Crexendo, Inc. (CXDO) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Crexendo Fourth Quarter and Year End 2018 Earnings Call. All lines have been placed on listen-only mode and the floor will be open for your questions and comments following the presentation. [Operator Instructions] At this time, it's my pleasure to turn the floor over to Mr. Steven G. Mihaylo, Chairman and CEO. Sir, the floor is yours.

Thank you, Tom and good afternoon, everyone. I'm Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo year end 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. 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?

Yes, sure, 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 facts are forward-looking statements. Forward-looking statements include but are not limited to words such as like, believe, expect, anticipate, estimate, will, and other 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 31st, 2018 and Form 10-Qs 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 very important year for Crexendo with very promising results that bode well for our future. The Cloud Telecommunications Service revenue increased for the year ended December 31, 2018 increased 24% compared to the year end of December 31, 2017. The continued growth in the Cloud Communications segment is very encouraging. As I've explained before, UCaaS service revenue is the most important metric that I use in reviewing the business. With that said, it's not the only positive development for the year. We had many other accomplishments. We reduced our year-over-year GAAP loss by 70% compared with 2017. Also very encouraging on a non-GAAP basis, we achieved 2000 -- again my IQ, we have to run like -- here -- we achieved $0.02 earnings per diluted common share for 2018. Also very promising is that our cash current ratio and shareholder equity all have nice improvements in 2018. We continue to make necessary investments in the business and still managed to only increase expenses by 11% for the year ended December 31, 2018. We managed the business very carefully. We work every day to increase shareholder value. I'm very proud of the Crexendo team and their efforts. Crexendo will continue to provide what I know is the best UCaaS products and services in the industry. I continue to have a high degree of confidence in our results for 2019 and convinced we will continue to grow the business organically. While most acquisitions we have looked at do not make economic sense as it would be hard to monetize the cost we will continue to look for accretive opportunities to further accelerate our growth. With that, I'd like to turn the call over to Ron to provide some more granularity to the numbers. Ron?

Thanks, Steve. Total revenue for the fourth quarter 2018 increased 10% to $3.1 million, compared to $2.8 million for the fourth quarter of the prior year. Service revenue for the fourth quarter of 2018 increased 14% to $2.8 million, compared to $2.4 million reported for the fourth quarter of the prior year. Our Cloud Telecommunications segment revenue for the quarter increased 18% to $2.6 million, compared to $2.2 million reported for the fourth quarter of the prior year. Web Services segment service revenue for the quarter decreased 21% to $189,000, compared to $240000 for the fourth quarter of the prior year. Our product revenue for the fourth quarter of 2018 decreased 13% to $330,000, compared to $380,000 for the fourth quarter of the prior year. Consolidated operating expenses for the fourth quarter of 2018 increased 11% to $3.1 million, compared to $2.8 million for the fourth quarter of the prior year. On a GAAP basis, the company reported a net loss of just $8,000 or breakeven per diluted common share, compared to net income of $32,000 or breakeven per diluted common share for the fourth quarter of the prior year. Our non-GAAP net income for the quarter was a $104,000 or $0.01 per diluted common share, that's compared to $150,000 or $0.01 per diluted common share for the same period of the prior year. EBITDA for the fourth quarter was $26,000, compared to $46,000 for the same period of the prior year. Adjusted EBITDA for the quarter was $120,000, compared to $138,000 for the same period of the prior year. On an annual basis, we are pleased with our total revenue for the year of $11.9 million, compared to $10.2 million reported in the prior year, an increase of 17%. We continue to see tremendous growth in our Telecommunications segment. The Cloud Telecommunications segment contributed 93% or $11.1 million of the total revenue for the year, that's an increase of 21% compared to $9.1 million contributed in the prior year. Service revenue increased 18% to $10.5 million, compared to $8.8 million reported for the prior year. Our Cloud Telecommunications segment service revenue for the year increased 24%, as Steve mentioned, to $9.6 million compared to $7.8 million reported for the prior year. Our Web Services segment service revenue for the year decreased 21% to $825,000, compared to $1 million reported for the prior year. Product revenue increased 7% to $1.4 million, compared to $1.3 million reported for the prior year. Product revenue can fluctuate significantly from one period to the next. Product revenue is deferred until installation is complete and services commenced. Our average customer is installed within weeks of completing the sales cycle. Large enterprise and multi-location customers can take longer to install, depending on the number of locations and complexity. We believe growth will initially be seen through increase in our backlog. Our Telecommunications segment backlog, which is anticipated to be recognized within next 36 to 60 months, increased 16% to $23 million at December 31, 2018, compared to $19.9 million at the end of the prior year. Operating expenses for the year increased by $1.2 million or 11% to $12.1 million, as compared to $10.9 million reported for the prior year. There was a 17% increase in revenue for that same period. On a GAAP basis, the company reported a net loss of $223,000 for the year, or $0.02 loss per diluted common share, compared to a net loss of $929,000 or $0.07 loss per diluted common share reported for the prior year. Non-GAAP net income was $287,000 for the year or $0.02 per diluted common share, as compared to a non-GAAP net loss of $21,000 or breakeven per diluted common share for the prior year. EBITDA for the year was a loss of $114,000 compared to a loss of $628,000 for the prior year. Adjusted EBITDA for the year was positive $324,000 compared to a loss of $17,000 for the prior year. Cash, cash equivalents and restricted cash at December 31, 2018 was $1.9 million compared to $1.4 million reported at the end of the prior year. Operating activities provided $452,000 increase in cash and cash equivalents. The company utilized $7,000 for investing activities and financing activities provided $122,000 increase in cash and cash equivalents. With that, I'll turn it over to Doug Gaylor our President and COO for our business and sales update.

Thanks, Ron. Q4 wrapped up in inflection year for Crexendo as we posted appreciable increases in telecom revenue, sales bookings, backlog, non-GAAP income and cash balances. I'm excited about the sales momentum that we're seeing and the residual effects on the key metrics of our business. We had strong sales bookings for the quarter from both our direct and partner channels. The partner channel continues to grow in sales bookings as well as in the number of partners with 22 new partners added during the quarter. The strong sales bookings included multiple sales over six figures and total contract value with our partners landing the majority of these accounts including an auto dealership, a multi-location real estate office, large regional non-profit organization and a multi-location industrial supply company. With our existing base of partners, as more sales successes and gets more comfortable leading with our solution, we should increase our funnel of opportunities which is at record levels. We've launched some nice incentives in Q1, which we anticipate will help continue our growth and momentum in the channel and our partners are equally excited about building on our successes in the year ahead. Our strong sales bookings for the quarter helped to increase our sales backlog to slightly more than $23 million as Ron mentioned, which is a 16% increase over December 31, 2017. We continue to see improvement in our Telecom sector gross margin as we hit a new high watermark of 68% in Q4. The fact that we design and manufacture our own telephone instruments along with our core platform allows for increased margin for us and higher commissions for our partners. Our increased bookings and improved margins over the course of the year allowed us to post non-GAAP net income of $287,000 for the year compared to a non-GAAP net loss of $21,000 -- negative $21,000 for the prior year. I'm very pleased that we have successfully posted non-GAAP net income for 2018, but I expect our momentum to continue and results to improve. Our non-GAAP net income and management focus on cost control help increase our cash and cash equivalents by 41% to $1.94 million as of December 31, 2018. Crexendo's platform also had a great year thanks to our in-house engineering group that provided numerous highlights for the year including winning the 2018 INTERNET TELEPHONY Product of the Year Award, enhancing Crexendo's system capabilities with features like texting, chat, outbound call campaign dialer, enhanced cloud communicator, active directory support, web RPC dialer and enhanced mobility capabilities. We also 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 differentiate Crexendo from our competition who traditionally charge much more for these types of offerings. We also enhanced our backup services and support with AWS, Amazon Web Services. And we successfully launched our white-label offering allows partners to sell our platform as their own platform powered by Crexendo. So as you can see 2018 was truly an inflection point for Crexendo as we were able to show positive momentum and results in the all the categories I've I just described. We're focused on continuing to improve on all of these metrics in the year ahead. And with our future platform, our expanding partner program and our strong management of cost, our future opportunity has never looked greater. Market for unified communication as a service UCaaS is still right with opportunity with approximately 70% of U.S. businesses still using traditional premise-based telecom solution. It's not a matter -- if these businesses migrate to the cloud, but rather when they migrate to the cloud. And Crexendo has positioned itself well to help these businesses make the transition to the cloud. As we begin 2019, I'm confident that we will continue to execute on our plans for growth and we're in a strong position to deliver. I will now turn it back over to Steve for any additional comments.

Thank you, Doug. Tom, we're ready for any questions that people on the call may have.

Thank you, sir. [Operator Instructions] We'll take our first question from Chris Hellman.

This is Greg Hellman [ph]. First of all, can you talk about your partner relationship with U.S. Cellular? What are you doing to train their sales reps and how is that coming on general, whether you've had any sales from that for example?

Yes. Great question, Greg. Thanks I appreciate that. Our U.S. Cellular relationship is doing fantastic. You're well aware that we announced that at the end of last year in 2017 and kicked-off sales training with them approximately February of 2018. We had strong sales throughout the year gaining momentum. Fourth quarter was our stronger sales with U.S. Cellular. A lot of excitement around the offering and a great partnership there. We also are excited to tell we are rolling out our program to their agent channel as we speak and just completed doing training for their agent channel in February. And so we're excited about the opportunities that will be hold for us.

That's great. And also for the 22 new partners that you've just alluded to were -- did any of this -- did any of those kind of big friend or were they just small partners regional partners so are they national?

I would say out of the 22 that we brought on in the quarter we had a few that were larger in size, most of them were smaller regional data borrowers and MSBs, but we did have a few in Q4 that came on that high multi-location offices and multi-location or regional type presence. So we get a nice mix each quarter of bigger partners. But what I would say probably the larger majority were smaller individual site that have single locations.

Okay. Well, then, I guess -- I mean in terms of incremental sales at this point what percentage of incremental sales from this point forward do you think you can bring to the operating line?

Bring to the operating line in respect to -- can you expand on that question?

Yes. Yes. It works for the -- I guess the contribution margin to additional sales that you're adding at this point?

Yes. So every account that we add today, I mean now that we've hit these inflection points of being basically a non-GAAP profitable and GAAP breakeven in Q4. Every customer that we add today gets very accretive for us because our costs are very stable. And so we don't have a large increase in our cost structure to add new customers. So not only we've hit some very nice inflection point here at the end of the year. Every customer that we add becomes a very profitable customer for us because our costs are very stable. So I can add additional customers for many quarters in a row without having to add much infrastructure cost to our platform. So that becomes a very accretive model as we continue to grow. And that's why that residual model was recurring revenue becomes very lucrative as we hit that breakeven point.

Greg this is Steve Mihaylo talking. Another thing I'd like to expand on what Doug just said. Some of our infrastructure cost will actually go down as we get larger. You may notice that we had a 68% gross margin in the fourth quarter. We expect to be able to expand on that going forward in 2019. I don't know exactly how much we'll expand on it. But I'm pretty confident we should end the year at 70-plus-percent gross margin. So, at least 70% and that's because cost per infrastructure such as bandwidth and other costs will continue to go down as we get larger.

Okay. Well, that's very encouraging. I’ll get back in queue. Thank you.

[Operator Instructions] We'll go next to Kevin Walsh, Private Investor.

Hi, gentlemen. Could you give us any color on a – where Q1 is going? Where two months in. So I'm wondering any surprises good or bad?

We have no surprises. I will say this we're right on budget, I'm going to let, Doug elaborate on that. But basically, we're pleased with the way things are going.

Yeah. We don't give forward guidance Kevin obviously. But we had strong sales bookings in Q4 and that momentum is continuing into Q1. So we're very excited about where the potential is heading for 2019.

Okay. Can I – I'm trying to get a feel for what it takes to drop let's say $0.10 of net income to the bottom line. What type of scale would it take to do another $2 million, $3 million of revenue?

You know Kevin you're trying to get us to make a forward statement here. The most forward I'm going to say is that things are going well. As you know, I've been a buyer of the stock all along and I'll continue to be a buyer. Generally, overall, we're very pleased with the way things are going. And I'll give you an example. Doug just talked about white-label customers. We spent probably six or eight months doing the software necessary to add white-label customers. We're also going to spend the next six months to a year developing our switch so that could be license. That's another product category that we'll have some time near to the end of this year or at the beginning of the next year. So we're expanding our sales tremendously. We're going after bigger customers. All of these things are very positive. And frankly, I expect the world for acquisitions to get more normalized as we go on in the next year. Then, you're going to start seeing growth in the acquisition front between organic growth and acquisition growth. I think you're going to expect to see better than the kind of growth we have in all of 2018, which was 24% growth in our service revenue for UCaaS. But that's the kind of growth I'd see in the UCaaS area. And as you know, over 90% of our income, or I should say our revenue came from expanding our monthly recurring revenue. And that's what I expect to see going forward.

Okay. Well, that's great. Not asking you to do it or anything but just out of curiosity. Are you getting any inquiries about others trying to buy Crexendo from you or from us since you're on an upward slope here?

I just can't talk about that Kevin. Obviously, anything I'd say will be considered a forward statement and that might be insider information. And we've got more people on this call than normal. But it's still a very small group. And I don't want to make anybody an insider here.

Okay. That's all I have. Thank you for taking time to answer my questions.

You're welcome, Kevin. Have a good day.

[Operator Instructions] We do have a call coming in from Michael Kaufman with MK Investment.

Am I on?

Yes.

Yes, you're on. Good afternoon Michael. Good evening back in the East Coast. I hope you're bundled up and keeping warm.

Good afternoon. Well, we're in Miami, so it's a little better, but sounds like you're doing all the right things -- doing things together. And the question is although acquisitions are not easy to do these days because everybody thinks there was a lot more. The question is can you do anything to pulling some low-hanging fruit? We have an installation here that we actually invited you guys in to quote on. And we're terribly unhappy with the group that's providing our phone service. But there is a 10-year contract and it would cost us $10,000 just to have them go away to buy up a contract because -- and we wouldn't mind paying the exact amount. We don't even need a discount. We just don't want to lay out another $10,000 because it's a giant condo and that's something the Board always has a problem with and I'm the President of the Board. So, the question is for situations like that where you really want to kick out the incumbent and it's only a small amount just to buyout a penalty and then you get a 10-year stream of revenue, in our case, it's $2,000 a month. And we're somewhat cost incentive we really want the service. Might you instead of giant acquisitions put a little fund together where things that make sense you give the sales force the opportunity to do things like that to just quickly accelerate some growth? Because the payback would be about seven months so you got…

Yes, hey, Michael. We are already aware of that opportunity. Doug is working at -- it's something we really ought to be talking about offline here. But rest assured, we're interested in all business.

Yes Michael, I'm familiar with the account and so we can take that offline and I can give you a shout later this afternoon or tomorrow.

Yes, it's just a conceptual framework. I'm not talking about even who the competitor is. But obviously if we're upset, other people who have the same competitor must be upset also.

Absolutely. No definitely, I'll give you a follow-up and we can strategize and hopefully come up with good solution for you.

Okay. Thanks a lot and good luck and I keep buying stocks when I get a chance to.

Thank you, sir.

Appreciate it.

Thank you.

Mr. Mihaylo at this time there are no further questions. I'll turn the call back over to you for any closing remarks.

I have no closing remarks other than to say that we're very encouraged by the progress we're making. I have complete and total confidence in our management team which is very stable. And I'm very happy generally speaking. With that I'm going to end this conference call and wish you all a good evening and talk to you next quarter. Thank you.

Thank you everybody.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time and have a great day.