Crexendo, Inc. Q2 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to the Crexendo Second Quarter 2022 Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Steven Mihaylo. Sir, the floor is yours.

Thank you. Good afternoon. I'm Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to Crexendo's Q2 2022 conference call. On the call with me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; Jon Brinton, our CRO; 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'll open the call up to questions. Jeff, would you please read the safe harbor statement?

Yes, sir. 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 such as 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. Those risk factors are explained in the detail of the Company's filings with the Securities and Exchange Commission, including the Form 10-K for the fiscal year ended December 31, 2021, and the Form 10-Qs as filed. Crexendo does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or any other reason. I'd now like to turn the call back to Steve. Steve?

Thank you, Jeff. I'm very pleased with the Q2 results. It shows strong growth and continued acceptance of both our software solutions division and cloud telecommunication services division. Considering that we are still facing macro and massive economic headwinds that I discussed last quarter, the results are very extraordinary. A 53% year-over-year increase in revenue is a very positive metric. Yet we continue to maintain profitability, both on a non-GAAP and an adjusted EBITDA basis, which is also quite impressive. All the trends look very good to me. The Company operates as one company. The employees from both sides of the business work together in our overriding goal, and that is to provide the best services in the industry. You have heard me say this before, and it is not an empty slogan; we love our customers and go out of our way to do the best for them every single day. I believe that Crexendo will continue to keep innovating and keep providing the very best services to our clients, all of which I am convinced will continue to accelerate our growth. With that said, we can still improve. We are managing the business very carefully. We stress fundamentals, sales process, margin, managing expenses, and margins. That is something we do every day. It makes a better business to increase its shareholder value. This is simple business 101, but often gets forgotten. So I remind the team regularly to manage the business, the product play. I am proud that we have carefully built the business, and we'll continue to do so. We have not run up unsustainable debt which, with current rising interest rates, is crippling many of our competitors and businesses. We will also stress process and careful strategic management. The results I am convinced will continue to impress. I have very high expectations for our future, and I am convinced we will impress our customers. Most importantly, we will impress our shareholders with our steady and sustainable results. We have grown the business the right way, and we will continue doing that. My confidence is boosted by the fact that we have won numerous awards lately. Perhaps the most impressive is our being awarded the number one high performance in G2.com’s Summer 2022 Grid Report for VOIP providers. The award is particularly gratifying as the only ranking from verified customers. This shows the efforts of our people. I'm convinced that this will continue to grow the business, both organically and with accretive acquisitions that we are carefully monitoring. With that, I'll turn the call over to Ron. Ron?

Thank you, Steve. Good afternoon, everyone. I'll start with some financial highlights for the second quarter of 2022. Our total revenue for the second quarter increased 53% to $8.8 million compared to $5.8 million for the second quarter of the prior year. Our service revenue for the second quarter increased 5% to $4.6 million compared to $4.3 million for the second quarter of the prior year. Our software solutions revenue for the second quarter increased 256% to $3.6 million compared to $1 million for the second quarter of the prior year. I'll remind everyone for comparison purposes, the three months ended June 30, 2021, only includes one month of activity from our June 1, 2021, acquisition date of the software solutions segment. Product revenue for the second quarter increased 57% to $692,000 as compared to $440,000 for the second quarter of the prior year. Gross margins were as follows: telecom services, 68%; software solutions, 67%; product, 46%; and our overall consolidated gross margin was 66%. Operating expenses for the second quarter increased 38% to $9.7 million compared to $7 million for the second quarter of the prior year. The same comment for comparison purposes, the prior quarter only includes one month of the software solutions segment operating expenses. The Company reported a net loss of $896,000 for the second quarter or a $0.04 loss per basic and diluted common share compared to a net loss of $1 million or a $0.05 loss per basic and diluted share for the second quarter of the prior year. On a non-GAAP basis, we reported earnings of $512,000 for the second quarter and $0.02 per basic and diluted common share as compared to non-GAAP net income of only $37,000 and breakeven on a basic and common share for the second quarter of the prior year. Our EBITDA loss for the second quarter was $232,000 compared to $983,000 loss for the second quarter of the prior year. Our adjusted EBITDA for the second quarter increased $626,000 as compared to a loss of $153,000 for the second quarter of the prior year. So, very positive increases there. Now I'll highlight some highlights for the six-month period. Total revenue for the six months ended June 30 increased 65% to $17 million compared to $10.3 million for the same period of the prior year. Our service revenue for the six-month period increased 6% to $9 million compared to $8.5 million for the same period of the prior year. Our software solutions revenue for the six-month period increased 578% to $6.9 million compared to $1.1 million for the same period of the prior year. And for comparison purposes, just to remind you, that our software solutions were only included from the acquisition dated June 1, 2021. Product revenue for the six months ended June 30 increased 47% to $1.2 million as compared to $808,000 for the same period of the prior year. Operating expenses for the six-month period increased 56% to $19.2 million compared to $12.4 million due to the software solutions segment only having one month of operating expenses from the prior period. The Company reported a net loss of $2.1 million for the six months ended June 30, 2022, or $0.09 loss per basic and diluted common share as compared to a net loss of $1.7 million or $0.09 loss per basic and diluted share for the same period in the prior year. On a non-GAAP basis, we reported income of $917,000 for the six months ended June 30, 2022, or $0.04 basic and diluted common share as compared to non-GAAP net income of $345,000 or $0.02 per basic and diluted common share for the same period of the prior year. EBITDA loss of $1 million for the six-month period compared to a loss of $1.7 million for the same period of the prior year. Adjusted EBITDA earnings of $928,000 for the six-month period as compared to $92,000 for the same period of the prior year. Total cash and cash equivalents at June 30 was $4.9 million compared to $7.5 million at December 31, 2021. Cash used for operating activities for the six-month period was $2.6 million compared to $224,000 used for the same period of the prior year. Cash used for investing activities for the six-month period was $40,000 compared to $10.5 million used in the same period of the prior year. Cash used for financing activities for the six-month period was $20,000 compared to cash used for investing activities of $966,000 for the same period of the prior year. With that, I'll turn it over to Doug Gaylor, our President and COO, for additional comments on sales operations.

Thank you, Ron. We had a very strong quarterly performance in Q2. Our non-GAAP earnings improved to $512,000 or $0.02 per share, alongside robust revenue of $8.84 million, reflecting a 53% increase over Q2 of 2021. Celebrating the one-year anniversary of our acquisition of NetSapiens in June, I’m thrilled with how well both organizations have integrated. We have realized strong synergies from merging the two companies and are well-positioned for ongoing growth and enhancements in both revenue and profitability. Our organic growth rate of 10% year-to-date in the cloud telecom segment aligns with our strong contributions from software solutions, underscoring our confidence that this merger has created the fastest-growing UCaaS platform in North America. After our first year together, I can assure you that the partnership continues to thrive, as demonstrated by our recent announcement of reaching a $2.5 million end-user milestone and the various third-party awards we have garnered for our products and services recently. Our backlog remains very strong at $42.2 million at the end of Q2, marking a 54% increase from our backlog a year ago. We also experienced substantial bookings in the software solutions segment, continuing to attract new UCaaS licensees who leverage our platform for their operations. Our pipeline for new licensees is promising, with significant interest generated at two industry conferences we attended in Q2, further highlighting the high demand for our platform. We are observing challenges for competitors like Avaya, Mitel, 8x8, and others, while our Crexendo licensees are thriving as businesses rapidly migrate to the cloud, leading to increased session purchases as they scale. We are actively developing new applications and solutions to further monetize additional services, thus driving more organic growth in our software solutions segment. We are excited about our version 43 software release launched during Q2, which includes numerous new and requested features. Additionally, we are looking forward to the upcoming launch of our Crexendo Contact Center as a Service, which integrates omnichannel customer engagement, chatbots, and automation, specifically designed for larger call center operations. This was previously announced as part of our collaboration with Mavenir, and we are eager for the release this quarter. We constantly evaluate potential partnerships to enhance the functionality of our platform and increase our revenue streams. Our differentiation from major competitors like Cisco's BroadSoft and Microsoft's Metaswitch in our software solutions segment remains strong, as our model provides significant pricing advantages. We now have over 210 licensees utilizing our platform, and we are optimistic about the prospects in our funnel for onboarding new licensees. Our partnerships with master agents such as Telecom Consulting Group and OTG Consulting are gaining momentum, and we anticipate substantial sales and pipeline growth from these associations. We are optimistic about the sales growth predictions stemming from these collaborations. Our Crexendo VIP offering, which includes a 100% uptime guarantee and a lifetime warranty on Crexendo phones, is experiencing robust growth as we onboard a record number of new customers in Q2. We continue to attract new and larger agent partners to the program, and we are enthusiastic about the opportunities these partners bring. The synergies recognized from our combined organizations regarding personnel and processes have led to a very robust Crexendo. Our sales and marketing teams, under the direction of our CRO, Jon Brinton, are performing exceptionally well. The integration of all accounting personnel under Ron Vincent has been seamless. Our engineering, development, and quality assurance teams work cohesively under our CTO, David Wang, benefiting from the enhanced resources and talent available from our merged teams. Our operations and support teams are excelling in managing all customer relationships, and I am pleased with how our two organizations have come together. I am genuinely excited about our future plans and our potential for growth. As we previously indicated, the amortization of intangible assets and stock compensation expenses means we are managing the business based on non-GAAP earnings. I am proud to report non-GAAP earnings of $0.02 per basic common share for the quarter, which I believe demonstrates the ongoing opportunities for growth and success within our combined organization. I am immensely grateful to our outstanding team of Crexendo employees for their hard work and effort in making this combination successful. We expect to see continued efficiencies and cost synergies as we grow. The future for Crexendo looks bright; demand for our products is high, and our solutions are robust, positioning us well. We will keep delivering the best UCaaS offerings in the industry to our customers, licensees, and partners, remaining committed to providing strong returns for our shareholders. I will now turn it back to Steve for any additional comments.

No. I think you've covered everything between you and Ron, Doug. I'm going to open it up for questions now. Mike?

Our first question comes from Griffin Boss from B. Riley Securities.

So first for me, I was curious if you guys could give us an update on how churn is looking, given it spiked up a few quarters ago? Just any color there would be helpful.

Well, I can tell you this, it's down. I'm going to let Ron Vincent fill in the blanks.

Thank you, Steve. We have seen improvement as we predicted. We were trending around 1.25% per month, but that has decreased to 75 basis points or 0.75% on a monthly average. This demonstrates significant improvement compared to the year-end numbers.

Great. That's great to hear. And then, yes, so next, just any color on how the customer migration process is progressing to the NetSapiens platform?

I'm going to let Doug handle that one, Griffin.

Yes. Griffin, that's coming along very nicely. We've probably got about 25% of our accounts migrated over. It's a full process. We don't have to migrate them over. So we're handling it very gingerly because there's a lot of details in migrating from one platform to the other. So it's just a slow and steady migration process. On top of that, all new customers are being onboarded onto the VIP platform. So everything is going extremely, extremely smoothly. We've got our engineering team working on scripts to allow us to do some of that migration a little faster, and that's coming along extremely well as well. So I couldn't be more pleased with how the migrations are coming along and how strong the VIP platform is on handling all of our new customers that we're adding to the platform.

Great. Okay. And then last one for me. I know you guys mentioned in the prepared remarks you're always evaluating new partners to add to your ecosystem. Just curious if there was anything else you can give us in terms of the M&A pipeline? Anything you guys are seeing or actively pursuing right now? Or anything along those lines?

Well, we're always working on M&A. And because of the accounting rules and the SEC rules that requires that we do an audit. And with that, I can tell you that that slowed us up significantly.

The pipeline is rich with opportunities out there, and we've got numerous discussions happening. And so we're excited about where those opportunities may lead us.

Anybody we have discussions with is under NDA, so we can't give any more detail than we've already given.

We now have Bruce Goldfarb from Lake Street Capital.

Congratulations on the great results.

I'm glad somebody has noticed. We're pretty excited about the result.

Fantastic and churn down and you're growing.

We are. We grow a little bit faster if there was some for the SEC and the AICPA. Anyway, go ahead. And I'm sorry. I'm just frustrated.

How is NetSapiens pipeline looking for the second half of the year?

I'm going to let Anand Buch handle that one and Doug.

Sure, I'm happy to jump in. We continue to see our partner base and license fees growing at a faster rate than the existing service providers in the market. This creates opportunities for growth, particularly in the pipeline with upgrades to existing capacity. Overall, that looks quite healthy. Additionally, as Doug highlighted, we are also seeing new clients coming in, particularly in North America and a significant increase internationally as well. Jon, would you like to add anything?

Yes. I would say, Bruce, the pipeline is strong. The nice thing that we're seeing is of the customers that we're talking to and the partners that we're adding, many of them are choosing to have us host the solution for them. As you know, part of our go-to-market strategy is that they can build and deploy it in their own infrastructure or deploy it in ours. So many of them are having us actually host the solution for them. And then about 1/3 of the new licensees that we've added to the software solutions portfolio are also choosing our subscription licensing model, which will help us grow our recurring revenue more rapidly over time. So we continue to see strong pipeline and good results in the period.

I might also add, Bruce, that we're taking business away from Microsoft. We've always taken business away from Cisco, but now we're starting to take business away from Microsoft, and that's because we love our customers, we take better care of them, and we've got a white glove service. For those of you listening out there that might be potential customers, we'd love to include you in that love fest.

It explains your success.

I'm excited.

Yes. My last question is, is there any change in competitor behavior like winning an 8x8, regarding their reseller transfer bounties and they're trying to take your customers away as even their sales are at risk.

No. Look, we all compete with each other. The fact that Vonage went to Ericsson and the fact that RingCentral and 8x8 are struggling because of all of the debt they have is helping us. But I'm going to let Doug fill that in.

Yes. I think it's still a very competitive environment. But we have seen some of those exorbitant bonuses dwindling some. So I think as you look at some of our competitors that are maybe under a little more of a cash crunch. I think that they're realizing that they've got to start showing better bottom line improvements. And so some of those incentives are lessening. So we continue to play our game plan, and it's been very, very successful. With the recent announcements of layoffs at RingCentral and Avaya and Mitel, we continue to see our competition swirling, and we're trying to take advantage of that as much as we can by just continuing to work our game plan, which is a very strong game plan.

And let me point out one other little factor here. We have no debt other than that on our building and a little bit of acquisition. But that said, our competitors are grounded in that.

Makes you a lot better positioned. Congrats again on the fantastic quarter. And that's all my questions.

We now have Chris Sakai from Singular Research.

I have a question. It appears that you have achieved a gross margin improvement of around 8%. Last quarter, you mentioned that some expenses previously categorized as cost of goods sold have been reclassified to R&D expenses. I would like to know how much of this improvement can be attributed to that change, and how much of it was not organic.

Well, let me first point out that Ron Vincent will give you all the details here in a second. But one of the things that I harp on a lot to all of our managers is the fact that we need to cut expenses. And we've identified a whole bunch of low-hanging fruit, which you're going to see over the next couple of quarters, we're going to improve. Having said that, I'm going to turn it over to Ron.

Chris, the majority of that improvement in our margin was related to refining our analysis on the team members and their performance on the development of our software products. But we completed that analysis and review of the guidance, and we made the reclassification to proper classify those individuals as R&D work on our software platform. So the majority of the margin increase there that we recognized during the quarter was that reclassification.

But just so you're aware of it, Chris, we are going to get better.

Okay. Right, you're saying that was the 7% range last quarter?

Yes. I think that's still in the targeted range, and I think we're well on our way to giving the resale numbers here in the next few quarters.

All right. And then with the full and the subscription revenue, how much is one-time and how much is recurring?

So on the software solutions side, for the quarter, about 74% was recurring and 26% was one-time revenue. And we break that down in our footnotes. So, yes.

Okay. Great. And then how was the Mavenir partnership going? I know you said it was going to start right in the last month of the quarter. How did that go?

Yes, Chris, this is Jon Brinton. So on the two sides of the partnership, in the last quarter, Mavenir launched their solution that was built on our UCaaS platform. So they're a platform customer for us in the software solutions division. And then as far as our commercial rollout of their CCaaS product, we're actually doing that in the next couple of weeks around the beginning of September for our commercial rollout of that offer. So we have some lighthouse partners that had been in preview with us on that product, and we're deploying that in our own product to offer within this quarter. So things are going great. It's actually gotten excellent feedback from the channel partners that we've kind of socialized and done some of the preview work with, and we're very excited about getting us in the market.

We now hear from Edward Gilmore, who is a private investor.

Congratulations on the great quarter and growth there. Just a couple of quick questions from me. I was curious, I think it was Doug that mentioned still kind of in the honeymoon phase since the acquisition. And I was curious if kind of given that remark if you still see any opportunities for continued consolidation and cost savings from the merger and acquisitions of the two companies?

The short answer is yes, and now I will turn it over to Doug and the rest of the team on this call.

Yes, absolutely. Thanks, Ed. I appreciate you joining the call. Yes, there's still some opportunities there as leases come up and things expire, we're taking advantage of that. We've recognized a lot of synergies and a lot of cost savings already and still have a lot on our list. When we put the two companies together, we had a hit list of probably about 60 or 70 priority action items, and we're very pleased with our progress there. The majority of those have been completed successfully, and we've recognized those synergies and those cost savings, but there's still some left. I mean we've got some lease space opportunities that come up over the next couple of months, and we're evaluating those options. And we anticipate seeing significant savings on reallocating that once we get those contracts renegotiated in some of those things identified. So they're all on our hit list, and we continue to check them off on our checklist, and we're extremely pleased with where we are right now and know there's still a lot more opportunity for us to continue benefiting each other as the organization continues to grow.

One of the things you have to remember, Edward, is that we're in the cloud telecommunications business, and that's the mobility business. And even though we save a little bit of money, we add productivity to our customers that's unbelievable if they're using the product correctly. And we are starting to see some of those benefits in our own business as well, and we will continue to see those benefits. So what Doug said is so true, but it's only going to get better and better from here on.

Okay. Great. And then next question, again, tremendous top-line growth with the increase in the revenues there. Do you see that as kind of a step shift where that's going to be continued to see the incremental lift will continue to subsequent quarters? And then also, do you see any expectations around top-line growth from that as a percentage of quarter-over-quarter that you might be able to give some color on?

We've maintained this position for the last two or three quarters, and I'll reiterate it. We anticipate achieving approximately 20%, with 15% to 25% coming from organic growth and 15% to 25% from acquisitions. This isn’t our first experience. The company we all have been involved with has navigated numerous acquisitions. As we grow larger, these transactions will become increasingly manageable. Now, I'll pass it over to Doug for his comments.

Yes, I think that the momentum that we saw from Q1 to Q2, I think will continue. We've got a strong pipeline, and I have been extremely confident on what the second half of the year looks like. So we're, again, continuing to execute on our game plan. We've got lots of good opportunities in the pipeline. Our operations team is doing a great job of getting these jobs implemented, so we can take them through revenue. So again, we don't give forward guidance, but I feel really confident that we're executing our game plan exactly the way we should be.

I have one last quick question. Can you share anything about the sales force and cost opportunities between NetSapiens and Crexendo? Are you experiencing a lift, and are your expectations being met in terms of customers from each company using the other’s services?

Yes. I think we have two segments for a reason. I mean, the software solutions segment sells our platform to our licensees out there. And so that's a different strategy than our direct sales force and our direct agents selling to end user customers, but benefits in how we go to market in both areas. And so we've got our user group meeting coming up in October, which will have a high majority of our licensees there. And so a lot of that focus this year is going to be on sales and marketing and how they can help grow their business. And so we're going to implement a lot of or suggest a lot of great ideas that have worked on our direct side to help them out in growing their businesses. The IP platform is our platform that we got through the software solutions acquisition. And so that's our platform going forward on our direct applications. And so it offers more functionality, more efficiencies out there with 100% uptime guarantee and our lifetime warranties. It's being received extremely well out there in the industry. So I'm very pleased with how the sales initiatives are going. They are two separate sales focuses. And so Jon has done a great job of keeping both teams focused on what's important to them. When we do these trade shows, if somebody comes up to us at one of these trade shows, and they're more of an agent than a platform licensee, we've got the best of both worlds because we can handle their needs with whatever they're looking for. So if they're looking for their own platform, great, we've got it. If they're looking for us to host their own platform, great, we've got that too. And if they aren't ready for a platform yet, they just want to sell our solutions on a revenue share basis, great, we've got that solution as well. Jon, any color you want to add to that?

I would like to expand on what Doug mentioned regarding our diverse go-to-market strategy. Ultimately, it’s important for our partners that we provide them with the option that best suits their business model. We offer two or three different paths for partners to experience our technology. The advantage is that everything operates on a single platform with one research and development stream and one investment stream, allowing us to continuously develop over time. We aim to enhance our capabilities, which aligns with what Anand is doing as we explore potential partnerships. We always consider how to deliver content to our platform licensees, our software solutions division, and our partners or end customers in our telecom services division. I believe that having two or three routes to market while maintaining the same revenue opportunity contributes significantly to our efficiency.

And one of the things you have to remember, Edward, is we have four distinct channels that we operate through. Our software solutions division sells licenses. Those licensees, they sometimes sell to the end user, and they also sell through white label customers. We sell a little bit of white label stuff, but we're mostly concentrating when I say that telecom division is mostly concentrating on the end user. And there, again, we have two different channels we sell through. We sell through our direct, which is about 10 salespeople, and we sell through a whole bunch of partners, which has multiple salespeople and there's over 200 of them. We cover everything, and I think our competitors probably only cover a portion of that. So we're just getting started.

Sir, it seems there are no more questions at this time. Do you have any final comments?

I do have a few closing comments, Mike. And one of the things I want to tell all of the people on this call and to everyone else that happens to replay this call, we are just getting started, and it's going to get better and better from here on out. I know it's been a long time in the incoming. But in answer to that, it's because of all of the hoops and regulation and everything else that we have to jump through. But it's going to get bigger. I mean, as we get bigger, it's going to get better. And just hang in there. Nobody is falling asleep on the job, and we're not going to either. With that, I'm going to wish you all a good evening and hope that everyone is here for the next call because it will be better. And we look forward to talking to you on the Q3 call. Take care, and good evening.

Thank you, everybody.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.