CXDO - NASDAQ

Greetings, and welcome to the Crexendo First Quarter 2024 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Jeff Korn. Sir, you may begin.

Thank you, Olly, and good afternoon, everyone. Welcome to the Crexendo Q1 2024 Conference Call. I'm Jeff Korn, Chairman of the Board of Directors and CEO. On the call with me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; Jon Brinton, our CRO; and Anand Buch, our CSO. In a moment, Jon will read our safe harbor statement. After that, I will give some brief comments on our performance for the first quarter. Ron will then provide more detail on the numbers before handing the call over to Doug to provide a business and sales update. After that, we'll open up the call to questions. Jon, would you please read the safe harbor statement?

Thank you, Jeff. 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, 2023, and the Forms 10-Q 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 otherwise. I'd now like to turn the call back to Jeff. Jeff?

Thank you, Jon. I'm very excited to report that in the first quarter Crexendo maintained its streak of achieving GAAP profitability for the third consecutive quarter and non-GAAP net income for the 22nd consecutive quarter. This performance reflects on the dedication of our entire team who work to make certain that we provide the best cloud communication software in the industry. We combine that with superb customer service, where G2 ranked us the #1 in 19 customer satisfaction categories in G2's spring 2024 report, making the fifth consecutive quarter that Crexendo has been rated first in multiple satisfaction categories. This shows that we strive for operational excellence and delivering value to our shareholders and our customers. With that said, we don't rest on our laurels, and we are always looking for ways to improve our cloud communication software and our customer service. We know there are multiple solutions, and we will continue to work to be the solution of choice, both on the software solution business and on the telecom services business. The strong financial results in Q1 included a 14% year-over-year organic increase in total revenues to $14.3 million, which was driven by a 25% growth in the software solutions segment as well as near double-digit increase in telecom services revenue, which equated to very solid performances across all revenue segments. Our efforts are certainly bearing fruit and is evident by the GAAP earnings of $434,000 and non-GAAP net income of $1.9 million and adjusted EBITDA of $2.1 million. Our goal is to deliver profitable growth and create value for our shareholders. The transition of customers from our Crexendo Classic system to the cutting-edge VIP platform continues to advance effectively. We remain optimistic about completing this migration by year-end. This will allow us to vacate our current premises and move to a new location. The cost savings of not maintaining 2 platforms, together with the reduction in rent costs and other ancillary expenses, should result in substantial cost reductions. We continue to aggressively manage costs. With that said, however, we will make strategic investments in the business so that we can continue to be the cloud communication leader. Last month was a really big month for us. We announced that we now serve over 4.5 million users on our platform. We continue to add users at a steady pace, and I see no end in sight. Frost & Sullivan, who in their recent 2024 report awarded us the Competitive Strategy Leadership Award for Excellence in Cloud Communications, confirmed that we are the fastest-growing UCaaS platform in the industry. Our team and our disruptive business model of Sessions Not Seats continues to give us a competitive edge. We were also given the honor of ringing the NASDAQ closing bell. Our exceptional team was able to join us either in person or by video, and many of our employees had their images flashed on the Times Square billboard. I must -- it was very exciting for us to share that honor with some of our licensees who joined us as we had our Partner Advisory Council meeting at the NASDAQ offices. We have a Partner Advisory meeting every quarter to make sure that we constantly stay in touch with our licensees and we are adapting to their needs. That's one of the ways that Crexendo excels. But it was really a thrill for us and me, in particular, to get to close the market that day. Our work with Oracle is also progressing rapidly and smoothly. As you may have seen, we put out a press release today to celebrate what I am sure will be a great winning combination. We are very excited about the growth of our hosted offering and anticipate even more positive developments. We expect substantial growth as more and more customers are looking for a more turnkey solution and seek to have us do the hosting for them. Our tremendous team working with the Oracle team should make us the top hosted solution in the industry. With that said, we will continue to improve our non-hosted solutions and keep them the best in the industry also. Lastly, I would like to touch on our recent filing today of a shelf registration, which you should be able to find on EDGAR. While this is not for immediate use, it's a testament to our commitment to good corporate governance. This is something I've personally advocated for some time even before becoming CEO. The shelf is good for 3 years and gives us flexibility to determine when and if we use it and under what terms. We anticipate that if we use the shelf, it will be for future strategic investments, most likely in accretive acquisitions. It's just one more tool in our arsenal to effectively close deals that make sense. In conclusion, I want to reiterate our expectation for double-digit organic growth. We are poised for continued success, and I'm confident in our ability to deliver outstanding results in the quarters to come. The future looks bright, and we could not be more excited. I'll now turn over the call to Ron to provide some financial highlights. Ron?

Thank you, Jeff. Good afternoon, everyone. Some financial highlights for the first quarter of 2024 are as follows. Total revenue for the quarter increased 14% to $14.3 million, compared to $12.5 million for the first quarter of the prior year. Our service revenue for the quarter increased 10% to $7.8 million, compared to $7.1 million for the first quarter of the prior year. Software solutions segment contributed 25% growth in revenue to $5.1 million, compared to $4.1 million for the first quarter of the prior year. Our product revenue increased 6% to $1.3 million, compared to $1.2 million for the first quarter of the prior year. We continue to see strong gross margins for the quarter. Service gross margin came in at 60% for the quarter; product revenue gross margin, 44%; for an overall telecom services segment gross margin of 58%. That's compared to 55% in Q4 of last year. Software solutions gross margin, 73%. That's compared to 66% in Q4 and 59% -- 71% in Q1 of the prior year. Overall gross margins, 63%. Our operating expenses for the quarter decreased 2% to $13.8 million, compared to $14 million for the first quarter of the prior year. We reported net income, as Jeff mentioned, of $434,000 for the quarter, that's $0.02 per basic and $0.01 per diluted common share, compared to a net loss of $1.6 million or a $0.06 loss per basic and diluted common share for the first quarter of the prior year. We also reported non-GAAP net income of $1.9 million for the quarter, that's $0.07 per basic and $0.06 per diluted common share, compared to a non-GAAP net income of $625,000 or $0.02 per basic and diluted common share for the first quarter of the prior year. EBITDA for the quarter was $1.3 million, compared to a loss of $666,000 for the first quarter of the prior year. Adjusted EBITDA came in at approximately $2.1 million; that's compared to $749,000 for the first quarter of the prior year. We ended the quarter with a strong cash balance of $11 million; that's compared to $10.3 million at December 31, 2023. We used $166,000 for operating activities during the quarter, mostly to pay down accrued liabilities and accounts payables balances. Cash used for investing activities was 0 for the quarter, compared to $9,000 in the prior period. And cash provided by financing activities for the quarter was $859,000, compared to cash used for investing (sic) [ financing ] activities of $200,000 for the same period of the prior year. I will now turn it over to Doug Gaylor, our President and COO, for additional comments on business and sales.

Thanks, Ron. We had another very strong performance in Q1, and I'm very pleased with our momentum to start 2024. Our 14% year-over-year increase in Q1 revenues, along with our third consecutive GAAP profitable quarter, were the direct result of our focus on growing organically and managing to the fundamentals. We had GAAP net income of $434,000 for the quarter, or $0.02 a share. And on a non-GAAP basis, we had strong non-GAAP net income of $1.92 million for the quarter, or $0.07 per share, and this is our 22nd consecutive quarter with non-GAAP net income. Our results for the quarter continue to highlight our success in managing costs and recognizing significant synergies from our acquisitions, allowing us to quickly leverage the opportunity to grow our business. Our entire team worked tirelessly together to improve business processes and make our company more efficient, and we believe we will continue to see more efficiencies and cost synergies as we continue our growth. We had significant organic growth in both segments of our business for the quarter. Our software solutions segment achieved 25% organic growth year-over-year, while our telecom services segment saw a 9% organic growth rate for the quarter. The combined 14% organic growth rate highlights the growing demand for our products and services. The 25% organic growth rate in our software solutions segment allowed us to eclipse the 4.5 million users mark on our platform during the quarter. The rapid growth we are experiencing on our platform was further highlighted by Frost & Sullivan awarding us their 2024 North American Strategy Leadership Award during the quarter and highlighting our outstanding 36% user surge in 2023, which was nearly double the industry average. Our Crexendo licensees and agents continue to benefit from the rapid migration by small and midsize and enterprise-level businesses to the cloud. And our licensees continue to grow. And as they do, they need additional services and increase their spend with Crexendo. Our telecom services segment grew at 9% organically, and we continue to see strong demand for our offerings from our channel partners and saw an 85% growth rate in our sales from our master agent partnerships compared to Q1 of 2023. Our channel partners sell our services to their prospects and customers on a revenue share basis, and we continue to see nice growth from our existing channel partners, who have great confidence in our solutions because of our 100% uptime guarantee and our best-in-class customer service and customer satisfaction results. And that was further highlighted by our 19 first place awards in Q1 from the leading industry review site, G2.com. Our backlog continues to grow and is now at $67.4 million, an increase of 41% from Q1 of 2023. Our backlog number is the sum of the remaining contract values of our telecom services and our software solutions customers that will be recognized on a sliding scale over the next 60 months, and it's a strong indicator of our future revenue stream. We continue to focus on improving our gross margins and saw a nice increase from 69% at the end of Q4 to 73% in Q1 gross margins in our software solutions segment. And in our telecom service margins, they increased from 60%, compared to 58% at the end of 2023. And the telecom services gross margins continue to be affected by the lower margins from our Allegiant acquisition that really focuses on MSP services. But without that, we're still seeing nice growth in our gross margins. And our telecom services product margins were also up quarter-over-quarter from 44%, compared to 40% at the end of last year. We recently released our version 44.1 software on our platform that continues to enhance and expand our product offerings. With our enhanced API integrations, we're seeing more and more artificial intelligence applications being developed and deployed on our platform. With hundreds of third-party developers building solutions to integrate on our platform, we're on the leading edge in regards to delivering AI-type solutions that every end user and every end user business can use and afford. As we've mentioned previously, our past acquisitions have been remarkably successful, and we are proactively looking for our next synergistic acquisition to complement our organic growth. We're optimistic that our efforts will result in significant inorganic growth opportunities in the near future. We started 2024 with a strong first quarter and had a lot of momentum, and I couldn't be more excited about the future direction and opportunity for Crexendo. We continue to execute well on our plan for organic and inorganic growth and increasing margins and managing expenses. Our rapid end user growth highlights that there is still great demand for our product offerings and solutions, and the future enhancements and developments around AI will ensure that, that demand continues. We're also committed to delivering the best UCaaS, CCaaS and CPaaS offerings in our sector to our customers and our partners and the best return for our shareholders, and that's evident by our continued growth and our continued success. I'll now turn it back over to Jeff for any further comments.

At this time, I don't have any further comments. So Olly, I'd like to open the call up to questions, please.

[Operator Instructions] Our first question is coming from Mike Latimore, with Northland Capital America.

All right. Great. Great to see the strong results and also the growth in the backlog at the same time here. The service gross margin moved up nicely here sequentially. I guess, can you talk a little bit about what happened there? And is that a sustainable level?

Well, historically, we've seen our gross margins in that segment anywhere from 66% was the low in Q4. But typically, it bounces around 71%, 72%. So it's at 73%. We had a strong quarter with the 25% growth, and it's very strong. But we think it is very maintainable in that 72% to 73% range [software solutions? ]

Great. And then you mentioned the, I think it was the 85% growth in the master agent channel. I guess, can you talk about that a little bit? These master agents, they have a pretty broad portfolio. You clearly are outperforming their mix there. And maybe give a little highlights on kind of how you're working with those channels.

I'll start with a little bit of that, and then I'll have Jon add a little bit more color. So the master agents that we've worked with out there, we've got a couple of them that we work extremely, extremely close with. And you're right, Mike, there's a lot of competitive factors out there. And so we really believe that highlighting our customer satisfaction and our customer surveys out there on G2.com probably sets us apart from all of the other competitors out there. So although these master agents have the choice to pick from anybody, if they're going to hang their hat on somebody's recommendation, they're going to highlight the fact that we've got the best customer satisfaction out there. And so that's really helped us improve those sales with those agents. It takes a lot of work to get these agents to recognize the benefits of Crexendo over the competition. But once we get them hooked, then they're sold on Crexendo and we see a lot of repeat business out of them. So Jon, do you want to add a little color on some of the success that we've seen over the course of last year?

Mike, so this is an area that we've invested in a lot over the last couple of years. I would tell you we have a great team that supports this channel. And when you take that, some of the programs we run and, as Doug mentioned, the G2 customer satisfaction ratings, it's just an area that we continue to see great growth in, and we're going to continue to drive for growth through this type of partner and this opportunity. So we've expanded this program a bit, we've got awesome people that are involved in supporting those partners and we're excited to see the continued success there.

Okay. Great. And then just last one for me on the software business. I think you talked about expecting kind of steady subscriber count growth there. As you look forward, is it mostly coming from your base? Or are there going to be increasing kind of replacement opportunities here? Maybe just talk about the source of that growth that you expect.

Mike, I'll let Anand answer that for you. But in general, it's both.

Mike, yes, that's exactly right. I mean, if you look at the 220-plus service providers that we have, they themselves are kind of growing at twice the industry average, on average. And then at the same time, obviously, the new logos that we bring on, they have a variety of different strategies from cap and grow or they're migrating people off pretty dramatically into our platform. So the reality is it's actually both, and we continue to see that. Now with the new logos, obviously, depending on what their strategy is, their ramp is a function of how they're migrating and/or bringing on new providers. But the folks that are already in play that have been with us for multiple years are just steadily increasing pace.

Mike, hold on. Jon wants to add something.

I'd just add to that, Mike, we talked before about really having good success and growth in the legacy Cisco BroadSoft and Microsoft Metaswitch partners who tend to have larger bases. And as Anand discussed, we see some of them now choosing to migrate customers to us over time. So there's the organic growth in the base of partners that we have, but there's some opportunity there for share shift that is part of what the formula is that we're using there.

Do you think it will skew more towards that share shift over time? Or is the balance going to be similar somewhat?

Well, we mentioned in the comments Frost & Sullivan benchmarked us at growing at about double the rate of the market. And we see us continuing to do that using that same formula of organic growth and then some migration from existing -- from legacy providers.

Our next question is coming from Josh Nichols, with B. Riley.

Great to see another profitable quarter with some nice margin expansion. I want to ask just because I think you touched on it really briefly on the call. The company has got back to consistent GAAP profitability. But are you thinking about maybe investing a little bit more to capitalize on some of these opportunities? I know OpEx was down slightly year-over-year in the first quarter, but I'm just curious how you're thinking about balancing profitability versus growth for the remainder of the year.

Well, it's a double-edge sword. Obviously, if we start doing acquisitions, we will -- the intangible costs associated with that will knock us out of GAAP profitability. While we are going to consistently make investments into the business, and that runs from quarter-to-quarter different investments we make, we would hope the investments would not challenge the GAAP profitability. But if there was something that we needed to do to make a game-changer or to solidify our position, we would make that investment.

And then just looking at the margins here, overall, 63-plus percent gross margin. Very, very healthy, supported by software but also the services piece of the business getting north of 60%. One is, do you think that, that margin level is sustainable for the remainder of the year? And then 2, if you could kind of elaborate a little bit on what kind of impact do you think getting everyone over to the NetSapiens VIP platform by the end of this year could have in terms of potential savings.

So I'll speak to the margins. So overall gross margins at 63% is a nice improvement over the prior quarter. If you look back to Q3, we were at 61%. So we've bounced around the 59% to 63%, and we think a 60-plus is the right spot to be. And we've seen margin expansion both in telecom services revenue, our product revenue as well as software solutions. So we're seeing it across the board, and that's why we think that's a sustainable amount, somewhere in that 60% range, low 60% range.

And on the migration front, Josh, we're probably closing in on 80% of our Classic customers migrated over to our VIP platform. And as we get to the final 20%, we anticipate, as Jeff said, being completely migrated by the end of the year. And that will pick up huge savings for us because we won't have the dual cost of running 2 platforms, 2 data centers, the extra resources required to manage the data center here in our Phoenix office for our Classic system. So we anticipate that migration continuing on track. We've got great success going on with it right now. And when we get completely off of it, we'll see some significant cost pickup there.

Not to mention, on top of that, we have staff and engineers that are working strictly on the Classic system, which we will be able to morph over to the VIP or hosted, too. So it will give us better staff distribution on top of all the cost savings. So we're very excited about that.

[Operator Instructions] Our next question is coming from Eric Martinuzzi, with Lake Street.

I had a question. You've talked about 2024, anticipating double-digit growth. I know sometimes quarter-to-quarter can be a little bit squirrely, especially on the software solutions side. But is the expectation that Q2 would be up sequentially versus Q1 based on what you see in the pipeline?

It's a little early in the quarter for us to answer that, to be perfectly honest. But as I said, we fully expect double-digit growth over the year. As you're right, particularly on the software solutions side because that's a much longer sales cycle, we see some variance from quarter-to-quarter. But looking at what we have in the pipeline for the year, I'm still quite confident of double-digit growth.

Okay. And then I wanted to -- I didn't know that I completely understand the Oracle cloud relationship. What part of the business is this impacting? And then what could we see as a potential benefit, whether it's gross margin or customer service?

Well, it shouldn't affect customer service. It's strictly on the software solutions side of the business. Essentially, they are going to be taking over all the hosting for us. While there are some initial costs upfront, this will be a substantial cost savings to us as we go over the years. We have a large staff who are managing all the data centers we have. We have to have them available to troubleshoot, to deal with things. That, like moving Classic to VIP, will enable us to move some of those staff to things where they can be doing something much more customer-facing and customer-centric. So we expect it will be a game-changer in that we will be providing completely reliable service. And some of the other benefits are they're masters at security. We have a staff who watches it. We're good at it. We're not as good as they are. They have other ancillary services they provide that they are better at than we are. So what we decided was a distribution of the work. They're going to do what they're great at. We're going to be providing the rest of the platform. And we are going to continue to be the top platform in the country and, hopefully, the world soon. Anand, do you want to add anything to that?

It's very scalable. When we talk about the international markets, we're seeing a lot of growth there in the international markets. This allows us to penetrate international markets that we haven't even touched yet and be able to bring them up fairly quickly.

Jon, did you want to add anything?

No, I think Doug hit it right on the head. I mean, I think expansion and scale is very, very important. And to be able to do it very quickly and efficiently, I think that's a big driver for what we're doing based on the demand that we see from the marketplace.

Our next question is coming from Chris Sakai, with Singular Research.

Just sort of wanted to comment and ask about the international expansion that OCI will help with. Where are you seeing the most potential for the international expansion? And where is this possibly already being used?

So Chris, where we see it, obviously, we already have data centers out in both Amsterdam and in London. We have customers out in Germany, in the U.K. We also see footprint expansion, I think we talked about this last time as well, in Australian markets as well and now into APAC and some of these other areas. So what Oracle allows us to do is, in essence, extend our existing infrastructure out very easily into those particular localized markets.

And by the way, they will speed up the amount of time that we can do an installation in considerably because of all the services they provide. So that will also be a beneficial game-changer for us and particularly competing in Europe and other parts of the world.

Thank you. As we have no further questions on the lines at this time, I will hand it back over to Mr. Korn for any closing remarks you may have.

Thank you, Olly. I just want to thank everybody for their time and attention. We're very excited to have announced the results we did today. And as soon as we finish this call, we're all going to roll our sleeves up and get back to work and try and continue to keep this train running. So again, thank you very much, and we look forward to talking to you when we announce our Q2 results. Good afternoon, everybody.