CXDO - NASDAQ

Greetings, and welcome to the Crexendo Second Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Jeff Korn, Chairman and CEO at Crexendo. Jeff, you may begin.

Thank you, Paul, and good afternoon, everyone. Welcome to Crexendo's Second Quarter 2025 Earnings Call. As Paul just said, I'm Jeff Korn, Chairman and CEO. With me in the room today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; Jon Brinton, our CRO; and Anand Buch, our Chief Strategy Officer. In a moment, Jon will read the safe harbor statement. After that, I'll provide an overview of our performance and strategy. Ron will then dive into the financials, and Doug will close with an operational and business update before we open it up for 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 either 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 fiscal year ended December 31, 2024, 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 over to Jeff. Jeff?

Thank you, Jon. I'm pleased to report another exceptional quarter for Crexendo. We continue to deliver consistent and impressive profitable growth. This growth in our results underscore the scalability of our business model and the strength of our team. Q2 was highlighted by significant success in our Software Solutions segment, combined with growth in our Telecom Service segment as well as the achievement of key operational milestones. I'm pleased, as you know, we reported a 13% increase in total revenue to $16.6 million, driven by a remarkable 31% year-over-year organic growth in software solutions revenue. Our GAAP net income was $1.2 million, and we delivered $2.8 million in adjusted EBITDA. This marks our eighth consecutive quarter of GAAP profitability and our 27th consecutive quarter of GAAP net income. This is clear evidence that our strategy is working and Crexendo is on a very solid trajectory. Our software platform continues to be a critical engine of our success. As you know, we surpassed 6 million users on our software platform and are marching towards 7 million users. Our ability to scale efficiently was reflected in the continually strong margins we achieved. We are very encouraged by the momentum in our licensee and partner ecosystem, which continues to gain traction in the wake of disruption from legacy vendors like Metaswitch and BroadSoft. Our differentiated architecture with session-based pricing, open APIs, and flexible cloud or on-premise deployment continues to resonate with customers seeking control, scalability and reliability. Simply put, we are building the platform of the future and the market is responding. If you want the best products, services, people and pricing, there really is no other choice. We continue to invest in the business and to expand our AI capabilities. And we are expecting to roll out over the next several quarters additional initiatives, including AI call bots and AI operator functions and messaging. This is in addition to the services already rolled out. On the telecom side, while the UCaaS landscape remains competitive, we continue to take a disciplined approach. We are not chasing growth at the expense of profitability. Our award-winning VIP bundle and industry-leading customer satisfaction scores as validated independently by G2 are helping us win in the right way sustainably and with long-term margin expansion in mind. With that said, we continue to look at aggressive promotions to compete with others in the space, but we'll only do that if it leads to profitable and scalable business. Importantly, we are executing well against our strategic priorities. We are in the final stages of sunsetting our classic platform, which will reduce operational drag and free up internal resources. At the same time, we are aggressively migrating to Oracle Cloud Infrastructure, OCI, a move we expect to yield significant cost savings and improve focus on innovation and customer success. These infrastructure initiatives will help us to continue to improve margins and drive long-term efficiencies in 2026. This is particularly impressive as we continue to invest in the business. We have no intention of resting on our laurels, and we are continuing to build the future of telecom, software and services. We also remain focused on inorganic opportunities. We are actively reviewing several potential acquisitions, including smaller tuck-ins as well as larger opportunities. I and the team, however, remain disciplined and focused that any acquisition we pursue will be accretive and aligned with our vision of strategic profitable growth. With a strong cash position of $23.5 million and growing cash flow from operations, we are well-positioned to support continued innovation, strategic M&A, and enhanced shareholder value. Finally, our ecosystem vendor partner program, EVP, as we call it, continues to gain momentum. As we lean into AI, analytics and automation, our open architecture is enabling new integrations that drive real value for our partners, further differentiating our platform from the market and continuing to get us to lead with our open APIs, which is a strong strategic advantage for us. In closing, I've never been more optimistic about where we are and where we're going. Over the last 2 years, we've transformed Crexendo into a high-growth, consistently profitable software company with a clear vision and strong execution. We are building a flexible, scalable, and future-ready platform, one that puts customer success and long-term value creation at the center of everything we do. With that, I'll turn the call over to Ron to walk through the financial results in more detail. Ron?

Thank you, Jeff. Good afternoon, everyone. Consolidated revenue for the quarter increased 13% to $16.6 million compared to $14.7 million for the second quarter of the prior year. Our service revenue for the quarter increased 4% to $8.4 million compared to $8.1 million for the second quarter of the prior year. Our software solutions revenue for the quarter increased 31% to $7 million compared to $5.3 million for the second quarter of the prior year. And our product revenue decreased 7% to $1.2 million compared to $1.3 million for the second quarter of the prior year. Our remaining performance obligations increased to $83.5 million at the end of the second quarter compared to $81.9 million at the end of the first quarter of this year and $71.2 million at June 30 of the prior year. Operating expenses for the quarter increased 10% to $15.4 million compared to $14.1 million for the second quarter of the prior year. The operating margin for the quarter increased to 7% compared to 4% for the same period of the prior year. Net income of $1.2 million for the quarter, that's $0.04 per basic and diluted common share compared to a net income of $600,000 or $0.02 per basic and diluted common share for the second quarter of the prior year. Non-GAAP net income of $2.9 million for the quarter, that's $0.10 per basic and $0.09 per diluted common share compared to non- GAAP net income of $2.1 million or $0.08 per basic and $0.07 per diluted common share for the second quarter of the prior year. EBITDA for the quarter was $2 million compared to $1.4 million for the second quarter of the prior year. Our adjusted EBITDA for the quarter came in at $2.8 million as compared to $2.2 million for the second quarter of the prior year. Cash and cash equivalents at June 30, 2025, was $23.5 million compared to $18.2 million at December 31, 2024. Cash provided by operating activities for the 6-month period of $2.5 million, that's compared to $2.5 million in cash provided by operating activities for the same period of the prior year. Cash provided by financing activities for the 6-month period generated $2.7 million compared to cash provided by investing activities of $800,000 for the same period of the prior year. Primarily related to $3 million net cash received from the stock option exercises and RSUs, offset by $3.3 million in notes payable repayments and finance lease payments. With that, I'll turn it over to Doug Gaylor, our President and COO, for additional comments on sales and business operations.

Thanks, Ron. We continue to execute well on our business plan and had a strong Q2 layered on top of a strong Q1 to start the year. We had a 13% year-over-year increase in revenue for the quarter and a 212% year-over-year increase in GAAP profitability combined with strong positive cash flow. This was our eighth consecutive quarter of GAAP profitability and 27th consecutive quarter of non- GAAP net income, and the results were a direct result of our focus on growing organically and profitably. Our continued success earned us a coveted inclusion in the Russell 2000 Index that was announced during the quarter. Our GAAP net income of $1.23 million for the quarter and non-GAAP net income of $2.9 million for the quarter were reflective of our success in managing the fundamentals of the business and continuing to maximize and recognize synergies within the business. Our entire team is continually working to improve business processes and make our company more efficient, and we believe we will continue to see more efficiencies as we continue our growth. During the quarter, we successfully completed our international data center migration to Oracle Cloud Infrastructure, OCI, and have closed down our international data centers, and we continue our U.S. data center migrations that should show additional meaningful cost savings over the next 12 months. We continue to see tremendous organic growth from our Software Solutions segment of the business, which grew 31% over Q2 compared to Q2 of 2024 and has seen a 32% growth for the first half of the year for 2025 compared to the first half of the year of 2024. In addition to strong upgrade orders from our existing licensees, we won one new logo from Metaswitch for the quarter and one new logo from Cisco's BroadSoft in the quarter as we continue to see opportunities created by uncertainties created by our two largest software solutions competitors, Cisco's BroadSoft and Metaswitch. Our unique pricing and support model for our software solutions platform, combined with our robust feature set allows us to differentiate ourselves from the rest of our competition at a much stronger price point than they might currently be paying. Our Telecom Services retail segment grew at 2% organically for the quarter. Our telecom service revenue was up 4% organically, offset by a reduction in product revenue of 7% to reach the blended 2% increase. As previously stated, we have proactively reduced selling some lower-margin product opportunities to maintain margins, thus the decrease in product revenue and increase in segment gross margins. We continue to see strong demand for our offerings from our channel partners and our master agent technology service distributors and expect retail segment revenue to continue to grow at a faster pace. The master agent technology service distributors saw an 88% increase in sales bookings year-over-year, and we expect that momentum to continue. As Jeff previously mentioned, we are focused on profitably growing this segment, and we are not pursuing low margin or unprofitable retail opportunities. Our remaining performance obligation, also referred to as backlog is now at $83.5 million, an increase of 17% from Q2 of 2024. Our remaining performance obligation number is the sum of the remaining contract values for our telecom services and software solutions customers that will be recognized on a sliding scale over the next 60 months and is a strong indicator of our future revenue stream. Consolidated gross margin for Q2 was 63%, flat with Q2 of 2024. We continue to see strong gross margins in our Software Solutions segment, where gross margins improved to 74% for the quarter compared to 73% in Q2 of 2024. For the first 6 months of the year, our Software Solutions gross margins were 76%, highlighting the scalability and operating leverage we have on the software segment of the business. Our Telecom Services segment gross margin was 56%, which was down from Q2 of 2024 and flat with Q1. Our telecom service gross margins are affected by product gross margins, which declined year-over-year as a result of the decline in product revenue. We are confident that we will continue to see gross margin improvements in both segments of the business in the future as we start to recognize cost savings from our planned consolidation of our data centers to Oracle Cloud Infrastructure. Crexendo's engineering team continues to enhance and improve our award-winning technology and our platform. Our cloud-native platform with robust and advanced API integrations allows us to enhance offerings with both in-house and third-party developed solutions. Artificial intelligence is leading the charge in these developments with many new and planned releases that will make small and mid-sized businesses more efficient and more productive. We currently have a variety of AI solutions already available for end users, including our voice AI Studio, AI call recording, and contact center AI powered by ChatGPT as well as new applications that are close to being released like our AI assistant and our AI operator solutions that will help end user customers do more with less. Crexendo's performance for the quarter and first half of 2025 was very strong, and I couldn't be more excited about the future direction and opportunity for Crexendo. We continue to see strong double-digit organic growth combined with increasing GAAP profitability and strong positive cash flow. We are positioned perfectly with the combination of strong demand for our product offerings along with great solutions with a disruptive pricing model and the best and most talented workforce in the industry to continue our strong growth and success, committed to delivering the best UCaaS, CCaaS, and CPaaS offerings in the sector to our customers and our partners and the best returns for our shareholders. We're proud to be the fastest-growing platform solution in the country and excited to see how future AI enhancements will spur our growth to 7 million end users and higher. We're laser-focused on enhancing our solutions, improving our efficiencies and continuing to return strong results. And with that, I'll turn it back over to Jeff.

Thank you, Doug. Thank you, Ron. Paul, you may open the call up to questions.

[Operator Instructions] First question today is coming from Joshua Reilly from Needham.

Nice job on the quarter here. Maybe just starting off in terms of the pipeline for the second half of the year. Congrats on adding 2 licensees in the quarter. Just wanted to verify, does that bring the total active licensee count to 240? And I guess, what are you just seeing overall in terms of the setup for the second half in terms of ramping existing licensees to grow software solutions versus adding net new licensees to the mix?

Josh, I'm going to go in reverse order. We see -- we have a lot -- we have a large number of sandboxes out and a large number of people interested. So we expect to see continued growth in new licensees while also seeing growth in upgrades. Both seem to be on a strong trajectory. So we're excited about that. And the number, Doug, what is the current number of licensees do you see?

Yes. We always highlight, Josh, 235 plus, but I think that number is probably pretty accurate at 240 with the 2 additional licensees. We usually go with the licensee number when they actually go live. So when we sell an account, maybe a couple of weeks or a month before that actual account goes live. So we don't actually give an ongoing live number as of the moment, but that number is in the right ballpark.

And we do obviously promote when we get wins from BroadSoft and Cisco -- from BroadSoft and Metaswitch.

Got you. Understood. And then UScellular, obviously, is a key reseller for you on the services side of the business. I believe their acquisition by T-Mobile just closed yesterday. Do you think this could create some incremental opportunities for you? Or how are you kind of managing this relationship now that they've been acquired by T-Mobile?

Yes. I think there's a tremendous opportunity there. UScellular has been a fantastic partner for us for over 8 years now, one of our largest resellers out there. A lot of excitement going into the T-Mobile combination, and we anticipate getting to the table with T- Mobile and seeing if we can expand that great success we've had with UScellular to their team as well. So I know that we've got a tremendous amount of support with the U.S. Cellular folks, and they're excited about the merger. Obviously, they're 2 or 3 days into the merger. So there's still a lot of things that they've got to get cleared up on their end. But we had a tremendously strong quarter and first half of the year with UScellular, and we anticipate that excitement and momentum to continue with the T-Mobile acquisition. And we're hopeful that we get a really nice seat at the table with T-Mobile to expand that offering with them.

Awesome. Maybe I'll just sneak in one question on margins. Now that you've closed down the international data centers, what should we expect in terms of margin improvement for the second half of the year? Or is it going to be more weighted to next year when you're able to close down the domestic data centers?

Josh, it's going to be -- I'll let Ron give a little more detail, but it's going to be more weighted last -- next year when we close more of the data centers in the United States. And as you understand, at the same time, we're continuing to invest back in the business. So that will also have some impact.

Yes, that's right. As Jeff mentioned, we're looking for the major savings to be when we're able to shut down our U.S. data centers. So that will be next year. The shutdown of the international data centers on our original time line is a major accomplishment for us, but the incremental savings is minimal as we reinvest that into the business as we add more resources. So international will not have immediate impact in margins, but we do expect the margins to improve when we are able to shut down the U.S. So stay tuned on that.

The next question will be from Mike Latimore from Northland Capital Markets.

Excellent results, great EBITDA software growth. You touched on master agent growth being very strong. Anything in particular that spark that kind of growth through that channel?

Yes, I'll start with my thoughts, and then I'll let Jon add some color to it. But we've been working with the telecom service distributors and brokers out there for quite some time and have some really strong relationships. And those relationships just take a lot of TLC to foster and grow. And so I think as we continue to gain more momentum with them, it's because we do a great job of implementing their sales. And so if an agent brings us an opportunity and we do a great job with it, they're likely to bring us more opportunities. We always highlight our G2 customer service and satisfaction results out there. And that's pretty evident with being able to gain traction with these master agents out there. If you stub your toe with the master agents, they can put you in the penalty box. And the fact of the matter is that we've been doing a great job with them. In fact, I think we're at one of the larger master agents conference as we speak with our team and making great inroads there. But I think overall, we're real pleased with the results we're seeing there, and we continue to spend a lot of time and resources to make sure that we grow that part of the business. Jon, any additional color?

Yes. I would just add to it, Mike. Our focus there has always been to not try to partner with all of the technology services distributors, but to focus on a small group and grow with them over time. And our team has just been executing well with the partners that we're aligned with. We're making investments in their program, their community, and we're getting good word of mouth and repeat orders based on some of the factors that Doug talked about with our G2 rankings for customer service and success and implementation ability. So it's just continued pull-through of long-term investment with those partners.

Okay. Sounds good. And then, Doug, I just want to be clear that you did reiterate an expectation of growing at a double-digit rate. Is that what you said?

Yes, correct. Organically, I think we're at 13% for the year, and we anticipate staying in that double-digit organic growth range.

And what kind of -- how would you bracket software revenue growth within that?

Obviously, as you look at the organic growth, the 30% plus range that we've been in for Software Solutions for the last 3 or 4 quarters now has been pretty exceptional, and that's helped raise the bar for the whole organization. But we continue to see great success with our licensees out there. They continue to grow and expand. And as they do that, they expand with us. So as we look at where we are today, strong, strong software solutions growth combined with organic growth on the telecom services side. And as I highlighted in my comments, continuing to grow the telecom services revenue is critical for us. We'd like to get that back to double digits. Right now, we're seeing a lot more success keeping in the high double digits with software solutions, but we continue to see great success on the telecom services side as well.

Got it. And just last one, I guess, as you look at potential acquisitions, how are the valuation expectations of the targets at this point?

Eric, when I look at acquisitions -- I'm sorry, Mike, when I look at acquisitions, I try to find something that we are convinced that we can find some savings and will be accretive in no more than 3 quarters. That's the benchmark we look at.

The next question will be from Eric Martinuzzi from Lake Street.

I wanted to go a layer deeper on the RPO/backlog color that you gave. That's impressive growth there. You're up 17% year-on-year to $83.5 million. Just curious to know if the kind of the mix of the contract terms in there is similar to what we had coming out of Q1 as far as how long -- what the -- what's going to be recognized, say, in the remainder of 2025 or over the next 12 months compared to a quarter ago?

Yes. So on our RPOs, they're highly weighted to the first 3 years of the 5-year runout. If you look at our run out -- 5-year runout that we have in our footnotes. And there's $23 million in '25, remaining $27 million in '26, and $18 million in '27, then it trails off to $9 million and $5 million. So it's heavily weighted to those first 3 years because we typically sell 36- to 60-month contracts, heavily weighted in the 3-year term.

Got it. And then hardware, it is a small number, but it was below what I was modeling. I was coming in at around $1.5 million or so, and you guys did a little bit less than that. You did mention -- you called out that we're talking about product is not a focus -- low- margin product is not a focus for you guys anymore. But is there kind of any annualized number that we should be thinking about? Or is it just -- was there a one-off issue in Q2 where maybe we recognized some in Q1 and it will come back in Q3?

Yes. As we've said all along, we typically guide to the lower of our prior historical 4-quarter averages because we -- it's hard to determine when that onetime revenue comes in, whether it's a cabling job of a school district or it's the desktop phones or any other equipment we may sell on our MSP division as far as routers and switches. The timing on that is unknown. It's kind of bumpy and it comes and goes from one quarter to the next. So it's hard for us to put a big number on products when we don't know what period or what quarter that revenue is going to come in.

And Eric, on top of that, as Doug had mentioned, we are strategically looking at product and trying to disassociate from some of the more labor-intensive, very low-margin business that just doesn't make sense for us.

I think one last thing, Eric, just to highlight is that, as Ron said, it does seem to ebb and flow. But in the last quarter, we did see a higher component of customers that brought their own devices. So it used to be where the high, high majority of customers that we were selling were legacy premise-based customers. And now we're starting to see more and more customers that are moving from 1-VoIP provider over to Crexendo. So if they move from a RingCentral or an 8x8 and move over to Crexendo and they bring their existing instruments with them, we can adopt them to our system. And so we don't have a hardware component in those particular sales.

The next question will be from George Sutton from Craig-Hallum.

It was nice to see both Metaswitch and a BroadSoft licensee come over. Could you just give us an update on the movement or activity that you're seeing within those licensee opportunities?

Well, as I said previously, George, we do have a lot of sandboxes out. We do have a lot of excitement. But as you understand, it's a long sales process. So it's hard for us to give you an estimate of when we expect X number to close, but we are very excited by the interest we have seen and the discussions we're having with various potential customers.

And I will highlight that the two opportunities that we did close during the quarter were larger -- on the larger scale. And so when we look at the amount of revenue that we're seeing out of the new logos, the amount of revenue that we saw of the new logos in Q2 was considerably higher on average than we've seen in previous quarters because there were larger opportunities.

Great point. So on your new innovations and as you add AI callbots, for example, can you just walk through as you're adding these in, I assume my existing customers see the benefits and my new customers are now more opportunistic with those add-ons. Is that how this will work from a pricing perspective?

You nailed it.

Yes. We see a lot of opportunity for upsell to our existing customers. And in many cases, it might be the reason why a new customer comes on board as they see the technology advantages. So in some cases, customers have been with us for quite some time, take for granted that the system is the system, but we're constantly coming out with new enhancements and letting our customer base know about new enhancements. So instead of them going out and looking on the market to see who can handle a particular application for them, in many cases, we already have that. And so their first call is hopefully to us, and we can sell them an upsell on a new AI capability or a new feature capability within the system.

The next question will be from Josh Nichols from B. Riley Securities.

This is Matthew on for Josh Nichols. I guess to start off, I mean, product revenue and margins showed some nice sequential improvement. So do you think competitors are starting to pull back from the irrational pricing? Or what do you think the status on that is?

Competitors have not started to pull back on the irrational pricing, and the market is just as competitive as it has been. We think we're winning more because of the value of our product, services, and customer service in particular. But as we said, we're going to continue to try and expand and continue to grow.

Got it. Great. And I guess just one last one for me. I mean, just given Mitel's bankruptcy filing back in March, is there an update on the size of that opportunity for you? Or has there been any benefits from that, that you've realized recently?

Yes. This is Jon. I'll add that we continue to see -- Mitel had been kind of retracting themselves from their cloud business for some time, but we continue to see opportunity with partners who are Mitel partners overall in who are looking for a transition in our home for the future as we do in a lot of the legacy providers. So it continues to be a source for us for potential new licensees and also partners in our retail business. And we've recently made some new introductions around that portfolio that we think will be a benefit to us even more. So we continue to see in that legacy communications market partners that are finding us as the home for the next 5 to 10 years for their customers.

Paul, let's take one more question.

Okay. The final question today is coming from Jesse Sobelson from D. Boral Capital.

A lot of things have been hit on here. One last question here. I guess just on international expansion, previously, you've highlighted some strong demand in Europe. How is the international markets look for you recently? And is there any specific interest in any geographies in particular recently?

Well, international continues to expand, and we continue to do quite well there. And the advantage of OCI is -- location is almost irrelevant to us because we can sell one instance in any one country and open up a data center there. So while we primarily rely on Europe -- particularly Europe and Australia, we're willing to expand anywhere.

And this does conclude today's Q&A session. I will now hand the call back to Jeff Korn for closing remarks.

Well, thank you very much, Paul, and thank all of you for your attention. We appreciate your support, and we hope to be delivering equally as exciting news on our Q3 conference call when we'll speak to you again. So everybody, have a great afternoon or evening, depending upon where you are, and we'll speak to you on Q3. Thank you.

Thanks, everybody.