank you, Andrew. So obviously we saw that April had a very big slowdown from a sales perspective, with businesses shutting down and the stay-at-home orders kicking in, but we saw a very strong rebound in May and June. I think that was due to two factors: businesses realized their infrastructure was weak and they couldn't adapt to the remote work environment. They were looking for alternatives, so we were getting a lot of inquiries from businesses that we had been courting to fast-track their implementation. We also saw quite a bit of success with our promotions that we ran. We put out some substantial promotions for businesses to adopt the cloud technology quickly and efficiently with very little out of pocket expenses.

We will take our next question from Josh Nichols with B. Riley. Please go ahead.

Yes, thanks for taking my question. I think we have noted before the company was looking to potentially increase some marketing spend a little bit more as you continue to have this improving profitability trend. Can you talk a little bit about specifically which areas of marketing you think would give you potentially the best ROI? And is it fair to assume that you think that you can accelerate the company’s UCaaS service revenue growth above this kind of mid-teens level if you reinvest a little bit more?

Absolutely, Josh, thanks for the question. Obviously, we do feel like investing in our marketing efforts will help return a healthy return and help us get out of the teens and into the low 20s. We anticipate seeing more and more spend going through those marketing efforts, as you are well aware, those marketing efforts tend to take a little bit of time to begin. We are currently working with email campaigns, marketing campaigns, and digital marketing spend; that is all going to take a little bit of time to produce results, but we anticipate that will be money well spent. We are also looking forward to the messaging from our new Director of Marketing. You will see changes to our website and presentation materials that will have a consistent look and feel. Yes, we do believe that increase in marketing spend will have a very positive return for us.

Great. And then I know the company has typically had over 21 stations per client historically. Are you going after the same type of market? Are there any opportunities you mentioned in the second half where you think you can start to scale that up? What would you think the biggest opportunities for the company are in the back half of this year?

Yes, so the average number of stations has remained fairly consistent for us for the last couple of quarters. It's still at about 21 stations with an average revenue per account of roughly $450. So we are trying to push that number higher, obviously, since we have about 70% of our sales coming from our partner channel. We actually saw a nice spike with our partner channel sales in Q2. We anticipate that we will start to see a little bit more of that. But again, our partners are working with their customer bases out there, and some of our new partners have larger customers coming on board with bigger clientele. We are starting to see some notable-sized transactions. I’m encouraged by the funnel that we see for larger transactions, and hope we can start seeing the average size account push up.

Great. And then a last question for me, since you mentioned it, like, what is the concentration you are seeing as far as your partner channel sales? Is it fairly well distributed there? I assume one or two that account for maybe a larger disproportionate percentage of revenue. Are there any big opportunities to expand that partner channel that can accelerate your sales growth?

Yes. Obviously, we are always looking for more partners. To me, it is always about quality, not quantity. We are focused on how do we get more out of our existing partner relationships, and how do we continue to build on that. I think we have a challenge that most sales organizations have; they get the high majority of their sales from a minority of their partners. That is consistent with Crexendo. We have some very high-performing partners that are very consistent, and we also have a lot of partners that we get occasional sales from. We are trying to increase our efforts with our partners that don’t perform consistently to get them on a more consistent cadence. We are spending a lot of time with the partners that have continued success to raise the bar with them and continue to see greater success. Some of our larger partners had tremendous quarters for us in Q2. Okay. Thanks, Doug.

Thank you.

We will take our next question from Kevin Dede with H.C. Wainwright. Please go ahead.

Afternoon, Steve, Doug, Ron. I was hoping that you gentlemen could chime in, as you saw fit on sort of the consistency of revenue and the consistency that you have posted in growth. Maybe talk a little bit to seasonality. I know you haven’t formally offered guidance for the year, but it seems to me given the results you have posted. It shouldn’t be too hard for you to offer some suggestions on what you think happens in the second half.

Well, Doug already mentioned that he expects with our marketing app for us to get into the low 20s organically. As you know, from my dissertation in the press release, we also now have a stock price because of the up listing to the NASDAQ, that shouldn’t allow us to do more acquisitions. If history says anything at all, I think we will see about half of our increase come from organic sales and half from accretive acquisitions. Furthermore, I think Josh Nichols pointed out that we should grow our channel. There are approximately 100,000 companies in the United States that are capable of selling our platform, and only about 250 of them are currently doing so. So, we have a lot of headspace. And Doug, would you like to add anything?

Yes, Steve. So, Kevin, obviously, as we look at seasonality, our industry does not see a lot of seasonality. Now, COVID obviously threw a curveball for everybody with the slowdown from a business perspective. But from our perspective, the migration to cloud communications has always been very rapid over the last few years, and I anticipate that momentum will continue, as more and more businesses realize that their premise-based platforms are unable to take them to the next level. So, I anticipate that the technology is going to require these businesses to move more to a UCaaS type platform that allows them to work remotely. We are perfectly situated for that.

Okay, so Josh did mention partnerships. Steve, I caught that. But it isn’t really clear how. This applies to the M&A pipeline too. So, maybe you could offer some insight on that as well. It didn’t really talk about how that environment has changed, right? I know. And Doug mentioned this in his prepared remarks that competitors haven’t been successful. So, I was wondering if you could talk to maybe how the environment in partnerships and M&A has changed in light of other businesses struggling and not being, not driving a profit as you guys have?

Well, let me add to this a little bit and then I’m going to let Doug fill in the color. On the acquisition side, we are seeing a lot more companies realizing they need to be bigger and part of a more substantial company. Those analyst that listed company, we are getting a lot more exposure. We are more exposed because of our marketing efforts. In that regard, we are starting to see a lot more activity. For adding partners, obviously, we can’t travel right now, it is probably not safe to do so. But once COVID is over, we are going to start looking for bigger dealers and partners, people that will be in a position to sell bigger systems. Doug, would you like to add anything to that?

Yes, Steve. The merger and acquisition opportunities seem to be a little bit more plentiful at the moment. I think COVID has definitely changed the way a lot of smaller businesses are looking at their future. As Steve said, this industry is really going at full speed right now, and the combined efforts of a larger company bode well for us. The message we are looking to take forward is that, by combining with Crexendo, there is a much bigger platform and a much bigger opportunity going forward. We are excited about some of the opportunities we are discussing.

Last question for me Doug, it is really on your marketing efforts; specifically, I’m wondering if you might consider offering us KPIs on how to monitor your product, aside from just watching sales grow. Are you going to be able to give us production by headcount or some other quantifiable measure that we can monitor progress on?

Yes, so to answer your question, in the short answer, yes, we will be doing that. We don’t have those metrics today, but Ron and I have talked about putting additional metrics into future presentations so that we can give you guidance on productivity per employee, customer acquisition cost, etc. These are details that we will have for you in the future.

Alright, sounds good. Thank you very much, gentlemen. And congrats on the nice job.

Thank you.

Thank you, Kevin.

We will take our next question from Arham Khan with Eden Capital Investment Group. Please go ahead.

Good to always hear from you, Rob, Doug, and Steve. It's 40 years apart and you are doing again, it is pretty incredible. I think some people grasp over the fact that management owns nearly 80% of the company. I was hoping that you guys could throw some color into what happened before COVID and through COVID with your churn rates?

Doug, why don’t you handle that one?

Okay, thanks, Steve. Yes, Arham, great question. We have been historically tracking our churn rates. We have historically had very low churn rates, and we did see a little bit of a spike in Q2 due to COVID. I will have Ron give a bit more color on that. The fact that the majority of our customers are in the SMB space, and our advertised customer count today is around 21 stations puts us in a little bit of a vulnerable category, given that we do have smaller customers out there. But the nice part is that our customer concentration doesn’t have high exposure in industries that are really struggling, for example, restaurants, etc. I will have Ron add a little more color on the churn and give you more detail there.

Thanks Doug. Yes, so for prior to COVID, for historical quarters, we were averaging somewhere around four-tenths of 1% on a monthly basis from a seat count churn. And due to COVID, we were ranging around six-tenths of a percent. So that is a 50% increase in our churn rate from one quarter to the next. We anticipate that it will settle back down, but as our small businesses are still struggling, depending on what happens with COVID, we may sustain that for another quarter or two. It is not alarming to us; it is not that material; we had a very low churn rate going into COVID, but that is six-tenths of a percent on a seat basis, month-over-month, and around 1% on customer churn.

Okay, okay, got that. Final question for me, is, and I might have missed this because I came in late. Where does the backlog stand now?

Yes, the backlog had a nice increase of $750,000 for the quarter, which puts it at, let me give you the exact number, $27.4 million.

Okay, well, excellent. I didn’t expect it to be like that. Always good to hear from you guys. Thanks for taking my question.

Thanks, Arham.

Thanks.

We will take our next question from Edward Gilmore with Little Grapevine. Please go ahead.

Hey, Steve, Doug and Ron. Thanks for taking my question. And congrats on a solid order. Question on gross margin. I was wondering how much are the promotions being offered impacting the gross margins now? And then how long do you think you are going to need to continue offering these incentives? Thank you.

Yes, I would say that our gross margins have been very stable and very consistent. The promotions that we are offering I don’t think will have a dramatic impact on our gross margins because many of the promotions we are offering are deferred payments. Just allowing customers to use the services and actually start their payments at a later date. So that doesn’t have a dramatic effect on the gross margin. Additionally, we have provided some incentives with free items like collaboration tools and our mobile applications that, again, don’t have a dramatic effect on gross margin. I think we are well positioned; we can continue these incentives without negatively impacting gross margins. As for how long we anticipate keeping those incentives, as long as it is driving the business, I don’t anticipate we will change the messaging a little. I would expect that we would continue having promotions at least until the end of the year.

Great. Thanks, Doug.

And Edward, I would like to add a little bit to that. As you know, our gross margins improved above two points quarter-over-quarter. I would expect that as we get larger, our gross margins will increase, not decrease. They are not going to increase significantly, but a percent or a 1% increase per quarter is possible because our fixed expenses are very well known. As we get larger, more of that falls to the bottom line and more of that will be in the form of margins. You bet.

We will take our next question from an unidentified private investor. Please go ahead.

Thanks for taking the time to do these calls. I would like to just talk a little bit more about your comments about acquisitions. You have always said consistently through these calls that you would only consider acquisitions that are accretive. In the past, that has always seemed to me kind of an aspirational stance because the currency that you had at the time was cash and cash was very tight at the company. Now all of a sudden, the stock is trading better. I’m actually more interested in the daily trading volume because, as a business owner, I’m thinking of selling the business. I thought there was some liquidity that might be better. So my question is, what is the landscape that you are looking at in that? I’m not really sure I understand what is the gross margins. Your 70% plus gross margins significantly above competitors? Is your accretiveness going to come from being able to buy creditors and make them more efficient? Is it going to come from taking small companies that you don’t need any of their infrastructure and you can just onboard their clients? Can you talk a little bit about that and what the size of the acquisition revenue basis that are out there that you are talking to kind of in general terms?

Yes. Well, I’m going to give you some color. Doug and Ron will want to chime in a bit. For smaller acquisitions, we do that over a two-step process. We pay about anywhere from 40% to 60% upfront, and then we adjust it for the amount of revenue over a period of six to 12 months. So, it requires less cash upfront and usually we adjust that either up or most of the time down a little bit, and it allows us to use some seller financing. I would expect that any acquisition around $3 million will be done with cash. Larger acquisitions of four million or five million up to maybe 20 million or 30 million will be done with stock and cash. We are generating a lot of cash; it will allow us to do more acquisitions with cash for smaller acquisitions. Doug or Ron, would you like to add to that?

No, I think we are well positioned. Again, if we think about accretive acquisitions, one of the synergies we look at is that if we can migrate customers to our platform, obviously there are cost synergies that help tremendously. When we look at acquisition targets out there, it’s really about how does that acquisition fit with our short and long-term goals for Crexendo. Obviously, customer acquisition and revenue acquisition are critical for us. Once we get that customer acquisition revenue, we need to continue growing the company. The acquisitions we are talking that are in that range that Steve just highlighted, they all fit the picture. We joke around here that we need to kiss a lot of frogs, and we do, but when we find a good opportunity, we try to determine how that will be a seamless integration for us going forward. We are excited about some of the opportunities we are discussing.

Let me just clarify something. So, you said you wouldn’t consider an acquisition that didn’t move on to your platform. You wouldn’t want to go into learning a new business?

So, I wouldn’t want to learn a new business. But obviously, if there is technology we are lacking, that would obviously be a good acquisition opportunity for us. Customer acquisition through existing customers allows us to migrate them onto our platform. If we talk about a technology acquisition that also has a revenue stream, that is a whole other picture. We feel like we have got a very robust platform today for the SMB market, but there are areas where the technology enhancement could benefit our product and offering even more.

Yes, and I would also like to add that the larger the more opportunity they have, if they were to go with one of our competitors. There is very, very little opportunity for them if they are in the $10 million to $20 million range; they have got all headspace and opportunity with Crexendo.

What is the gross margins for most of the industry? It feels is at 70. Is that average or above average?

No, we are actually on the low side of average. Some of our competitors have gross margins above 80%, and we will eventually get there as we get larger.

So, I’m waiting for that. Thank you for your answers.

We will take our next question from Michael Kaufman with MK Investments. Please go ahead.

Hi, Steve, Doug, and Ron, great quarter. It is refreshing to see a company scale and maintain and grow profitability these days, especially after looking at some of your competitors. The question is, what kind of people have you added in the quarter? What is the current headcount, and what specifically are you going to do to try to get some bigger customers?

Yes, great question. And thanks, Michael, for always being on the line for great questions. Our current headcount is 59 employees. At the end of the quarter, we added a couple of sales and marketing folks during the quarter and think one or two on the engineering side, so as we continue to grow the organization, we are always looking at good people that can help us continue that growth. The marketing aspect is critical for us. Sales is always a constant for us, so we are always looking for good salespeople to help increase those sales efforts. The second part of the question again, Mike.

Well, I’m just wondering, specifically, what would be a larger kind of target account? What are the attributes of the larger account that will get you to rev up your growth rate?

Yes, so obviously, at 21 stations, that is the epitome of a small to midsize business. To get to those larger opportunities, our product fits perfectly with larger opportunities. In fact, we sold quite a few six-figure total contract deals during the quarter. Our largest account today is about 3,500 stations. We can easily play in the larger size arena. It is getting to those opportunities. Our marketing efforts are focused on trying to find bigger opportunities, as I mentioned in previous questions. Our focus with our partners is to find partners that have bigger customers in their customer base. If we think about the fact that 75% or 79% of our Q2 came from partners, if I have got a partner that is a data VAR or managed service provider, if their average customers are 10 employees or 15 employees, that is going to be the target market they bring us into. Some of our new partners that we have brought on in recent months have customers that are much higher in size and range, so if I bring out a partner with a lot of 100 phone or 200 phone opportunities in their customer base, it will bode well for us. I am seeing those changes in our funnel right now, with some of the newer partners bringing bigger opportunities to the table right out of the gate.

Yes. And stepping on the gas, if you bring in more the equivalent of applications engineers that can turn-key transition from their current system to your system. Because your gross margins are so high, you're going to recover those costs very quickly. You may need more people on your own basically to make it a seamless transition to the customer.

Absolutely; that is an important factor in any of these acquisitions. We do a lot of diligence to make sure that it is a very smooth migration for us and for the customer.

And Michael, I might add that in an acquisition there are productivity gains because you don’t need all of their back staff. Obviously, if they have performing salespeople and performing engineers, we will want to retain them now, but we look at productivity very, very closely. Right now, our productivity is about 280 or 290 per head. We would like to get it over 300,000 per head, and that is our goal. Frankly, I think we will make our goal.

Sounds incredible. I wish you the best of luck and keep up the good work and stay healthy.

Thanks, Michael.

Thank you. You too.

We will take our next question from an unidentified private investor. Please go ahead.

Hey, Steve, Doug, and Ron. Nice to be on again. I have got two questions for you. One, given the, I guess maybe parabolic stock price rise we have seen the past month. Are you considering a stock offering? And if you had a stock offering, even let’s say a million shares, would be let’s say $10 million, $12 million, would that cash be - would you ever put that to work to drive sales faster?

Well, let me answer that one, and then I think Jeff Korn and maybe the entire team would like to chime in. This volatility was caused by short sellers. That’s the only explanation for it. We need to have a slightly larger float, and in order to get a larger float, you are going to need to sell a little bit of stock. I’m very keen on having anti-dilutive outputs here. As far as cash goes, to get a bigger acquisition we will have to have more cash and stock so that they have skin in the game and they have more upside, which they wouldn’t have with a bigger competitor. At that, I’m going to turn it over to Jeff, Doug, and Ron.

Yes, this is Jeff. As Steve said, being on NASDAQ, we would have to consider everything we could; some of the things he suggested would be topics we will discuss with our board and as a management team. But no decisions have been made at this time. But rest assured, any money we work around would be used to grow the business.

Doug, you or Ron want to add anything to that?

Now, obviously, as you pointed out, it takes money to make money. Additional capital we can put towards any of those efforts, not only from an acquisition perspective but from marketing efforts as well. I don’t anticipate, when you look at some of our competitors that have SG&A expenses in the 60% to 65% range, we are not going to go crazy in that perspective. But reinvesting back into the business has been working well for us, and we will continue to do that.

You had another question.

Yes. One more question: given the huge stock price increase, it looks like there is what I call one big boy out there trying to get a big position with you. Do you have any color on that? Assuming it is someone that you are probably familiar with, are you open to a BOD spot for a new large holder?

Well, our Board of Directors thought, obviously, that we want to reserve the Board of Directors to either a CEO or CEO of a target company. As far as large shareholders, you would have to watch this on Bloomberg or watch it every second of every day, quite frankly, we are more interested in growing the business than we are in determining who is a large shareholder and who isn’t. But right now, unless we get a little bit more liquidity in the stock, we are likely to have short sellers taking advantage of a situation. But I think as Doug said earlier, organically, we should be able to grow at about 20% or more. My goal is to grow, on an acquisition basis, by at least that much. We are going to get a lot bigger, but it is going to take several years going forward. Any short seller on our stock is going to be disappointed in the long run. Maybe, Jeff, you would like to add to that.

Actually, Steve, I don’t have a lot to add to that, other than to answer your question; we are not aware of who’s acquiring the stock. And frankly, if we did know, we probably wouldn’t discuss it on the call anyway.

I understand. Thank you very much. I’m a little guy stockholder, so you can understand how I might come up with dumb questions. Thanks a lot and I will look on the next call.

Thanks.

We will take our next question from Greg Hillman, a private investor. Please go ahead.

Doug, I have a couple of questions for you. Do you know what the net promoter score is for Crexendo and how it has changed over time?

I do not know that, Greg, but I will get that information for you and I have got your contact information to reach out to you after the fact, but I do not have that handy now.

Okay. And also, in terms of conferencing, how does the functionality of your system compare to Zoom for people doing meetings with multiple people?

Yes, we have a great collaboration offering as part of our platform. It is called Crexendo Crex-Connect. Our Crex-Connect is actually a collaboration tool, very similar to Zoom. Just a quick, funny side story that the founder of the person, we didn’t actually build that in house; we white-label that offering. The founder of the company that makes the product that we represent is one of the co-founders of WebEx, and the other co-founder of WebEx was the person that started Zoom. When WebEx was sold off to Cisco years ago, both co-founders, after their non-competes expired, started up collaboration companies - one of them is Zoom. We are very pleased with our association with the partner we have, which is Moxtra. We have been very pleased with Moxtra; the product is very similar to Zoom. Most of our Crexendo clients use our collaboration tool to remotely video conference and communicate and collaborate and screen share, and file share with customers and employees. We have a very robust offering that competes nicely with Zoom.

Sounds great. In terms of your partnership with U.S. Cellular, how many of their reps are trained in your platform right now, and how is that changing?

Yes. We had our strongest quarter ever with U.S. Cellular in Q2, so a very strong quarter; the relationship continues to grow and prosper. I think they have got about 100 to 125 direct reps out there. They also have their agent and partner channels that have also come on board and have been extremely successful with us. The partnership with them is extremely robust, and we have a tremendous funnel and tremendous amount of opportunity. We indeed had our strongest bookings quarter that we have ever had with them since the relationship started.

That is great. And Doug, how does your company compare to competitors? What costs do you have in terms of enterprise value to EBITDA or price to sales?

If you think about RingCentral just announced this past week; they had a great day, but they had tremendous losses, and I think disappointed the street with their losses. They had nice revenue growth but continued to lose more money than they anticipated. RingCentral had nice revenue growth, but continues to lose money. We feel we are managing the ship extremely well; we had a smaller percentage of growth than our competitors but much more profitability. We have always believed we will grow, but we are going to grow profitably. We are reinvesting back into the business, but we are not spending, as I mentioned earlier, in the 60% to 70% range for sales and marketing expenses; it is hard to reach profitability with those numbers. So granted, our competitors are growing their top line, but at the expense of their bottom line. Our churn rate is probably one of the lowest in the industry, and I think our operating profits today are probably one of the highest.

That is great.

And on a valuation basis, we are probably less than half the valuation of our larger competitors. Some, like RingCentral specifically, cash flowing a little bit, but they are losing on a GAAP basis. From a valuation standpoint, we are at about 40% or 45% of their value. There is a lot more headspace with Crexendo than with any of those competitors. I don’t know if you would like to add to that, Jeff or not, but and you also Doug.

I think you summed it up well.

Thank you.

We will take our next question from an unidentified private investor. Please go ahead.

I have a couple questions for you, Doug. On the sales cycle, how has the sales cycle changed over time? How does that differ for a 20-station organization versus a 300-station organization?

Yes, I agree; sometimes it takes just as long to sell a 300-phone opportunity as it does a 20-phone opportunity, and vice versa. The sales process is fairly similar in both environments; you find your needs and pain points in the business and then you recommend solutions, and hopefully you have a good ROI to help them move forward quickly. The sales process hasn’t changed. If anything, COVID has sped up the process because up until COVID, businesses were looking at migrating to the cloud since they realized it was something they eventually had to do. COVID fast-tracked that urgency. We talk to a lot of businesses; if their communication solution is lacking in COVID, it doesn’t work at all. Before, when everybody still had all their employees showing up at the office, even though their phone systems may have been lacking in capabilities, they still functioned for day to day. Now, many cases in our office, 80% of our employees are still working remotely. Businesses using premise-based systems have employees on personal cell phones using home phones, lacking consistency within their organizations. The sales process has sped up because we are seeing businesses making quicker decisions. The larger businesses tend to actually make decisions quicker than the smaller businesses because larger businesses realize they can’t wait and must reinvest to continue keeping their business running. Smaller businesses tend to have more emotional decision-making aspects that are harder to control. We tend to see larger deals in our funnel go through the funnel process actually more quickly than the smaller ones. An average size transaction for us, from the time we start talking to them until we get an agreement to move forward, is typically about four weeks.

Four weeks. Okay, and just one housekeeping: What is the churn rate right now? I think you said I forgot what it was?

Yes, our churn rate, so on a seat basis, we're averaging six-tenths of a percent on a monthly basis. And on a customer basis, it is around 1%.

Okay, 1% per month churn.

Yes. That has moved up from about six-tenths of a percent in the prior quarters.

And there appear to be no further questions at this time. We will turn the floor back to Mr. Mihaylo for closing remarks.

Okay, thank you, Karen. Obviously, this has been a good quarter for us. We expect to see all of you back here when we announce the third quarter, which will be in early October. I'm sure this time we reported out normal because we have got a couple of analysts on the call that follow our competitors, which are announcing on the same day we wanted to announce. We will see if we announce alongside the rest of the pack or if we announce a few days after the rest of the pack. At any rate, we will see you all back here. Be safe, follow the CDC guidelines, and we'll talk to you at the end of our third quarter.

Thanks everybody.

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.