Good afternoon, ladies and gentlemen, and welcome to the Crexendo Third Quarter 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Steve Mihaylo. Sir, the floor is yours.

Thank you, Matthew. Good afternoon, everyone. I'm Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo third quarter 2021 conference call. On the call with me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; Anand Buch, our CSO; and Jeff Korn, our General Counsel. I'm going to ask Jeff to read our Safe Harbor statement. After that, I will give some brief comments. Ron will provide more detail on the numbers. Doug will provide a business and sales update. And then we will open the call up to questions. And what I'd like you to do is to ask the specific person you want to answer the question instead of us parsing them out, which will move this call along a little quicker. Jeff, would you please read the Safe Harbor statement?

Yes, sir. Thank you, Steve. 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 facts, are forward-looking statements. Forward-looking statements include, but are not limited to, words like believe, expect, anticipate, estimate, will, and other 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, 2020 and the Forms 10-Q as filed. Crexendo does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. I'd now like to turn the call back to Steve.

Thank you, Jeff. First, since Veterans Day is right around the corner, I want to take this opportunity to thank everyone who has served our country. We never take for granted the freedom that we have as individuals and as a company. It is due to the sacrifices and dedication of those who have served and their families. We thank you and are grateful for your service. This quarter was an excellent quarter and exceeded even my optimistic expectations. Consolidated revenue grew by 113% for the third quarter, which is very remarkable. Our record revenue of 8.8 million for the quarter proved that we are fully engaged, and what we are doing is working. Our non-GAAP income of 800,000 for the quarter or $0.04 per basic and diluted common share is a testament to our hard work. We have continued to execute on our plans with precision, returning the company to profitability. We organically uplisted to the NASDAQ. We were able to do an effective offering. And more importantly, accomplished the major game-changing or accretive acquisition. The merger with NetSapiens is going exceptionally well. The teams are working very closely, and this week all the senior management of NetSapiens is here in the Tempe office to work with the Crexendo team. This is an ongoing process of the teams working together more efficiently. We are increasing efficiencies, managing cross reporting, and functionality while achieving substantial benefits from the merger. The benefits will be realized by shareholders and equally as important to all the Crexendo and NetSapiens constituencies. We are making both the Crexendo and NetSapiens service better, more effective, and more efficient. We intend to work diligently the rest of this year, completing operational efficiencies between the teams and continuing to realize shareholder value from the merger. We are continuing to maximize savings by merging accounting systems, by moving Crexendo customers to the award-winning VIP platform, and by having the team share resources. This will continue to provide benefits and value to our shareholders, teams, customers and partners, licensees, and end-user customers. We will continue to grow the business organically. We will also look for appropriate accretive acquisitions. Increasingly, CCaaS, CPaaS, and UCaaS companies, including NetSapiens resellers, are contacting us indicating that they might be interested in the partnership or acquisition. This adds the possibility of an exit strategy for any of our partners. We will review these carefully and closely, and I expect that the right opportunities will come along which will only accelerate our growth. I continue to see substantial growth and a very exciting time for Crexendo and our shareholders. I am highly optimistic about our future. And with that, I'll turn it over to Ron.

Thank you, Steve. Good afternoon, everyone. As Steve highlighted, we had a great quarter. This is the first quarter we are reporting three full months of operating results from our NetSapiens acquisition, and I'm very pleased with the results. Total consolidated revenue for our third quarter increased 113% or 4.7 million to 8.8 million as compared to 4.1 million reported for the prior year. Our cloud telecommunications segment service revenue for the quarter increased 18% or 670,000 to 4.3 million compared to 3.7 million reported for the third quarter of the prior year. The software solutions segment contributed from the NetSapiens acquisition for the quarter was 3.8 million. Product revenue for the quarter increased 43% or 212,000 to 701,000 compared to 489,000 reported for the third quarter of the prior year. Gross margin for the quarter was strong. Telecommunication services gross margin was 72%, software solutions 56%, product gross margin 34%, and overall gross margin was 62%. Consolidated operating expenses for the quarter increased 4.8 million or 120% to 8.8 million compared to 4 million reported for the third quarter of the prior year. The NetSapiens acquisition contributed 3.5 million of the additional operating expenses. Pre-tax income was 12,000 for the third quarter and net loss of 125,000 or $0.01 loss per basic and diluted common share as compared to net income of 131,000 or $0.01 for basic and diluted common share for the third quarter of the prior year. Non-GAAP net income for the quarter was 800,000 or $0.04 per basic and $0.03 per diluted common share as compared to 290,000 or $0.02 per basic and diluted common share for the same period of the prior year. EBITDA for the quarter was 622,000 as compared to 212,000 for the same period of the prior year. Our adjusted EBITDA for the quarter was 1 million as compared to earnings of 348,000 for the same period. For the nine-month period, our consolidated revenue increased 58% to 19.1 million compared to 12.1 million for the same period of the prior year. Our cloud telecommunications service segment for the nine-month period increased 19% or 2.1 million to 12.8 million. Our software solutions segment revenue contributed from the NetSapiens acquisition for the nine-month period was 4.8 million. Product revenue for the nine months increased 15% or 192,000 to 1.5 million compared to 1.3 million for the same period of the prior year. Consolidated operating expenses for the nine-month period increased 89% to 21.1 million compared to 11.2 million for the same period in the prior year. The NetSapiens acquisition contributed 4.8 million of the additional operating expenses. Additionally, we incurred 1.1 million of acquisition-related general and administrative expenses during the nine-month period. Net loss for the nine-month period was 1.8 million or $0.09 per basic and diluted common share compared to 779,000 or $0.05 per basic and diluted common share for the same period of the prior year. Non-GAAP net income for the nine-month period was 1.1 million or $0.06 per basic and $0.05 per diluted common share. That's compared to 1.2 million or $0.08 per basic and $0.07 per diluted common share for the same period in the prior year. EBITDA for the nine-month period was a loss of 1.1 million compared to earnings of 1.1 million for the same period in the prior year. Adjusted EBITDA for the nine-month period was 1.1 million as compared to 1.4 million for the same period in the prior year. Our cash, cash equivalents, and restricted cash at September 30 were 7.7 million and that’s compared to 17.7 million at year-end December 31, 2020. We used 473,000 for operating activities during the nine-month period, used 10.6 million for investing activities, primarily business acquisitions, and financing activities provided 1.1 million of cash, cash equivalents and restricted cash primarily from stock option exercises. With that, I'll turn it over to Doug Gaylor, our President and COO, for additional comments on sales and business.

Thanks, Ron. I'm ecstatic about the results we were able to post in our first full quarter after the acquisition of NetSapiens, highlighting what a strong combination these two organizations have become. Our organic growth of 22% on the Crexendo Classic side of the business complemented by the strong revenue contributions from our acquisition of NetSapiens propelled us to a 113% increase in total revenue compared to Q3 of 2020. Our impressive growth in revenue, combined with our diligent and effective management of the business and expenses, allowed us to post strong non-GAAP income of 800,000 for the quarter. The UCaaS industry continues to grow at a rapid pace, and that has helped increase the number of end users using our NetSapiens platform to over 2 million as our NetSapiens partners continue to benefit from the rapid migration by small, mid-size, and enterprise-level businesses to the cloud. They need additional services from Crexendo, which is clearly evident by the large amount of add-on expansion orders that we received from our partner community during the quarter. Those 2 million plus end users continue to benefit from our award-winning solutions as we recently announced our highly anticipated Version 42 software release and are diligently working on enhancing our capabilities and solutions associated with our next release. Our unique Sessions, Not Seats pricing model continues to drive new NetSapiens partners to our platform and allows us to differentiate ourselves from our two largest competitors, Cisco's Broadsoft and Microsoft's Metaswitch platforms, offerings which are significantly higher priced based on their cost-per-seat model of pricing. We recently attended three live industry conferences, and we were very pleased with the amount of excitement and interest that we continue to receive from UCaaS and MSP businesses looking for a platform solution. Our traditional Crexendo agent program continues to grow and flourish as we had our strongest quarter of the year from our agents, spurred on by our Crexendo VIP offering powered by the NetSapiens platform that we recently introduced to the market and has a 100% uptime guarantee along with a lifetime warranty on our Crexendo phones. We continue to add new and larger agent partners to the program and are excited about the opportunities in the pipeline that these new agent partners are bringing to the table. Our backlog continues to grow and is now north of $30.7 million at the end of Q3. This number only represents Crexendo direct customers and does not currently factor in the term obligations from our NetSapiens partners. In addition, our UCaaS service margins increased to 72% as we continue to actively focus on cost management. We continue to work diligently to integrate the two organizations together and have already started recognizing many operational benefits and synergies from the combined company. Our tremendous engineering talent on both teams are already working well together and benefiting from best practices. We've seen immediate synergies from consolidating our marketing efforts, and we had a tremendous turnout of over 200 attendees at our most recent NetSapiens user group meeting in San Diego last month that our marketing team executed flawlessly. Our sales teams are benefiting from the exceptional industry knowledge and experience both organizations bring to the table and complementing each other extremely well. We're in the process of consolidating all of our accounting systems, and our personnel, and our operations and customer service departments are executing on our plans to maximize efficiencies, productivity, and cost. I'm very pleased with how our two organizations are coming together, and I'm very excited about our go-forward plans to continue to grow and prosper. With the acquisition costs associated with the merger and the amortization of intangible assets, we're primarily concerned with our non-GAAP earnings, and I'm very pleased that we were able to generate strong non-GAAP earnings of $0.04 per share. Our results this quarter are strong proof that our combined organization has been able to quickly leverage the power and opportunity we have to grow and succeed together. And I'd be remiss if I did not acknowledge the hard work and efforts from every one of our great team members. We believe we will continue to see these efficiencies and cost synergies as we continue to grow and merge the organizations. As we sprint towards the finish line for 2021, I couldn't be more excited about the future direction and opportunity for Crexendo. The combination of tremendous demand for our product offerings, great solutions with disruptive pricing, and a phenomenal talented combined workforce positions us perfectly for the future. We're committed to delivering the best UCaaS offering in the industry for our customers and our partners and the best returns for our shareholders. We are confident that the synergies of combining our two great organizations will make us a major force in the industry and fuel our continued growth. I'll now turn it back over to Steve for any further comments.

Thank you, Doug. I have no further comments except I want to point out that our accounting department is working very, very hard, all of them, especially our CFO, and our Controller and our Division Controller, as well as the other people in accounting. With that, Matthew, would you open it up to questions? And remember, I want you to direct it towards the person you'd like to answer it.

Certainly. Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Andrew King from Colliers Securities. Your line is live.

Hi, guys. Thanks for taking my question. Really great quarter this quarter. I just have a couple of questions for Doug and Ron. Just wanted to get an idea. Within the organic Crexendo business, it really looks like that growth this quarter was really propped up by product revenue, which is up really significantly with services revenue just pretty flat quarter-over-quarter. Can you give us a little bit more color into what dynamic caused that? And how you see that going forward?

Yes, thank you for the question, Andrew, and for being on the call. We are seeing strong organic growth. There was an increase in product revenue this quarter. Many of our customers have been with us for a long time, and we maintain a very low churn rate. For our existing customers, we conduct what we call a technology refresh, offering newer phones as they approach the end of their agreements to encourage them to sign on for longer terms. This refresh often results in some one-time equipment sales when customers renew. Additionally, larger sales with significant upfront equipment costs contributed to the overall increase in equipment revenue for the quarter. I'll have Ron provide more details.

Yes. I'll add, Andrew, that we did have 18% growth in our services revenue for the quarter. And so we've been bouncing back and forth between 16% and 20%. We'd like to be at 20%, like it was last quarter, but 18% is still a solid performance.

Got it. Great. And then, Ron, I have a quick question. Are you experiencing any pressure from supply chain issues since you supply your own hardware, or is that not really a concern for you? If it is an issue, can you explain how you've addressed it?

Yes, we're not really seeing many issues there. We order in advance to ensure that we have enough phones available to meet demand. Other than a couple of weeks delay in getting the products off the ship and onto the dock, that's really been the only challenge we've encountered.

Great. I appreciate you taking my questions and congrats on a good quarter.

Thank you.

Thanks, Andrew.

Thank you. Your next question is coming from Josh Nichols from B. Riley Securities. Your line is live.

Hi, guys. This is actually Aman jumping in for Josh. Congratulations on a really good quarter here. I guess my first question will probably be for Doug or Steve here. I think you talked about some of the puts and takes on OpEx, and clearly we're able to accelerate growth while keeping sales and marketing in check here. Was that largely due to the synergies from the acquisition? Any color on that would help.

Yes. Great question, Aman, and good hearing from you as well. When you look at the synergies that we're able to realize between the two organizations, that allowed us to keep our expenses in control. As you know from following us for quite some time, cost management is something that we're constantly looking at. The synergies of putting the two organizations together, lots of synergies. When we look at the opportunities for growth, the management teams are working extremely well. When we look at opportunities like overlaps and subscription costs and overlaps in services, we both use AWS for functionality. A lot of those things we can consolidate, as we continue to grow, we've got more leverage to go out there and negotiate better agreements. That really helps our operating expenses. We continue to see that happening. If you look at our margins on our service side, again, 72%, that was a 3% increase from the previous quarter. So again, we're just managing costs and making sure that we can continue to grow those margins.

And Aman, there's one other thing I'd like to add. Organically, one of the reasons we hired Jon Brinton is to increase our organic growth. We have two new salesmen from NetSapiens, two new salesmen on the East Coast, and we've added a lot of new salespeople here on the direct side as well as the channel side, and we'll continue to grow that. So we're very, very interested in our organic growth.

Got it. That's helpful. And then yes, that's a good segue for my next question about gross margin. Services gross margins are over 70%, while software solutions are around 55%, which is very robust. Should we expect that kind of performance from those two segments moving forward?

We're still working through the software solutions. Last quarter, we saw gross margins of 48%, which increased to 56% this quarter. As we forecast the business, we are examining the trends. At this time, we can't confirm that this will be the number going forward, but we expect it to remain within that range consistently.

That's helpful. And then can you talk about the launch of the Crexendo VIP platform? How's the reception been for that platform so far?

Great. Aman, I would just highlight that when you talk, we're getting a little crackling on your phone. So the VIP platform would be a perfect solution for B. Riley, so we can call you afterward, and we'll set up a meeting for that sales opportunity. But all kidding aside, the VIP platform has been received extremely well. When you look at the opportunities out there, the 100% uptime guarantee, a lot of our competitors during the previous quarter had outages; RingCentral, 8x8, Nextiva, all had outages associated with the interruption of service that Bandwidth.com had. We look at some of the opportunities out there, and we have 100% uptime guarantee because we're that confident in our redundant and resilient setup and our geo-redundant setup for our VIP platform. Plus we offer a very unique lifetime warranty on all our Crexendo phones. So the VIP rollout has been extremely well received. I'll have Jon Brinton, our CRO, just add a little bit more color since he was the main guy in rolling that program out and getting everybody excited about it.

Hi. Regarding our VIP platform, I want to highlight that last week our joint team, including NetSapiens and Crexendo sales and channel employees, showcased our product at the Channel Partners Conference. It was fantastic to present a product that truly sets Crexendo apart, particularly in how we incorporate video in phone interactions. Our customers are adopting and transitioning to the VIP platform, which has contributed to our product sales growth. We've received positive feedback from both channel partners and customers. We will continue to emphasize being the largest independent channel community in America while promoting the robust technology platform we gained through our merger with NetSapiens.

And one other thing, Aman, that I'd like to add, and that's the VIP end users all have access to video, which means that we do video and collaboration.

That's helpful. Last question for me, I think it will likely be for Jon. Can you maybe talk about the growth you're experiencing in your direct channel versus your reseller channel?

Yes. We don't give great granularity between those two. But in our direct sales area, there are just some customers and transactions that are more transactional. So we cover those off with the direct sales team. We've had good performance from that group as well. Our mix is to be primarily channel-oriented and continue to expand those partnerships. If you've seen some announcements over the last few months, we've done that. So we're working to a mix in our model. It might fluctuate from month to month, but we're generally within our targets for direct and channel performance.

Thank you. I'll pass it on.

Thanks, Aman. I appreciate it.

Your next question is from Michael Kaufman from MK Investments. You are now live.

Hi, Steve and Doug. It's truly refreshing to witness such impressive growth and financial discipline in a technology company. I commend the entire team for achieving this. Some of these questions have been touched upon, but I'm curious about the long-term expense to revenue ratio and gross margin expectations now that we have significantly increased solution revenue. How do you foresee this impacting overall growth? I understand you may not have specific numbers at this moment, but it would be beneficial to gain some insights on this in future calls. Additionally, this seems like the best-kept growth secret I've encountered, so what steps are you taking to introduce the company to the financial community?

Yes. Let me have Ron answer the first part of the question related to where we see the growth in margins on the software solution. We do break that down into the different departments now. You'll see the UCaaS division, you'll see the software solutions division, and then product. So Ron can expand on the margins and what we expect to see there. And then I'll wrap it back up with what you'll see from us getting our word out there with the investor community.

Michael, duly noted that you'd like to see that information going forward. I think we'll be tracking that as it normalizes. We understand the business and the changes from one-time revenue items to recurring revenue items that come from the software solutions segment. We'll watch that closely and we'll hope to be able to report some normalcy to you as the margins do normalize.

Thank you.

Yes. From an investment perspective, we continue to do investment conferences. We did the LD Micro-Cap Conference last month in Los Angeles. We were actually out of 150 presenting companies. We were the most requested company for investors to meet with. We had over 35 meetings in two days there. We're doing investor conferences. We've got some virtual non-deal roadshows lined up over the next couple of months, so we're getting our word out there. I agree with you, Michael. I think we are the best-kept secret in the technology space. I think these earnings speak for themselves on what the opportunity is ahead for us. We're excited to get that message out there to the investment community.

Is there anything you can do to at least have on your website some of these conferences, because most companies do have that, and that's a way for busy investors to keep track of a company they're interested in?

Yes, we can do that. We do have an event page. But we haven't been posting that. We do usually put out a press release anytime we're doing a conference. So I'll make sure that we're diligent about getting that onto our website as well. But we do put out press releases. If you've got any Google Alerts out there on Crexendo, you should see any of the press releases when we have conferences or roadshows that we're going to be doing out there.

That would be very helpful, because it would all be in one spot.

Absolutely.

And while looking at it, somebody should go in and revise your Yahoo! page. You're still showing, I think, 85 total people in the company.

Okay, we will do that. I think they pull their information out of our filings. And so sometimes, when we've tried to get Yahoo! to change anything, it takes an act of God sometimes. But we will try and push the envelope. They typically pull that off of our filings, and so our headcount is probably pulled off the 10-K, I would imagine. We'll see if they can update that in the interim. But we're sitting at about 118 employees total as we speak.

Thanks again, and good luck. I think you're doing a great job.

Thanks, Michael. Greatly appreciate it.

Thank you. Your next question is coming from Arham Khan from Arham Khan and Partners. Your line is live.

Good afternoon, everyone. I hope you’re all doing well. I have a quick question regarding your recent acquisitions. I noticed the small acquisition of Centric Telecom alongside NetSapiens. Considering your current cash position and your nearly breakeven cash flow potential, are you able to sustain these smaller acquisitions? While we are looking forward to the larger mergers, I am curious about your ability to invest in three, four, or five additional smaller companies like Centric Telecom as you move forward.

Yes, absolutely, Arham, and good hearing from you as well. When you look at the opportunities that are out there, as Steve mentioned in his comments, the door has been knocked on quite a few times since the NetSapiens acquisition. Some of these are smaller in scope, and some of these are larger in scope. Absolutely, the deal that we did with Centric Telecom could easily be managed with cash on hand. Again, we anticipate post-merger now that cash flow is positive; cash flow should be a given. With the balance sheet where it is with 7.7 million in cash, we can go out there to find small acquisitions and pull those off without having to do any kind of additional capital raise. Larger acquisitions, obviously, when they come to the table, are going to be very appealing to us as well. Lots of opportunities to make those happen.

I'll just add that, right now through the fourth quarter, we're laser-focused on the integration of NetSapiens to find synergies. We want to focus through the end of the year on our current acquisition that we have at hand and getting that company integrated with our operations.

And last but not least, we're always going to underestimate what we can do and probably over exceed what we think we can do, but we're not going to make that a forward-looking promise. Our idea is to just do a good job and we look at everything. We look at productivity. We look at expense ratios. We look at everything.

Got it. Okay, perfect. Yes, I look at the position you're in; I look at how you've returned capital as of late, and I feel very good about it. Really good results. Thank you for taking my question, and then I'll talk to you guys soon.

Thanks, Arham. I appreciate it.

Thank you. There are no further questions in the queue. I will now hand the conference back to Steve Mihaylo for closing remarks. Please go ahead.

Well, once again, I want to thank all of our veterans. Last but not least, I want to wish all of you Happy Veterans Day, a very good Thanksgiving. For those of you that celebrate the holidays in December, Happy Holidays to all of you. With that, we look forward to presenting the fourth quarter and year-end probably in early March. Thank you and good day.

Thank you, everybody.

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