Crexendo, Inc. (CXDO) Q2 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to Crexendo's Second Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Steve Mihaylo, CEO and Chairman of the Board.

Thank you, Jeremy. Good afternoon. I'm Steve Mihaylo, Chairman and CEO of Crexendo. I would like to welcome all of you to the Crexendo Second Quarter 2018 Conference Call. With me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; and Jeff Korn, our General Counsel. I'm going to ask Jeff to read the safe harbor statement. After that, I will give some very brief general comments relative to the quarter. Ron will then provide granularity to the numbers. Doug will provide a business and sales update. And then we will open the call up to questions. Jeff, would you please read the safe harbor statement?

Thank you, Steve. I want to take this opportunity to remind listeners to this call that the 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. The 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, 2017, and the Form 10-Qs for 2018 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 Steve. Steve?

Thank you, Jeff. This was a very important quarter for us. We achieved GAAP profitability. While this is a big step and an important milestone, it is only one step on our course we have chartered. We are not spending a lot of time congratulating ourselves. We are spending our efforts to continue to work to improve sales, service and our processes. We continue to have impressive increases in the UCaaS service revenue. UCaaS service revenue for the quarter of -- the second quarter of 2018 increased to $2.3 million compared to $1.9 million for the second quarter of 2017. As you are aware, this is now our fourth quarter in a row that we achieved non-GAAP income. I believe this shows that we are on the right track. We watch every penny we spend very carefully. We believe that this is essential to properly operating the business as part of our commitment toward -- to increase shareholder value. We will continue to provide what I know is the best UCaaS products and services in the industry. We have a service that is world-class and provides substantial savings to most of our customers. I continue to believe very strongly in our company and the Crexendo team. I am convinced we will continue to grow the business organically, and we are regularly reviewing potential accretive opportunities and believe in the right -- if the right opportunity comes along, that they will be a way to further accelerate our growth. With that, I'd like to turn the call over to Ron. Ron, would you give some colors to the numbers please?

Thanks, Steve. Revenue for the second quarter of 2018 increased 22% to $3 million compared to $2.4 million reported for the second quarter the prior year. Approximately 93% of that revenue in the quarter was contributed by our telecommunications segment, which contributed $2.8 million for the quarter. That's an increase of 28% compared to $2.2 million contributed in the second quarter of the prior year. Revenue growth was driven by strong growth in both product and service revenue. Service revenue for the quarter of -- second quarter of 2018 increased 19% to $2.5 million compared to $2.1 million reported for the second quarter of the prior year, and product revenue for the second quarter of 2018 increased 44% to $437,000 compared to $303,000 reported for the second quarter of the prior year. Year-to-date revenue increased 22% to $5.8 million compared to $4.7 million reported for the same period of the prior year. Year-to-date service revenue increased 20% to $5 million compared to $4.1 million reported in the same period the prior year. Product revenue increased 38% to $803,000 compared to $582,000 reported for the same period the prior year. On a GAAP basis, the company reported net income of $47,000 or breakeven basic and diluted common share for the second quarter of 2018. That's compared to a net loss of $256,000 or a $0.02 loss per basic and diluted common share for -- reported for the second quarter of the prior year. Year-to-date, we have reduced our net loss by $755,000, down to $16,000 loss for the 6 months ended June 30, 2018. That's breakeven per basic and diluted common share compared to a net loss of $771,000 or a $0.06 loss per basic and diluted common share reported for the same period of the prior year. On a non-GAAP basis, net income for the second quarter was $178,000 or $0.01 basic and diluted common share compared to a non-GAAP net loss of $66,000 or breakeven for basic and diluted common share reported for the same period of the prior year. Year-to-date non-GAAP, the company reported net income of $195,000 or $0.01 per basic and diluted common share compared to a non-GAAP net loss of $226,000 or a $0.02 loss per basic and diluted common share reported for the same period the prior year. EBITDA for the second quarter was $71,000 compared to a loss of $192,000 for the same period the prior year. Adjusted EBITDA for the quarter was $184,000 compared to a loss of $60,000 for the same period the prior year. The company reported EBITDA of $27,000 for the 6 months ended June 30, 2018, compared to a loss of $646,000 reported for the same period of the prior year. The company reported adjusted EBITDA of $202,000 for the 6 months ended June 30, 2018, compared to a loss of $216,000 reported for the same period the prior year. Cash, cash equivalents and restricted cash of $1.4 million at June 30, 2018, and December 31, 2017, respectively. The company utilized $32,000 of cash for operating activities during the 6 months ended June 30, 2018. The company utilized $136,000 for investing activities, and financing activities provided $226,000 of cash during the 6 months ended June 30, 2018. With that, I'll turn it over to Doug Gaylor, our President and COO, for additional comments.

Thanks, Ron. We continue to see nice growth on our telecom revenue numbers and are pleased that we have reached the milestone of GAAP-positive earnings for the quarter. Our concentration on increasing sales and reducing costs has resulted in non-GAAP profitability, now for 4 straight quarters as Steve mentioned, and the 22% total revenue growth and 28% telecom revenue growth year-over-year were significant. And we continue to work towards doing even better, and we are confident we have the right platform and offerings in place to make that happen. We continue to see strong contributions from our partner channel and had multiple 6-figure total contract value sales by our partners during the quarter. Some of our new partnerships that we've previously announced are having early successes and they're building strong pipelines. We continue to work on improving the channel and one action we took in Q2 was promoting Theresa Weitzel to Director of Channel Sales. We are impressed by the ideas, excitement and energy she brings to the channel and are excited to have her in this new role. Our sales backlog increased 15% year-over-year to $20.8 million at the end of Q2. Our telecom segment gross margins improved to 67% for the quarter as we continue to manage our phone manufacturing and network costs to improve margins. We consolidated some of our co-manufacturing processes in Q2 that should allow us to better control margins in our hardware. We installed a record number of devices on our network during the quarter, and our implementation processes and customer onboarding processes have been further improved to help us achieve even greater customer satisfaction results. We also had a record amount of traffic on our network for the quarter, which gives us more leverage with our network providers on their rates. We recently added our Crexendo mobile application, CrexMo, as well as our Crexendo collaboration tool, Crexconnexe, as a standard offering for new customers. New customers will see 1 CrexMo mobile application per device as well as 1 Crexconnexe collaboration tool per account when they sign up for our services. Initial response to this has been terrific as we see more and more customers using mobility and collaboration in their everyday needs. We presented at 2 investor conferences during Q2, but we'll be -- we'll also be presenting at the Dougherty & Company Investor Conference in Minneapolis on September 6. Our presentations have been well received in these conferences. And we posted these presentations on our link on our website at www.crexendo.com/investor, and we'll update that link later this month with our updated presentation that we will be presenting in September. There continues to be a tremendous amount of consolidation in our industry, and that's creating even more opportunity for Crexendo to thrive. As potential partners get disenfranchised with their current providers and there are changes in consolidations, they're finding a breath of fresh air when partnering with Crexendo. We are clearly at an inflection point at the company as we begin the second half of the year with strong cash flow, GAAP profitability, strong backlog, stronger and larger partners and a rapidly increasing funnel of sales opportunities. We are positioned well to take advantage of the growth and changes in the industry and outpace the competition in respect to growth and earnings. I'm confident that Crexendo will be able to execute on our plans as we continue our growth, and I am excited about the path our organization is following. I will now turn it back over to Steve for any additional comments.

Thank you, Doug. At this time, Jeremy, we'd like to open the conference up to questions.

[Operator Instructions] Our first question comes from the line of Christopher [ Lassiter ] from Morgan Stanley.

Congratulations on reaching GAAP profitability. Maybe just a couple quick questions here. I think the first one is on subscribers. Any color on subscriber count?

We continue to add more and more subscribers. As I mentioned, we had a record amount new desktops that we added to our network. We don't usually give out extra subscriber statistics, but we continue to have record increases. And this is a record quarter for us as far as new desktops added to our network.

Sure enough, understood. As a follow-up question, I think, Steve kind of mentioned earlier that you guys were looking at potentially accretive opportunities. I'm wondering if you guys are looking at opportunities within the telecom space? Are you guys looking at maybe exploring some new markets?

Yes, primarily telecom space. So as we look at our acquisition opportunities, we're looking for hosted-type opportunities that will be accretive to revenue. We've -- since we've developed our own platform and have designed our own technologies, we're really not looking for a technology-type acquisition. We're really looking for a revenue and a customer base acquisition and strategy. And so those are really the opportunities that we've got our eyes focused on right now is acquisition of customer base and an accretive revenue stream.

Christopher, I'd like to add a little bit of color to that. You know our platform is very versatile, and we've got a tremendous amount of functionality in it. So obviously, we're looking for folks that have similar revenue basis that we can swing under our platform. But having said that, we've got a lot of other areas that we can extend this business in. I'll give you some examples. We're a CLEC and SIP trunking is one area. White labeling folks that are larger and want to expand their own brand would be another one. And eventually, I'd say probably this time next year, we'll be able to start licensing our platform to potential big partners. So there's all of that and a lot more. But to be pretty precise about it, we're looking for accretive opportunities that will add both sales and GAAP income to our bottom line.

[Operator Instructions] It seems we have no more questions at this time.

All right. Well, thank you, Jeremy, and thanks to all of you for joining our conference call. We're going to be hosting our third quarter shortly after the end of September. Probably, either at the end of September or the first week in...

of November.

Excuse me, you're right, first week in November. So we look forward to seeing all of you and hope you have a good week, what's left of it, and a good weekend. Thank you. Take care.

Thank you, everybody.