Good day, ladies and gentlemen, and welcome to the Crexendo’s Second Quarter 2019 Earnings Call. [Operator Instructions] At this time, it's my pleasure to turn the floor over to Mr. Steve Mihaylo, Chairman and CEO. Sir, the floor is yours.

All right, thank you, Tom. Good afternoon, everyone. I'm Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo’s second quarter 2019 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 brief general comments relative to the quarter. Ron will then provide more details on 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 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 in fact 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 the fiscal year ended December 31, 2018 and the Forms 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, future events or otherwise. I'd now like to turn the call back to Steve, Steve?

Thank you, Jeff. This was an excellent quarter for Crexendo. We had our second quarter in a row of substantial GAAP profit. We had a very respectable increase in Cloud Telecommunications segment. UCaaS service revenue for the second quarter of 2019, which grew 28% to the second quarter of 2018. On a GAAP basis, we also had a very nice progress reporting net income of $338,000 for the second quarter or $0.02 per diluted common share compared to $47,000 or breakeven per diluted common share for the second quarter of 2018. Our cash management also has been very effective. Cash provided by operating activities for the six months ended June 30, 2019 was $495,000 compared to cash for operating activities of negative $32,000 for the 6 months ended June 30 2018. All in all, I'm very pleased and excited with the results we announced today. I have told you before that I consider the most important metric as UCaaS service revenue and the sustained positive results in that metric give me high confidence in our continued growth. With all of that said, we still manage the business very carefully. Crexendo did increase operating expenses for the second quarter of 2019, 12% compared with the second quarter of 2018. This increase included necessary investment in the business and included improvements to sales and service and marketing. We invest in the business, but do so carefully and expeditiously. Even with these investments, Crexendo watches every expense very carefully. We work every day to increase shareholder value. The results we announced today are due to the hard work and tireless efforts of the Crexendo team. Our people show up wanting to serve our customers and with the mission to provide what I know is the best UCaaS products and services in the industry. I continue to believe very strongly in our company and the Crexendo team. I am highly encouraged by our revenue growth and I'm confident, we will sustain that growth. With that said, I will turn the call back over to Ron. Ron?

Thank you, Steve. Consolidated revenue for the second quarter of 2019 increased 21% to $3.6 million compared to $3 million for the second quarter of the prior year. Service revenue for the second quarter of 2019 increased 24%, to $3.1 million compared to $2.5 million reported for the second quarter of the prior year. Our Cloud Telecommunications segment, service revenue for the quarter increased 28% as Steve said. $650,000 to $3 million compared to $2.3 million reported for the second quarter of the prior year. Our Web Services segment revenue for the quarter decreased 21% or $43,000 to a $165,000 compared to $208,000 reported for the second quarter of the prior year. Our product revenue for the second quarter of 2019 increased 7%, $467,000 compared to $437,000 reported for the second quarter of the prior year. Consolidated operating expenses for the second quarter increased 12%, to $3.3 million compared to $2.9 million for the second quarter of the prior year. Our net income for the second quarter was $338,000 or $0.02 per diluted common share as compared to $47,000, or breakeven per diluted common share for the second quarter of the prior year. Non-GAAP net income for the second quarter of $447,000 or $0.03 per diluted common share compared to $178,000 or $0.01 per diluted common share for the same period of the prior year. EBITDA for the second quarter was $362,000 compared to $71,000 for the same period of the prior year. Adjusted EBITDA for the quarter was $457,000 as compared to $184,000 for the same period of the prior year. Some highlights for the 6 months ended June 30 2019. For the six month period, consolidated revenue increased 23% to $7.1 million as compared to $5.8 million reported for the same period of the prior year. Service revenue…

Thanks, Ron. I'm very pleased with the momentum and results that we delivered for Q2. For the second consecutive quarter, we had substantial increases in total revenue, telecom revenue, backlog, GAAP income and cash balances that shows that we are executing well on our business plan. Our total revenue increase of 21% year-over-year and our Telecom segment revenue increase of 25% year-over-year helped contribute to increases in our GAAP and non-GAAP earnings. Our strong GAAP net income of $338,000 is a culmination of consistently managing our plan to grow profitably. As I have previously mentioned, our recurring revenue model combined with our relatively fixed cost structure has allowed us to reach these recent inflection points of non-GAAP and GAAP profitability this year. We continue to manage our costs well and saw a 41% increase in GAAP profitability over Q1 on a total revenue increase of 3% for the same period. Highlighting management's constant focus on improving our efficiencies. We continue to see strong sales bookings from both our partner and direct channels. During the quarter, we secured more than half a dozen opportunities with total contract value greater than $100,000, many of these sales were multi-location opportunities, which is one of the target markets that Crexendo's ride the cloud solution is particularly effective with. All of these metrics also helped increase our cash balances for the quarter by nearly 20% over the previous quarter and by over $650,000 for the first half of the year, further highlighting the inflection points, that the company has reached. Our backlog continues to grow and increased 19% year-over-year averaging $1 million increase per quarter over that period. Our installations are strong and we are very pleased with the momentum we are seeing. Our combined telecom gross margins increased slightly for the quarter to 68% and we continue to work on efforts to drive that percentage higher. We continue to be recognized for our system design and capabilities. We were recently awarded the 2019 Unified Communications Product of the Year Award presented by TMC and INTERNET TELEPHONY magazine by focusing on enhancements to our platform that include texting, chat, softphone, collaboration, we have been able to develop one of the strongest UCaaS offerings in the industry. This award presented by one of the leading industry authorities on UCaaS further confirms that our platform is truly best-of-class. You will see a separate press release on this announcement coming later this week. We have now had two consecutive strong quarters of revenue growth complemented with increased GAAP earnings, reaching these inflection points in our growth has been a major accomplishment and we are committed to working even harder to keep these trends and momentum continuing. I'm proud of the efforts of the entire Crexendo team and our partners and I'm very excited and confident on our ability to continuing to execute on our plans in the second half of 2019 and beyond. I will now turn it over to Steve for any additional comments.

Thanks, Doug. At this time, Tom, we'd like to open it up for questions from the folks that are on the call.

Thank you, sir. [Operator Instructions] We'll take our first question from William Gibson with ROTH Capital Partners.

Thank you. You mentioned backlog being up 19%. Do you have the specific number handy?

The specific number is just shy of $25 million. I believe, it's $24.8 million. But Ron is going to look at it, but just shy of $25 million, Ron.

4,772,000 [ph].

And then the operating expenses up 12%, the investments in sales, service and marketing. Do you have a sense of how many sales agents there are now say versus a year ago? And does that lead to an acceleration in the growth rate?

Thanks, Bill. So our sales agents and our direct sales reps are actually pretty stable from last year. I don't think, we've had a large increase there at all. When we talk about investment in sales. We've put some incentives out there for our partner community out there, and so those are really where we're putting the majority of those resources. So from a growth perspective, we're putting it more in marketing expenses than in actual direct head count.

Thank you.

But an answer to expand on that. This is Steve Mihaylo, William. To expand on that, we've added more partners. So we do have more feet on the Street from the standpoint of partner sales.

Okay, thanks, Steve.

You bet.

We'll take our next question from Kevin Dede with -- H.C.W.

Good afternoon, gentlemen. How you’re doing.

Good afternoon, Kevin.

Hey, Kevin. How are you, sir?

I’m good. Thanks for taking the call. Congrats on the results. Steve and I suppose that Doug echoed his sentiments. You seem pretty confident about the growth trends. Clearly, strong growth in the backlog, my assumption is that converts -- you measure that and convert to sales over the next 12 months. I'm just wondering, what else? What else leaves you feeling confident about your ability to grow your customer base? Especially in light of the BroadSoft deal, it's been -- Cisco has ingested now for over 1 year. I'm just wondering, how you're measuring your confidence there? Where it's coming from and how you see your competitors?

Sure. Thanks, Kevin. Great question. First let me expand on your backlog question. So that actually probably runs out over the course of more like 40 months or 45 months as opposed to 12 months. So that backlog most of -- just about all of our customers are under long-term contracts, typically anywhere from 36 months to 60 months. So I think, our average customer run out, is probably about 48 months or so. But if you look at what's happening out there in the industry. What gives me great optimism is the fact that depending on the industry statistics, if you look at 70% to 80% of the businesses out there are still on legacy premise-based equipment. And so I've said this before and I'll say it again, it's not a matter of if these businesses move to the cloud, it's when they move to the cloud. So there is truly a tremendous amount of opportunity, kind of related to the cell phone industry when everybody had a Motorola Flip phone before the smartphones came out and when the smartphones came out, it was a race to get everybody on smartphones. And now today, you would be hard-pressed to find anybody using a flip phone, same thing is happening with business telecommunications. So today that 70% to 80% that's still using legacy premise-based equipment, over the course of the next 5 years, if you look at Gartner or Frost & Sullivan or any of the reports out there. Over the course of the next 5 years, the industry is going to continue to see tremendous adoption of cloud. And so it's in the next 5 years, you'll see that percentage go from 70% to 80% down to 5% to 10%. So it's going to be a massive migration. So we're there, ready willing and able to take that business. I think, we're very well suited to take as much of that business as we can get our hands on. But it's not -- not going to be a shortage of customers migrating to the cloud for quite some time. So we have plenty of runway left for us to take advantage of the huge migration from premise-based to the cloud.

And Kevin, I'd like to add just a little bit to that. Since we own our platform, eventually will be licensing it in countries around the world and this is not just a U.S. or North American market, it's also a world market. And you can figure out how big the market is, but as Doug said, it's a massive market and only about 20% or 25%, maybe 30% of the market is converted. So there is a huge market out there. And obviously, we're doing everything we tend to move up scale into bigger customers as time goes by here.

Okay. Well, Steve. Thanks for mentioning that because that's sort of my next question. I'm wondering, if you looked across your customer base, you could give us a rough guess on how many of those customers had fewer than 50 seats and those that had more? And then, how you're going to try to position yourself to grow your exposure to those companies that have a larger installed base?

Again another great question. So if you look at our average sized customer today, our average sized customer at 21 stations. I don't have that breakdown per se, Kevin, as to what percentage of the customers are larger or smaller and what categories they fit into. But I will tell you that our focus is trying to get those larger customer accounts each quarter. I mentioned, the larger accounts that we were able to secure and so this past quarter having over half a dozen opportunities of $100,000 total contract value, it was significant. I will tell you that the high majority of our customers today come through our partner sales. And so we're bringing on bigger partners that are focused more on bigger opportunities. So as we look at where our focus is, it's obviously moving to larger opportunities but the fact that we rely so much on our partners to bring in opportunities. If a partner has got a 10 phone [ph] customer, we're going to take that 10 phone customer. But we're getting our partners to get us involved on a lot of bigger opportunities and so we're really pleased with some of the opportunities that we've got in the pipeline right now that could pay off tremendously for us due to the size and the opportunity that exists there.

Yes and one more thing, Kevin, in order to get bigger sales for contract value. We're going to be incentivizing the channel to concentrate on larger customers, larger end users. As we speak that's in the works and we'll be announcing that sometime over the next 2 weeks to 3 weeks. So we're doing everything possible to move up scale in the marketplace. And we currently have customers all the way from under 10 phones to as many as 3,000, 4,000 phone. So our platform will handle very, very large customers in the future.

Okay. Last question for me, gentlemen. It's probably the toughest one for Ron. Ron, I sort of have this picture in my mind of a table in Phoenix, where the 3 of you gentlemen are sitting around sort of having a 3-way arm wrestle because there is $0.5 million bucks sitting on the table, and I'm wondering, who's going to win the arm wrestling match, how is it going to get spent. And if Ron, if you win, how you're going to invest it?

Well, I think we do have to arm wrestle because Doug, would like to be investing in marketing and additional promos for sales. And I think, I'd like to save the money for future needs. And Steve, he would be watching those expenses and making sure that we don't just spend it all in one space. So, I think, everyone is going to have a different answer to that question. I'm sure, Doug, would like to spend it on the marketing materials and I think that would be the best place to spend it at this time to generate future revenue from new customers.

Yes, I would tell you that every dollar that we invest with our partners and with our end user customers comes back in spades. So we are very, very cautious on how we spend, and you can see that in our increase in our GAAP profitability just over the last 3 quarters. So we're very cognizant of what we're spending money on, but we're also very diligent in the fact that we will spend money to make money and we've talked about this on previous calls, Kevin, and I'm looking at acquisition opportunities. Right now, it's less expensive for us to go out and acquire customers by putting nice incentives out there than it is to go out there and overpay for opportunities in the acquisition market, so when we look at what we do with those extra funds, it's putting it back in so that I can invest 1$ to make $3.

Yes, and there is one more area that Doug and Ron neglected and that's R&D. This company is a technology company. So we're going to continue to expand R&D as well as sales and marketing. Those are the 2 things that drive our sales, and we'll just continue to grow that along with the rest of the business.

Well, I just thought, I would throw that one out there to get your read on it and I know, it's a great problem to have. And it's a welcome problem to have, so congratulations on the progress. And thanks again gentlemen, for entertaining my questions.

You bet.

Thanks, Kevin.

We'll go next to Michael Kaufman with MK Investments.

Hi, Steve, and Doug and Ron, great quarter. Really good progress. Certainly focusing on the bottom line and cash flow. I guess at this point as you bring on more leverage with partners, anything you could do to train them, so they get up to speed quicker, give them material, so they can go out to their customers in a more expeditious fashion would be helpful. And any money that you spend on that kind of material or additional people and marketing to hold their hand to get them up to speed. I think, would be well worth that in the long run now that you have a little bit of leverage in terms of the bottom line and cash. So if it was my company, I would lean into the opportunity just a little bit more.

You're exactly right, Michael

And stay profitable.

You're exactly right. Now that we've got some nice GAAP earnings over the last couple of quarters, good cash flow, we're reinvesting that. I would tell you, the on-boarding process we have for our partners is solid. The travel budgets increase a little bit to make sure that we can get out there and shake hands and kiss babies to use an old term. And so quite frankly, I myself, I have been visiting some of our partners, the last few months and I'll will be continuing to do that because it -- you're exactly right. Getting these guys onboard and getting them excited about what we're doing out there. It's an extra revenue stream for them. We've got partners that are making tremendous amounts in recurring residual commissions now. And so it's just a matter of getting out there and continuing to preach that message. So we are putting those efforts in there. We do have marketing materials. We hired a marketing firm at the beginning of the year that's helping us with our partners developing drip campaigns for them and developing marketing campaigns for our partners to co-brand materials out for end users, and we just recently launched a new partner portal site for our partners that they can go and have access to all of those resources electronically.

Yes, I guess, I don't know what the bandwidth is of your people to hold the hands of these third parties, but you may have to increase the investment in that. So they -- you're touching and feeling them as often as possible. And you're giving them...

Yes, no doubt.

A complete presentation. So they can basically -- you may even have to help them sell the first few big deals to get them comfortable.

We actually do that now and as we get bigger, Michael, we will continue to do more of it. So the other thing that Doug, failed to mention is that, training is very, very important in our business. And as we get larger, we'll start bringing folks into Phoenix or having training sessions around the country and more hand holding just more of the above.

Sounds great. Good luck.

Thank you.

Thanks, Michael

We'll take our next question from Ryan Hop with Axon Axis [ph].

My question is pretty simple. Thanks for taking my question. Have you guys talked about going to the NASDAQ and what kind of requirements do you have to meet in order to go there?

We have talked about that. I'll let Ron, give a little bit more color as to the minimum requirements but that's definitely been a topic of discussion for us, Ryan, as we continue our progress to uplift and so I'll have Ron add some more color to that.

Yes, thanks, Doug. Yes. We were previously on the NYSE MX Exchange. We dropped off and joined OTC in January 2015. So we've continued to maintain all of our corporate governance and filings at -- on the OTCQX. There are a few requirements that we still need to meet and one of those is the shareholder equity a minimum of 4 million and the second is a public float. And so we're internally always working through to meet those requirements, organically, we can meet the shareholder equity in the next 6 months to 12 months, but depending on the share price and the number of shares we ebb and flow will determine whether or not we had that minimum requirement of $15 million in public float. So those are the 2 remaining requirements that we need to satisfy and so we're working towards those as we speak.

Okay, thank you.

We'll take our next question from Arham Khan with Eden Capital.

Hi, guys.

How are you, Arham.

Good, good. How you guys doing.

We’re good. Arham, thanks.

Good to hear from you again. Doing well. Most of my questions have been kind of been answered, but I did want to touch real quickly on the U.S. Cellular Partnership. Is there -- what kind of revenues can you attribute to their partnership with you guys.

We don't actually break that out into segment reporting. But I will tell you that we had our strongest quarter ever with them in Q2 by far. So that was almost 3 times better than we have in any previous quarter. So we continue to see great momentum with U.S. Cellular in that relationship and lots of excitement there. And we recently started rolling out the program to their agent reseller channel and are getting great results there as well. So extremely happy with the relationship with U.S. Cellular and extremely happy with the momentum that we're getting there.

Okay. And this comes up today, is there -- just kind of looking at what else is going on in the market with some of your competitors, is there a class of acquisition opportunity and a plethora of opportunities within it, in which you can acquire and tap into the existing customer base or are those either 2 large or too small to go out there and is that something you'll be focusing on?

It is our home. There is a tremendous amount of opportunity out there. The only limiting factor is valuations and synergies. So when we look at opportunities out there, there is a lot of players in our space. And so you take out obviously the big guys, the Vonages, the 8x8s, the RingCentrals. And when you look at, for example, BroadSoft resellers out there. BroadSoft when they were acquired by Cisco had 750 plus resellers out there. So if you take out the big guys out there, there's probably 500 or 600 that are much smaller players that have BroadSoft platforms. So there is definitely a lot of opportunity out there. We look from an acquisition perspective for opportunities that are going to be synergistic for us. And the ideal acquisition would be something in the $2 million to $10 million range, that would be synergistic and accretive from day 1, so we're very selective, we've talked a lot of opportunities out there, we're always looking for opportunities, but that's going to have to be a good fit for us to make that investment. With our same-store growth, we want to make sure that we don't do anything to derail the momentum we've got. So when we look at these opportunities, it’s got to be the perfect opportunity.

Okay. Understood. All right. Thanks for taking my question. I've been watching you guys for a long time. I think, this is -- I kind of really picked up interest in this inflection point and it's really good to see these results. Best of luck to you guys.

Thanks, Arham.

Thank you, Arham.

Appreciate it.

[Operator Instructions] We'll go next to Kevin Walsh [ph], private investor.

Hey, Steve and Ron and Doug. Great quarter. Thank you, for the great work.

You bet.

I've got a question on backlog. I guess, everyone is looking at backlog because it converts to revenue and revenue backlog growth equals revenue growth. I'm noting in the change from current year to prior year. You had $4 million increase in backlog, which is about $1 million per quarter. Then I noticed the April '19, the June '19 backlog increased 545,000 roughly, which should come out to about $2.2 million a year. And I'm -- I also note, to be fair, I note that on April to June '18 backlog was flat, didn't really increase. But I'm trying to glen or get some information on, are we looking at a $2.2 million backlog increase this year or is it something cyclical, a big ticket items that drop in that allowed the $4 million increase from prior year, but we only had a $0.5 million plus increase this quarter.

Yes, Kevin [ph], this is Steve Mihaylo.

Hey, Steve.

One of the things you have to realize is that our backlog is net. And we've had some adjustment in our customer base. One customer in particular went bankrupt and that created little bit of a hiccup. But we expect that to continue to increase. I'm going to give it to Ron and Doug, in case, they want to add any more color to that.

Thank, Steve. From a cyclical standpoint, we don't think that's a cyclical business at all. But there are time periods where we had stronger closes in the quarter than -- one quarter from the next. I think, if we look back in most recent quarters. Our Q4 of 2018 and Q1 of 2019 were very strong quarters and so there are -- as you mentioned, changes from one quarter to the next. We may have a slightly less of an increase in one quarter, but if we look at it over on an average, looking back, it's been pretty consistent at about $1 million per quarter over the long run. And so that's why we look at it over a period of time of four quarters trending instead of just one quarter to the next because we may push a lot of jobs and to a quarter just because of the timing of when customers want to close those deals and then we recognize the revenue out of the backlog when we install those jobs. So some jobs did install right away and some jobs are installed over multiple months and so that's why there is a variant degree of when the backlog goes up and goes down.

Okay, thank you very much.

And we do have a follow-up question from Michael Kaufman with MK Investments.

Yeah, hi guys. One of the things I noticed from some companies that I've spoken to is that the existing competitors have draconian cancellation fees, they have long contracts and if you try to cancel even though they really like your service. They just don't want to pony up for that extra amount. So the question is do you have, with your partners a technical [ph] file that with [Indiscernible] of when those contracts expire or you get them on your program, where there wouldn't be any cancellation fees going from an existing server to yours.

Yes. So we -- you're right. There are termination fees associated with most agreements. So we do work with our partners, so if they find opportunities with one of our competitors, we always try and track when they might be out of their agreement, so that we are there and ready and waiting when it's time for them to jump ship, so to speak. So we're very cognizant of when we do reach out to potential prospects, if they are under agreements, we track when they come out of those agreements and try and help them expedite that. We also have a very, very concentrated effort within our own organization to make sure that our customers when they come up on their term agreements are contacted and we have a very, very high retention rate and very low churn within our organization. So we do reach out to our customers to make sure that they are aware that we love them and we don't want them to leave. And so we make it very attractive with us. But from a competitive perspective, Michael, we're very cognizant of the fact that a lot of our competitors are under agreement. And if they're not happy with them, we try and do everything that we can to expedite their capabilities to get out of an agreement. Obviously their agreements -- different agreements have different termination clauses and different termination amounts, but we try and give them whatever guidance we can to help them through those challenging times. And hopefully, when they do make that transition over, they're happy they did. And I would tell you that we've taken a lot of customers early from their contracts and they're very pleased with the fact that they get much better service and support. And so for a lot of them, we've had to make the comments that -- it's -- they're happy that they paid termination fees to move, because they can run their business with some of the challenges they were having with existing carriers.

Okay, thank you very much.

Thank you, Michael.

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

All right. Thank you, Tom. Well, Number one, we appreciate everyone being on the call today. Number two, we're going to continue working very hard for you and number three, we look forward to being with you next quarter and it will probably, let's see September -- and will be in November 5, as what Ron is saying to me. So we'll see all on November 5 for the third quarter conference call and we hope you have a good evening. Take care now. Bye.

Thanks, everybody.