Crexendo, Inc. (CXDO) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Greetings, and welcome to the Crexendo Third Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Mihaylo, Chief Executive Officer. Thank you. You may begin.

Thank you, Adam. Good afternoon. I'm Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo Third 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 am going to ask Jeff to read the Safe Harbor statement, after that, I will give some brief general comments relative to the quarter. Ron will then provide granularity to the numbers, and Doug will provide a business and sales update. And then we will open the call up to questions. Jeff, would you please provide the Safe Harbor statement?

Yes, 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 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 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, further events or otherwise. I'd now like to turn the call back to Steve. Steve?

Thank you, Jeff. This was a positive quarter for Crexendo. We continued to grow the cloud communication segment. UCaaS service revenue for the third quarter of 2018 increased 26% to $2.5 million, compared to $2 million for the third quarter of 2017. This continues our trend of substantial quarterly increases year-over-year. Obviously, Crexendo services revenue is the most important revenue number to use to review our progress. This continued growth is a very positive sign. As you also know, I watch our balance sheet very carefully, and that was -- and that has continued to improve, which is also a very important metric. However, Crexendo did increase expenses this quarter, which impacted our results. There were onetime costs, including certain changes we made to our sales team, and we invested in our business with the decision to expand channel sales and direct channel sales personnel. These investments are something we expect will further increase sales results in the future. Even with these investments, Crexendo watches every expense very carefully. We work every day to increase shareholder value. Crescendo will continue to improve what I know are the best UCaaS products and services in the industry. I am contacted all of the time by customers who tell me that we have improved their productivity, increased the functionality of their telecom system and saved them money by implementing cloud telephony. I continue to believe very strongly in the company and the Crexendo team. I am highly encouraged by our revenue growth, and I am confident that we will sustain the growth in the fourth quarter of 2018. And I have an even higher degree of confidence in our results for 2019. I am convinced that we will continue to grow the business organically. Crexendo also continues to look for accretive opportunities to further accelerate our growth in the future, and now that we are approaching sufficient bulk to growth through acquisitions, I am further convinced that we will grow that way as well. With that, I would like to turn the call over to Ron. Ron?

Thank you, Steve. Some financial highlights. Total revenue for the third quarter of 2018 increased 14% to $3 million, compared to $2.6 million reported for the third quarter of the prior year. Service revenue component for the third quarter increased 20% to $2.7 million, compared to $2.3 million reported for the third quarter of the prior year. Of our service revenue Cloud Telecommunication segment service revenue for the quarter increased 26% or $500,000 to $2.5 million, compared to $2 million reported for the third quarter of the prior year. Our Web Services segment revenue for the quarter decreased 22%, or $57,000, to $203,000, compared to $260,000 reported for the third quarter of the prior year. The product revenue component for the third quarter increased -- decreased 18% to $314,000, compared to $385,000 reported for the third quarter of the prior year. Year-to-date total revenue increased 19% to $8.8 million, compared to $7.4 million reported for the same period of the prior year. Year-to-date service revenue increased 20% to $7.7 million, compared to $6.4 million reported for the same period of the prior year. Cloud Telecom segment revenue for the 9-month period increased 26%, in line with the quarter, to $7.1 million, compared to $5.6 million reported for the same period of the prior year. The Web Services segment revenue for the 9-month period decreased 21% to $636,000 as compared to an $806,000 reported for the same period of the prior year. Year-to-date product revenue increased 16% to $1.1 million, as compared to $967,000 reported for the same period in the prior year. The company reported a net loss of $199,000 or a $0.01 loss per diluted and basic common share for the third quarter of 2018, compared to a net loss of $190,000 or $0.01 loss per basic and diluted common share reported for the third quarter of the prior year. Year-to-date, we have reduced our net loss by $746,000, down to $215,000 loss for the 9-month period ended September 30, 2018. That's a $0.02 loss per basic and diluted common share, compared to a net loss of $961,000 or a $0.07 loss per basic and diluted common share reported for the same period of the prior year. Our non-GAAP net loss for the third quarter was $12,000 or breakeven per basic and diluted common share, that's compared to non-GAAP net income of $55,000 or breakeven basic and diluted common share reported for the same period of the prior year. Year-to-date, the company reported a non-GAAP net income of $183,000 at the $0.01 basic and diluted common share compared to a non-GAAP net loss of $171,000 or $0.01 loss per basic and diluted common share reported for the same period of the prior year. EBITDA for the third quarter was a loss of $167,000, compared to a loss of $28,000 for the same period of the prior year. Adjusted EBITDA for the quarter was $2,000, compared to $61,000 for the same period of the prior year. The company reported an EBITDA loss of $140,000 for the 9-month period ended September 30, 2018, as compared to a loss of $674,000 reported for the same period of the prior year. The company reported adjusted EBITDA of $204,000 for the 9-month period ended September 30, 2018, as compared to a loss of $155,000 reported for the same of the prior year. Our cash and cash equivalents and restricted cash at September 30, 2018, is $1.9 million as compared to $1.4 million at December 31, 2017. Operating activities during the 9-month period provided $350,000 of cash during the period. The company utilized $136,000 for investing activities during the period, and financing activities such as option exercises and capital lease obligations provided $300,000 of cash during the 9-month period. With that, I'll turn it over to Doug Gaylor, our President and COO for additional comments on business and sales update.

Thanks, Ron. We had some very positive metrics this quarter, including the fact that our growth in sales bookings, total revenue, telecom revenue and backlog for the quarter were all up appreciably year-over-year and quarter-over-quarter. These gains, however, were offset by additional infrastructure investment expenses that prevented us from delivering GAAP profitability. We had a strong sales contribution during the quarter from our direct sales team, as they secured a large agreement for a 17-location health care organization with potential for more locations to follow. We also have strong contributions from our partner channel and added 23 new partners to our program during the quarter. We invested heavily in our partner channel during the quarter, adding additional seasoned and experienced channel managers to the team, led by our recently promoted Director of Channel Sales, Theresa Weitzel. Our strong sales bookings for the quarter helped to increase our sales backlog, which increased 19% year-over-year to $21.7 million at the end of Q3. Our gross margins remained at 67% for the quarter as we completed the consolidation of our phone manufacturing processes. We continue to process a record amount of traffic on our network each quarter, and we continue to enhance our platform with new and enhanced capabilities. Since the beginning of this year, we have added active directory support, outbound call campaign dialers, enhanced cloud communicator and white label support to the platform. With our white label offering, we now offer the ability for a partner to resell our platform as completely partner-branded solution. This allows a partner to sell the service as their own platform powered by Crexendo. With the recent acquisition of BroadSoft by Cisco, we have had numerous requests to enhance our platform with a white label offering, and we are pleased to have launched our first white label partner during the quarter. During Q3, we added our Crexendo mobile application, CrexMo, as well as our collaboration tool, Crexconnexe, as a standard offering for new customers. Offering these capabilities for every new account has helped differentiate Crexendo from our competition who traditionally charge more for these type of offerings, if they support them at all. As a standard offering on our platform, we allow every new customer to benefit from the advantages of mobility, collaboration and videoconferencing all at the same standard price points of our platform. This offering has been very well accepted in our sales efforts. We also launched our new Crexendo website during Q3, that is much more interactive and content-rich for our customers, prospects and partners. As you can see, we made a lot of progress on many different fronts during the quarter, and our focus to drive -- and drive to continue improving our platform, increasing our sales and managing our cost has never been greater. These initiatives require investing in our team and infrastructure and the determination to build on these initiatives resulted in a GAAP loss for the period. As these investments were made with long-term vision, we are confident in their future returns. Even with these investments, we were able to generate a 22% increase in cash flow for the quarter, which, combined with our increased sales bookings and sales backlog, have positioned us well to take advantage of the growth in the industry. As evident from our year-to-date growth in UCaaS revenue, backlog and improvement to the bottom line, we are definitely trending in the right direction. I'm confident that Crexendo will be able to execute on our plans as we continue our growth, and I'm excited about accelerating the path the organization is following. I will now turn it back to Steve for any additional comments.

Thank you, Doug. At this time, Adam, we'd like to open it up to questions.

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

Definitely excellent top line growth, I'm happy to say, from you guys. Just one quick question here. In terms of up-listing, what's the timeline look like for getting that done?

You are saying -- up-listing?

Right, because I'm -- I was looking at buying shares but I think I can't do it because you're not on a national exchange yet. So I'm just kind of curious as to what the timeframe is.

Well, there's 2 things that will -- actually only one thing that will prevent us from up-listing, and that's our net worth and our stock price. Both of those things, we think, will be corrected through operations over the next year, 1.5 years. If we choose to accelerate it, it will require additional investment in the company. I'm prepared to do that, but it still doesn't solve one of our problems, and that's float. So we're looking at that right now, Christopher, and we'll keep you posted.

All right, all right, I look forward to it. I think the other point I'm looking at here is just, given the model and given the ability to kind of generate significant amount of free cash flow from this model, what do you guys think in terms of acquisitions? Are you guys actively seeking of? Is that something that you're looking at completing within the next couple quarters? Or what's kind of the outlook there?

That's one of the things I mentioned in my comments. I think we have sufficient bulk and we're looking at enough deals right now. We have looked at, literally, dozens and dozens of deals in the past, but we're looking at enough deals right now that I think we'll probably have at least one acquisition next year.

Our next question comes from the line of [ Michael Kaufman ], a private investor.

It's [ Mike Kaufman ] from the old days. And very good progress, I've been accumulating stock on the open market. And just with the additional investments, what revenue run rate now -- level do you need now to get you to at least cash breakeven? Or...

We're already at cash breakeven. As you know from my comments, we made a few changes in our sales and marketing that were onetime charges that we had to take, and then we increased channel sales and direct sales, which added a little bit more expense. And as a result of that, we should see pretty good organic growth next year, at least a point or 2 above the industry. And as I just mentioned to Christopher, we also expect to make an acquisition next year. The combination of those 2 should get us close, I don't know exactly how close, but close to probably $20 million in revenue. But it could be plus or minus as much as $2 million, $2.5 million in revenue.

All right. Well, I wish you the best. I know you know how to do it. So keep it up.

Well, it's been a long struggle with getting the legacy business behind us. But that's firmly behind us now, and we're poised for additional growth through the UCaaS services and products.

Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing.

Thank you, Adam, and thank you for all of you for joining the call today. Obviously, our next quarter will be reported a little later because of the fact that we're reporting full year revenue and earnings numbers. We expect to have those numbers completed by the end of February, the first part of March. So we'll talk to all of you then. In the meantime, I want to wish everyone a Happy Thanksgiving and a great holiday season. Thank you all, and goodbye.