Greetings. Welcome to the Crexendo Second Quarter 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Jeff Korn. You may begin.

Thank you, Holly, and good afternoon, everybody. I want to welcome you all to our second quarter conference call. On the call with me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; Jon Brinton, our CRO; and Anand Buch, our CSO. In a moment, I'll ask Jon to read our safe harbor statement. After that, I'll give some brief comments on our performance for the quarter. Ron will provide more detail on the numbers before handing over the call to Doug to provide a business and sales update. After that, I'll open the call up to questions. Jon, would you please read the safe harbor, please?

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. These 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, 2022, and the Forms 10-Q 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. Back to you, Jeff.

Thank you, Jon and I might add, you actually do a better job of reading the safe harbor than I used to do. I'm exceptionally pleased with our results for the quarter. And I think they speak volumes about the hard work undertaken by the entire team. From a high level in the second quarter, we continued to drive strong organic top line growth while making great strides in our cost reduction plan. Consolidated total revenue for the quarter increased 43% or $3.9 million to $12.7 million compared to $8.8 million for the second quarter of 2022. These are very, very impressive results driven by the steady organic growth across our organization. On the cost side and keeping with my remarks from last quarter, we have made considerable strides to streamline our operations and cut out nonessential spending while still investing for growth. These efforts have translated to almost $1 million sequential improvement in net loss from Q1. Most importantly, we were substantially cash flow positive in Q2, which I fully expect to continue. This is not a minor point. If you look at our industry peers, you will see that most do not have positive cash flow. We have always managed the business using sound business principles, being appropriately prudent and not mortgaging our future by overpaying for customers with unsustainable debt. I think our sound business philosophy is why we have the results we have and I have high expectations for our future. We plan to continue looking judiciously at our spending. We have sufficient staff and sufficient technology to expand. We continue to maintain a hybrid workforce, which has proven to be more productive in our digital-based line of work. Our team is effective and productive and just like our award-winning solutions have the ability to be…

Thank you, Jeff. Good afternoon, everyone. I'll go over the financial highlights for the second quarter of 2023. Total revenue for the second quarter increased 43% to $3.8 million to $12.7 million compared to $8.8 million for the second quarter of the prior year. Service revenue for the second quarter increased 63% or $2.7 million to $7.3 million as compared to $4.6 million for the second quarter of the prior year. Software Solutions segment revenue for the second quarter increased 9% to $3.9 million compared to $3.6 million for the second quarter of the prior year. Product revenue for the second quarter increased 107% or $740,000 to $1.4 million compared to $692,000 for the second quarter of the prior year. Gross margins. For the quarter, Telecom Services gross margin was 58%; Software Solutions 67%. Our product margins were 38% and overall gross margins came in at 58%. Operating expenses for the second quarter increased 36% or $3.5 million to $13.2 million compared to $9.7 million for the second quarter of the prior year. The company reported a net loss of $545,000 for the second quarter or $0.02 loss per basic and diluted common share as compared to a net loss of $896,000 or $0.04 loss per basic and diluted share for the second quarter of the prior year. Non-GAAP net income of $1.1 million for the second quarter or $0.04 per basic and diluted common share as compared to non-GAAP net income of only $512,000 or $0.02 per basic and diluted common share for the second quarter of the prior year. EBITDA for the second quarter was $383,000 compared to a loss of $232,000 for the second quarter of the prior year. Adjusted EBITDA for the second quarter increased $1.2 million compared to $626,000 for the second quarter of the…

Thanks, Ron. I'm very pleased with our strong Q2 results and excited that we continue to execute on our game plan and manage the fundamentals of the business. Our 43% year-over-year increase was driven by a substantial 22% organic growth from our Allegiant acquisition, which outperformed expectations, combined with 9% organic growth in our Software Solutions segment and 6% organic growth from our Telecom Services segment. The $12.7 million in revenue that we generated for the quarter, combined with a 21% year-over-year increase in our backlog to $51.2 million gives us greater visibility and confidence in our growth predictions over the coming quarters. As a reminder, our backlog is the sum of the remaining contract values for all of our telecom services and software solutions customers that will be recognized on a sliding scale over the next 60 months. Our organic growth efforts are continuing, and our performance in Q2 was generally steady. The 6% organic growth rate in telecom services was primarily driven by increased cloud adoption from end users and the 9% organic growth in our Software Solutions segment was driven by new logos as well as additions from our licensee network. As our licensees grow, many will add or need to add additional services from Crexendo, creating low-hanging organic software solutions cross-selling opportunities for the organization. We added eight new licensees for the quarter, bringing us to 233 licensees in total, which is on track with our internal expectations and we anticipate a significant number of additional licensees to come on board throughout the remainder of the year on the Software Solutions side of the house. And we also expect to continue to add strong dealer partners and agents in the Telecom Services segment. Our traditional Crexendo agent program continues to grow and our three large master…

Actually, Doug, I don't have any comments. So Holly, I'd like to turn the call open to questions.

[Operator Instructions] Your first question for today is coming from Eric Martinuzzi at Lake Street.

Eric, how're you?

Doing well, congrats on the cash flow positive. It was sooner and more than I was expecting for Q2. So that's definitely a nice milestone to return to there. I wanted to dive in on the how you're differentiating the master dealer channel specifically. You had obviously good success with your partners and agents here. And the record installs highlights that. But how - you don't lack for competitors. How are you differentiating?

Eric, I'll let Jon answer that.

Eric, good question. First, I'll start with one of the ways that we have significantly differentiated ourselves is our real focus on carving out just a great customer experience. If you are familiar with G2.com, they are the largest independent software review site. We're currently ranked number one across all providers for our category by our real customers on G2. And that's what I love about them. They validate that your reviewers are actually representing the company and your customers that they hold themselves forward to be representing. And if you understand that the master agent or technology service broker channel, the biggest thing, one of the key criteria to them is support after the sale. So where other competitors have stumbled of recent or not done as well in that area, we really focus across Crexendo on delivering an exceptional customer experience. I think it pays off there. I think there's other ways that we're differentiating ourselves when you get in - have been successful in growing into larger-sized customers over time and growing that channel. But to me, that's one of the key ways that I really feel like that we create additional value for those partners.

Got it. And then on the Software Solutions side, obviously, it's a lumpy business. We were up 26% in Q1 with a good chunk of perpetual, I'm guessing, and then were 9% in Q2. But just on kind of an overall 12 months basis, what does that business grow? Is that a high single-digit growth business?

Yes. Right now, we're looking at for the remainder of this year, high single digits, and we're moving into the low double digits for next year.

And keep in mind, Eric, as we've talked about in the past, we have two ways to acquire our platform. One is on a proprietary perpetual license and one is on a subscription basis. And so as we see more perpetual licenses, we'll see a little bit higher nonrecurring revenue coming out of a quarter. That's what we saw a little bit in Q1. Q2 was a little bit more normalized with more subscription services. And those subscription services are great because we get a higher monthly recurring commitment out of those opportunities. And so that makes for a very more reliable, predictable monthly recurring revenue stream going forward. So that's where you saw a little bit of the up and down from Q1 to Q2, but still really nice growth in Q2 with 9%.

Yes. I understand and congrats again on the quarter.

Thank you, Eric.

Your next question is coming from Josh Nichols at B. Riley.

Hi Josh. How're you?

Doing great. Thank you. Good to see the dramatic improvements in sales and operating performance. Looking here, I wanted to touch on a little bit more - I know you've taken a lot of initiatives to minimize expenses and improve profitability. Like could you elaborate a little bit on what you've done there, how much that's currently saved? And anything else that you could do to further bolster the bottom line?

Well, part of it is - Josh, what we did is we looked at all of the employees we had and realized that we have - when we could cross utilize them, we could prevent hiring an additional 10 to 12 people. So that was the use savings right there when we did a good job of putting everybody together. We stopped certain spending, which I thought was wasteful. We deferred certain spending, which we believed we could defer and we are waiting, as I said, for the huge savings that's going to come from being on one platform. That's going to have some actual very substantial hard costs and savings. The rent here, the electricity, all the licenses that are necessary to keep it up. Not to mention, we will then have another seven to eight employees that we could redeploy across the organization who will continue to enable us not to have additional hires. It's hard to quantify because we are genuinely watching every penny. Ron is my watch dog. If somebody asks me to spend any money, Ron looks at it first and see if it's in the budget, and if it isn't, there has to be some cost savings to substantiate it. So it's mostly a matter of discipline and mostly a matter of genuinely watching every penny we spend and not skipping on customer service.

I think, Josh, to add to that as we get larger, we have more leverage with our vendors and suppliers. And so the larger we get and the more we spend, the more leverage we have to negotiate rates. And so we've been able to do a good job of controlling our costs by renegotiating certain packages that have reduced our costs significantly.

And then just to follow up on the point that you made in terms of migration of customers to the VIP platform, where are you? Is that like halfway down, 1/3 of the way down? And I know it's a gradual process, but expectations on time line there since it's a big opportunity.

It's about halfway done, Josh. And as I mentioned on the call, we have sold the building here. We have a maximum of being in the building 18 months. We can leave as soon as 12 months. I would love to have it done in 12 months, but we will absolutely have it done by the time we have to be out of the building.

We're picking up a lot of steam there, Josh, and the fact that we've automated a lot of the processes. And so that was probably the biggest challenge is making things a little bit more seamless and quicker in the processes. And so we've maximized that, and so we're going to start seeing that accelerate even more.

Then you talked about it on the call, but if you could just dig a little bit deeper into the international opportunity. I don't believe - it's not a very big percentage of the company's revenue today, but how quickly could you roll that out? In what regions are leveraging the channel effectively to be able to do that?

Josh, I'm going to let Anand answer that. Go ahead, Anand.

Josh, I think the thing to look at is, today, we're probably about north of 20 international service providers outside of the U.S. Each one of these - the longer sales and I think Jeff spoke to the fact that the bigger service providers that we're getting, they will come in. And as we're establishing our brand there, what you're starting to see, and we've seen that with a handful of our providers as you're starting to see the upgrades kick in. So the reality is that we're being opportunistic in certain areas. But if you look at kind of the throughput on a per person basis in that region, there's a lot of activity. And then also from a macro perspective, the conversion to cloud is trailing outside of the U.S. relative to where we are here in the U.S. So there's kind of a natural organic move in that direction. In terms of the services that we already have, as Doug spoke to, folks are able to actually use a perpetual license or have a subscription and also host it in our facilities. We currently have facilities out in Amsterdam and the United Kingdom. And then we look to continue - and we've got plenty of capacity there. And then with the next generation of hosted services, we're already looking at virtualizing and pushing out, which is already in place. So I think all the pieces are there. Now it's just a matter of continuing to kind of service the prospects that we have in the pipeline.

Thanks. And then just a housekeeping question for me. I know you broke out some of the organic versus Allegiant, but what was the total Allegiant revenue contribution during the quarter? I think last quarter it was $3.1 million.

Yes. So for the total revenue contribution was $3.2 million for the quarter.

Great. Thanks.

Thank you, Josh.

Your next question for today is coming from Chris Sakai at Singular Research.

Good afternoon, Chris.

Yes, hi. Good afternoon. Can you talk about new licenses for the quarter? And how many were there from existing licensees?

Yes. Let me just reiterate my statement from my comments and then I'll have Jon add some more color. We added eight new logos in the quarter. I think six of those were domestic, two of those were international. And as far as the upgrades, we're constantly getting upgrades from our licensees that we have out there, we've got over 230 licensees now. So Jon, do you want to add a little bit more color on that breakdown?

Yes. So Doug gave you the general numbers and just understand with the new licensees, the opportunity is, about half of them are electing to have us host it as on and talked about in our infrastructure, our data centers have for self-hosting. And then about the current quarter, about 50% chose to procure their licenses on a subscription basis. So when we talk about kind of the big initiatives, giving customers buying choice, whether they buy perpetual or subscription licensing and then giving them the opportunity to either host it themselves or us host it for them, we're generally seeing a pretty even split in those options, and we think that's one of our competitive advantages in the market.

Okay. Sounds good. And then can you guys talk about your hiring freeze from latter? Has there been any traction for new hires?

Well, Chris, I loosened up the hiring freeze. Originally, it was a complete hiring freeze. And then as we got the discipline we needed and started to cash flow, we've decided that it was necessary to replace positions where people have left or have been terminated. So it's not a complete hiring freeze anymore, but it is a - we are only replacing people who have left. Next year, we will probably add, but we'll have to see where we are at that point.

Okay. Sounds good. And then can you talk about the Access4 and UC Xpress in Australia. Can you provide any - what should we expect as far as revenue there?

I'll let Anand answer that.

Yes. I mean I think from a revenue perspective - so a couple of different things. Obviously, I don't think we provide guidance on where we're going to go. But just to give you a little bit of context, Access4 in general is one of the largest white label providers that has a pretty large channel following probably with respect to probably in the 600 to 800 range of resellers that turn around and resell off of the platform. So this is a white label offering that they're taking to market, which before - and again, before they were actually providing those services using a BroadSoft platform. So they've made a pretty significant commitment. However, the growth prospects are - we will see kind of overtime as we go and then I think the other thing to keep in mind here is it's an alternative offering in the marketplace, and we've seen a general uptick from a lot of need in Australia in general. But it is basically a channel strategy that they're putting in place that will obviously turn around and benefit us in a great way.

Okay. Thanks for the answers.

All right. Thank you.

Your next question for today is coming from [Vivek Kalani] at Northland Capital.

Hi Vivek. How're you sir?

Hi there. I'm good. Hope you guys are doing good as well. I'm Vivek on for Mike Latimore. I have a couple of questions with me. And the first one is what is the latest subscriber count?

I'm sorry, the latest what?

Subscriber count.

Do you know that Ron?

On the Software Solutions side, we have 233 licensed providers on the software solutions side of the house. And then on the direct side of the house, I don't have an exact number, but north of 90,000 direct end users on the platform.

Okay. And my second question is, have you seen any change in the sales cycle or mid-size?

As we talked about during the call, we have found that the sales cycle for enterprise customers tends to take longer than it does for smaller customers, and we are trying to sell to far more enterprise customers. So to that extent, the sales cycle has increased, but I'll let Doug give a little more detail on that.

Yes. I think when we're talking about the small and midsized businesses, I think the sales process hasn't changed dramatically. But as we've highlighted, we have seen an uptick in larger sized opportunities. I think we had over a dozen six month total contract value sales during the quarter, which is pretty significant. And so when we see these larger-sized opportunities, they do take a little bit longer to materialize. And so we're not seeing a lot of headwinds from the economic challenges out there. So we're just plowing ahead, and there's a lot of demand for our products. So the sales cycle has not changed dramatically for us, and we're continuing to see good adoption of the product in the small and midsize. And again, the enterprise has always been a longer sales cycle, and we're going to probably continue to see that.

Okay. That's it from my side. Thank you.

Thank you very much.

Your next question for today is coming from Michael Kaufman at MK Investments.

Hi Michael. How're you?

I'm very good. I want to applaud the team's success and keeping up a financially responsible growth strategy compared to growth in any costs, which we've seen in some of our competitors like 8x8 and RingCentral. And I guess, to that end, how are we going to convey what we're doing that this is really a diamond in the rough to the investment community? I mean what kind of program do we have and at what point do we start doing some outlooks? Will we talk about the expense and revenue ratios, the total available market based on what we're doing and so that people get a better appreciation for - that this is bigger than a breadbox.

Well, Michael, we are making strides in that. As you're aware, we did hire an IR firm who is going to be getting us out to home offices, which will get us in front of the new market. The team aggressively goes out to investment conferences and tells the story. We are doing an excellent job internally of tracking stock owners and potential stock owners, and we're reaching out to them directly. One of the things you're son recommended to us. We continue to market both to customers and potential stock owners see it. I mean we're in a little bit of a pickle here. As you well know, the telecom sector has some substantial headwinds for reasons that have nothing to do with us. It was the growth at end strategy and borrowing cheap money, which has now become quite expensive and has hurt them something we didn't do. And you're right, we need to do a better job of distinguishing that and showing that we've carefully run the business by sound principles, and we are growing from organic growth. The message will start to get out. I hope that the micro-cap market will start to be getting a closer look now that we've had the big runs in the larger markets. And we just - Michael, all we can do every day is put our head down, work as hard as we can and deliver as hard as we can or reaching out to as many people as we can and continue to get results like this so when we're getting more eyes and when the market has turned both in telecom and from the micro-cap, that people will see that we are, as you said, a diamond in the rough.

And we do have, Michael, we do have four investment conferences coming up in September and October that you'll see a press release on here shortly. So we're doing our best to get our message out there to the masses because we know it's a great story.

No, I think you guys are doing a great job rooting for you. And - but anything you could do in kind of forecasting without really forecasting. But look at the type of metrics you're expecting in terms of gross margin and the mix between the type of companies that you're servicing. So that's somebody could see going forward where this thing is starting to go.

We understand that. We're looking at it. And as we discussed during the call, one of the difficulties of doing that is the - as one of the previous questioners asked, the lumpiness in the Software Solutions side, as we tend to convert more of the customers to a monthly subscription model, it will give us far more quarter-to-quarter ending, which will enable us to do that more easily. But it's something we're working on and something we're looking at.

Okay. Best of luck. Congratulations.

Thank you. Michael.

Your next question is coming from [Ronald Saul], a Private Investor.

Yes. Thank you. We made a lot of good progress in reducing the GAAP net loss in this quarter from like - perhaps to $500 million. When do we think we could be GAAP neutral?

Well, part of the problem, and I'll let Ron address this in more detail is the intangible costs we have from the acquisition. They are huge. They're not real cost to us, but their GAAP cost. So getting to GAAP profitability this year would be difficult, if not impossible. It's possible next year. But again, if we were to start doing acquisitions, you get back to intangible costs, but I'll let Ron give a little more detail.

As Jeff mentioned on the net income, net loss position from a GAAP basis, it's going to be a little challenging for the next year or so to get there. But on a non-GAAP basis and on an adjusted EBITDA basis, you're going to continue to see improvements in those numbers and we look forward to reaching that breakeven next year.

Are you still there, sir?

Yes. Well, we made so much forwards in this quarter from $1.5 million to $0.5 million. I just thought maybe in the next quarter or 2, we could get it to breakeven.

Unfortunately, the $0.5 million is the - is basically a lot of the intangible costs, and there's nothing we can do about that. But we will work as hard as we can. We will grow as fast as we can, and we are shooting for GAAP breakeven and/or profitability next year. But as Ron said, we will continue the cash flow, and that's the most important thing. As long as we're putting cash on the books and we're profitable, we will continue that.

Right. Yes, it looks like we made a lot of progress on the cash flow.

Okay. Any follow-up Ron?

No.

Thank you very much, sir.

Your next question is a follow-up question coming from Josh Nichols. Josh, your line is live.

Yes. Thanks. Just one last question. I think you mentioned the backlog was, I think, $51.2 million. I assume that includes Allegiant which isn't really apples-to-apples on a year-over-year basis. Do you know what the sequential growth in the backlog was? What we end Q1 at?

So that growth is both excluding Allegiant. That is the Software Solutions and our cloud telecom, excluding the acquisition backlog. So the number you have there is apples-to-apples on a comparison basis.

Got it. Thank you.

Thank you, sir.

[Operator Instructions]

Seeing none, I want to thank everybody for their attention and for joining the call. We look forward to discussing with you our Q3 results. While I can't promise you what the stock market will do, I can promise you that everybody in this room has rolled up their sleeves - okay, it's 109 degrees here in Phoenix. So nobody had long sleeves. But are rolling up their sleeves and are working incredibly hard every day to keep making this a better company, and I am confident that our results will continue to impress and that we'll have more exciting news when we reconvene again at the - for the Q3 meeting. So I thank all of you. Good afternoon, and thank you.

Thank you, everybody.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.