Crexendo, Inc. (CXDO) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Crexendo first quarter 2015 earnings conference. Today's program is being recorded. At this time, I would like to hand things over to Chief Executive Officer, Mr. Steve Mihaylo. Please go ahead, sir.

Thank you, Lisa, and good afternoon, everyone. I am Steve Mihaylo, CEO and Chairman of Crexendo. I want to welcome all of you to the Crexendo 2015 first quarter conference call. With me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; Satish Bhagavatula, our CTO and CIO; and Jeff Korn, our Chief Legal Officer. I am going to ask Jeff to read our Safe Harbor statement, after that I will give some brief general overview comments relative to the quarter. Ron will provide some granularity to the numbers. Doug will provide a business and sales update. Satish will give an update on technology. And then we will open the call up to questions. Jeff, would you please provide the Safe Harbor statement?

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 fact are forward-looking statements. Forward-looking statements include, but are not limited to words like, belief, 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 on the call 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, 2014, and the Form 10-Q for the period ending March 30, 2015. Crexendo does not undertake any obligation to publicly update or revise any forward-looking statements, whether result of new information, future events or otherwise. I'd now like to turn the call back to Steve. Steve?

Thank you, Jeff. This quarter has been pretty close to what I expected. I say this often, but it is a very important point in understanding our business. We are a mature company, but our telecom business is a three-and-a-half-year old startup, and we are in a growth phase. We will have challenges, but we meet them head on. Having that fighting spirit is a huge benefit to us. We are very willing to accept input from clients and adopt their technology to meet their needs. We are particularly meeting the needs of enterprise clients by quickly adapting our software to allow for specific needs quickly. This attentiveness to customer needs was why we succeeded with a large number of enterprise customer sales in Q4 as well as a large number of equipment sales during the quarter that were installed in Q4. We had a strong sales booking quarter in Q1, but were not able to get as many sales installed during Q1. And that is one reason our quarter-over-quarter revenue numbers were down slightly in Q1, as well as the fact that we still booked revenue from our stores online business that was mostly completed in Q4 2014. With that said, our Q1 backlog is up 13% over Q4. And I believe that is the most important metric to show we are in a growth mode. I am also very excited by the increasing contributions from our dealer partner channel. We continue to have qualified dealers, and we continue to grow sales from that channel. We are adding internal staff to work with the dealers to be even more responsive to the needs of our dealers and their end-user customers, as they bring them on to the Crexendo platform. I believe this is one of the most important things we are doing. We are continuing hard to work to add qualified direct sales people, and we are working to add inside sales and leads developers. This is also very important to our future growth. The timing of this is particularly good due to the market acceptance of our services and product offerings. Speaking of our service and product offerings, we are continually adding software apps and services that our customers need. We believe that this gives us a competitive advantage. We do this while keeping a laser focus on cost. We are able to outsource some of the initial development work, while our highly trained engineers act as project managers with the outside developers. We are continually cutting cost out of our business without compromising service levels. Cash burn from operations in Q1 continued to decline, and our team and I watch this very carefully, because we know that how we spend money is essential to our mission of cash flow breakeven and profitability. We continue to be on track for the rollout of our new endpoints. The initial testing and customer comments have been very positive. The sleek design and customer-friendly software apps convince me that they will be a big value-add for us. I think that in the future, the new phones will help us with some big accounts, lower our costs and increase our margins. I continue to be very excited and confident about our future. I am very happy with quality of our service and products and the quality enthusiasm of our very talented people. I know we are in the right space, and I know we have the best service and products in the industry. With that, I'll turn the call over to Ron. Ron would you like to give us some granularity on the numbers?

Thank you, Steve. We reported consolidated revenue for the first quarter of $1.9 million compared to $2.1 million for the first quarter of the prior year. Our Hosted Telecommunication segment contributed $1.3 million for the first quarter, up 39% compared to $955,000 contributed in the first quarter of the prior year. Our Web Services segment contributed $528,000 for the first quarter, down 53% from $1.1 million contributed in the first quarter of the prior year. Consolidated operating expenses for the first quarter decreased 14% to $3.2 million compared to $3.7 million for the first quarter of the prior year. On a GAAP basis, the company reported $1.2 million net loss for the first quarter or a loss of $0.9 per diluted common share compared to a net loss of $1.6 million or a loss of $0.15 per diluted common share for the first quarter of the prior year. Non-GAAP net loss was $676,000 for the first quarter or $0.05 loss per common diluted share compared to non-GAAP net loss of $1.4 million or $0.13 loss per diluted common share for the first quarter of the prior year. EBITDA for the first quarter was $1.3 million compared to $1.4 million for the first quarter of the prior year. Adjusted EBITDA for the first quarter was $860,000 compared to $1.3 million for the first quarter of the prior year. Total cash and cash equivalents, including restricted cash at March 31, was $2.2 million compared to $4.3 million at March 31, 2014. Cash used for operations for the period was $756,000 compared to $1.3 million for the same period of the prior year. Cash used for investing activities for the period was $4,000 compared to cash provided by investing activities of $2 million for the same period of the prior year. Cash used for financing activities was $61,000 for the period compared to cash provided by financing activities of $23,000 for the same period of prior year. With that, I will turn it back over to Doug Gaylor, our President and COO, for additional comments on operations.

Thanks Ron. We had a strong sales bookings quarter for Q1, and for the fourth straight quarter our bookings steadily increased than the previous quarter. Our new sales from both the direct channel and the partner channel increased from our strong Q4, and helped increase our current telecom backlog by 13% to $11 million. We continue to pursue and secure larger-size transactions and had numerous sales during the quarter with a 100-plus stations. I believe with the rollout of our newly released Crexendo end-points that Steve mentioned, along with enhanced ACD and feature releases, this trend should continue. In combination with increasing our sales bookings, we also saw a significant cost savings initiatives contribute nicely to our efforts to reach profitability. On the sales front, both our direct and partner channels had new sales bookings increases quarter-over-quarter. Our direct sales team is focused on larger multi-location accounts, continues to produce strong results and bigger average sales transactions. Our sales successes during the quarter saw some large call center opportunities, a large city municipality, multiple educational facilities, and a new national account. Our ability to customize reports, features and solutions for these types of clients is critical to our success and is a value-added differentiator over many of our competitors. Our direct sales concentration on specific verticals, where we have had strong success continues to add new customers in these verticals, and establishes Crexendo as the go-to-solution in these specific industries. We have shared these direct sales, channel approaches and success stories with our partner channel, and had a very productive three-day business partner conference event at the end of January, where we trained and educated our partners on how to have more success with the Crexendo solutions. I think that our focus in this regard is why our dealer program is producing as well as it does. We continue to add new partners to our channel and continue to train and enhance our offerings with our partners. We added two master agent partners to our channel during the quarter and are extremely excited about these relationships, as it introduces the Crexendo solution to over 300 independent sales agents across the country. Training will begin during Q2 for these agents, and we are excited to see positive contribution from these relationships going forward. As the partner channel is critical to our success, I am please with the response and the contributions we are getting from the channel now, and only expect better contributions in the future. As we announced on our last call, we introduced a new series of telephone endpoints during Q4, and I am very pleased with the acceptance and performance of these new phones. In addition, we have two additional phone models currently in the final stages of testing that will be released in the next few months that will help complete our full suite of Crexendo phone instruments. As a majority of our phone offerings will be designed and developed by Crexendo, we would be able to realize higher margins and have more control of our product offerings as opposed to our previous arrangement where we were subject to the pricing and development control of a third-party. We constantly review our cost structure in the organization, and we are continually evaluating cost control measures to help quicken our path to profitability. These efforts made a considerable impact on our reduced losses and reduced cash burn for the quarter. As many of these initiatives are based on timing, we hope to see additional cost savings impacting our bottomline in the quarters ahead. Our operation's team continues to do a great job on fulfillment and customer implementation. As the size and complexity of our installations continues to increase, it is imperative for us to have a very detailed customer oriented process to assure smooth and efficient cutovers to the Crexendo solution. Based on the customer satisfaction surveys we do on every new installation, I'm very pleased with our high-level of customer satisfactions from every level. Although, we had a slight decrease in telecom revenue from Q4 to Q1, coming off to significant 30% increase in telecom revenue that we saw from Q3 to Q4, I am confident that we have the right focus and momentum with any organization growing forward. Our telecom backlog increase of 13% this quarter and 11% last quarter are key indicators that we are building a strong recurring revenue stream for the future. The opportunity pipelines from both our direct and partner channels, continues to grow and improve, and with our award-winning technology serving us the foundation for our growth, we're positioned nicely to execute on our plans for growth and profitability. I will now turn it over to Satish Bhagavatula for our engineering and technology update.

Thank you, Doug. Greetings everyone. I'm glad to report that we made significant improvements to our telecom services, products, and technology during Q1 to meet the demands of larger multi-location enterprise opportunities. We continue to see such opportunities in both the direct and partner channel. Our earlier Q4 efforts to streamline service cost, product directions, development priorities and resource realignment are starting to payoff greatly. I'm confident this realignment of product development and operational engineering costs on our telecom product will yield greater efficiencies and agility in meeting the demands of our ever growing customer base. As our telecom customers continue to increase, we have seen a remarkable growth in the traffic and stress on our infrastructure. Our efforts to sunset underperforming carriers while consolidating our VoIP origination and termination has proven to be beneficial on all fronts. This initiative has yield greater efficiencies, improved quality, and enormous cost reduction, thus helping with our overall service margins. In Q1, successful deployment of larger multi-location enterprises and call center applications demonstrated that our infrastructures is scalable and that it can withstand the continued growth of the Crexendo base both in volume and complexity of each customer deployment. A notable accomplishment that I would like to report is the great overall performance and uptime of our cloud infrastructure. We are very pleased with the results we have seen and hope to continue the great trend going forward. We are currently evaluating potential vendors and solutions to realize our geo-redundant load-balanced cloud architecture and strategy over the next three years. This continuous analysis, monitoring and evaluation process enables us to be the best in the cloud service provider. On our product development side, we continue to rollout new updates every six weeks. During Q1 of 2015 much of the emphasis on telecom product development was spent on enhancing our Crexendo platform to address specific requirements of recently deployed larger multi-location enterprise and larger call center customers. Our ability to meet the changing business requirements of our customers, and the agility in developing features quickly to meet such needs is paramount to achieving greater levels of customer satisfaction. During Q1, we were able to displace both a cloud call center solution and an on-prem phone system at the same time with Crexendo's single unified cloud solution. These deployments of a large call center has proven the elasticity and scalability of the Crexendo's product and service offering. Our new Crexendo desktop CX240 and CX340 have been received very well both by our customers and partners. Product teams also spend considerable time improving our browser-based Crexendo Cloud Communicator. We added directory integration along with drag and drop, and call part functionality. We enhanced the screen part functionality to seamlessly work with web-based CRM such as Salesforce. Many of our customers have strict content archival requirements, and therefore we added cloud storage Dropbox integration to meet such requirements to allow our customers to archive their voice mails, faxes and call recordings for long-term storage. We improved our security features to protect both our customers and our infrastructure against international toll fraud by adding daily call limits. Such features are essential building blocks and are very important to be able to mitigate our changing landscape of cyber threats to small, medium-size enterprise customers and service providers. Our design and development of our newer family of cost reduced endpoint is progressing well. We are confident our value-add continues to increase as we continue to enhance and build our telecom product portfolio and the infrastructure that supports it. We continue to look into synergistic technology partnership opportunities to augment our internal product development and does meet the need to innovate rapidly and provide quick time to market. We continue to adopt more cloud technologies to allow for greater automation of our business, which in turn improves our margins and enables us to better serve our customers. With that, I will now turn it back to Steve Mihaylo. Steve?

Thank you, Satish. Lisa, we're open for questions at this point. All right, Lisa, it looks like there are no questions. I would like to just add a few closing comments. Obviously, now we're to the point where most of the revenue is telecom, so we should get a quarter-to-quarter comparison that makes sense. Comparing to the previous year is still going to be a bit distorted, because of our extended term payments on the old business, but that is mostly collected in the fourth quarter of last year and a little bit more in the first quarter of this year. Going forward, there's two things you need to look at. You need to look at our use of cash, which can down by about 45% quarter-over-quarter. So we're making good progress in that area. It's a combination of starting to see very nice gross margins, lowering expenses, and even more of a laser focus on cash usage. The other metric that you need to be looking at is our backlog. And as Doug pointed out, it grew by 39% -- or I should say, 13%; sales grew 39% quarter-over-quarter, which is quite amazing when you consider the fact that there were still quite a few extended payment terms in there. The long and the short of it is we're ready to really put their accelerator to the paddle here. We're adding more inside and outside sales people, more dealer partners, and we're also looking at customer acquisitions as well as strategic acquisitions. I remain as committed as before and I will be increasing the sales price of my 10b5-1 plan on Friday once we are out in the quite period. So all of these are an indication of my support of the company and I intend to support the company as long as it takes, but I think we're getting closer and closer each quarter. And I appreciate everyone's support and look forward to talking to you next quarter. With that, I'm going to say, thank you very much for being here. And we'll talk to you next quarter. Thank you, Lisa.

Thank you. Once again, ladies and gentlemen, that does conclude today's conference. Thank you all for your participation.