Greetings, and welcome to the Crexendo, Inc. Second Quarter 2024 Earnings Call. At this time, all participants are on a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Jeff Korn, CEO of Crexendo, Inc. Sir, you may begin.

Thank you, Ollie, and good afternoon, everyone. Welcome to Crexendo's Q2 2024 Conference Call. I'm, as Ollie just said, Jeff Korn Chairman of the Board and CEO of Crexendo. 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, John will read our safe harbor statement. After that, I will give some brief comments on our performance for Q2 and a discussion of what I see happening with the business. Ron will then provide more detail on the numbers before handing the call over to Doug to provide a business and sales update. After that, we will open the call up to questions. Jon, would you please read the safe harbor statement?

Thank you, Jeff. 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, 2023, 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. I'd now like to turn the call back to Jeff. Jeff?

Thank you, Jon. I'm thrilled to share the outstanding results and strategic directions that highlight our most successful quarter yet as a technology telecom company. Let's dive right into our highlights. This quarter, we exceeded both our internal expectations as well as those of our analysts. I won't step on Ron's thunder, but our revenue number of $14.7 million, up 16% year-over-year, and our net income up 220% year-over-year is in a word, remarkable. Crexendo maintained its streak of achieving GAAP profitability for the fourth consecutive quarter, which is only due to the hard work and dedication of everyone in the room with me as well as the entire Crexendo team. I cannot tell you how lucky I consider myself to work every day with this tremendously talented team. Everyone at Crexendo is focused on driving shareholder value, but also making sure we have the world's best technology for our wonderful licensees and our direct customers. It's been a remarkable period of growth and achievement, signaling a bright future ahead. However, our philosophy remains rooted in continuous improvement. While it might be tempting to rest on our laurels, we recognize that satisfaction can breed complacency, and we are committed to putting the boundaries further. We have made significant strides in refining our teams and reporting structures. Through these enhancements in staffing, processes and responsibilities, our organization is becoming more agile and effective. This ongoing endeavor is crucial as we adapt to the evolving market demands. A key factor in this quarter's success has been the increased efficiency of our customer support team. We've seen improved installation and response time, and we remain committed to elevating our service levels even further. These enhancements directly contributed to our strong performance metrics this quarter. We work every day to improve our operations. We…

Thank you, Jeff. Good afternoon, everyone. As Jeff mentioned, we had a wonderful quarter with total revenue for the quarter up 16% to $14.7 million compared to $12.7 million for the second quarter of the prior year. Our service revenue increased 10% to $8.1 million compared to $7.3 million in the prior -- second quarter of the prior year. Software Solutions revenue for the quarter increased 35% to $5.3 million compared to $3.9 million for the second quarter of the prior year. Our product revenue decreased 10% to $1.3 million compared to $1.4 million for the second quarter of the prior year, as we continue to focus on higher gross margin product offerings. Consolidated gross margins for the quarter were 63% as compared to 58% for the second quarter of the prior year. Our Software Solutions gross margins for the quarter were 73%. That's compared to 67% for the second quarter of the prior year. Our Telecom Service segment gross margins for the quarter were 58%, that's compared to 55% in the second quarter of the prior year. That's driven by service revenue gross margins of 60%, that's up from 58% in the second quarter of the prior year. And our product margins increased to 46% from 38% in the second quarter of the prior year. Operating expenses increased 7% to $14.1 million compared to $13.2 million for the second quarter of the prior year. To put this into perspective, we have added 12.5 FTEs and 10 outsourced resources compared to the second quarter of the prior year, so, as we continue to invest in our product and our services. Net income of $588,000 for the quarter. That's $0.02 per basic and diluted common share compared to a net loss of $544,000 and $0.02 loss per basic and diluted common…

Thanks, Ron. Q2 was a great quarter for Crexendo, and I'm very pleased with our results for the quarter and for the first half of 2024. Our organic growth rate of 16% year-over-year in Q2 and 15% organic growth for the first half of the year, along with our fourth consecutive GAAP profitable quarter were the direct result of our focus on growing the top line organically and managing the fundamentals of the business. Our strong GAAP net income of $588,000 for the quarter or $0.02 a share, and our non-GAAP net income of $2.1 million for the quarter or $0.08 a share, highlight that we are executing on our business plans extremely well. This is our 23rd consecutive quarter with non-GAAP net income, and our results for the quarter continue to highlight our improvements in our processes, our procedures and sales, as well as our success in managing costs and maximizing synergies from all of our business segments. These strong results also contributed to our strong positive cash flow for the quarter, which saw our cash position increased 223% year-over-year and 23% from the prior quarter. We continue to see significant organic growth in both segments of our business for the quarter. What is particularly exciting is that our Software Solutions segment achieved 35% organic growth, which propelled us to a combined 16% organic growth rate for the quarter, providing a solid indication that the continued strong demand for our products and services continues. The 35% organic growth rate in our Software Solutions segment has us closing in on the 5 million user mark on our platform that I anticipate we should eclipse this quarter. The rapid growth we are experiencing on our platform is a combination of our existing licensees, continued success, together with strong new logos coming…

Thank you, Doug. And, Ollie, I don't have any further comments. Let's open the call up to questions.

[Operator Instructions] Our first question is coming from Mike Latimore with Northland Capital Markets. Your line is live.

Hi, Mike. How are you?

Thanks a lot. Good evening. Congrats on the great results here. Cash flow from operations look great and organic growth is excellent. So, congrats on that. I guess I had a question around your software business. The growth rates accelerated from looks like 21% to 25% to 35% over the last few quarters. I guess can you frame that a little bit more? What are you seeing from new versus existing selling software versus subscription within there? Maybe some actions your own licensees are taking on their part and pricing? Just a little more kind of context would be great because that's a pretty big acceleration.

Mike, I'm going to give that to Jon and Anand to answer, we'll start with Jon.

Yeah. Mike, how are you doing today? Good. We are seeing continued growth and success in a couple of areas. I mean, one, when we talk about the compounding and the user growth, I think you really understand we're partnered with some great entrepreneurial companies and larger carriers that are driving at a great growth rate. They continue to excel, leveraging our software and that leads them to purchase upgrades and things like that from us in the future, and we've had a healthy funnel in that area. We are seeing an influx in interest, as Doug indicated from and Jeff indicated from both Cisco BroadWorks partners and Microsoft Metaswitch partners and others who have bases that they're concerned about the long-term future for them. So, they are looking at moving to our platform, and we're getting some traction with those type of partners. And we just continue to grow also in our ecosystem and the additional services that we can sell to our partners as well. So, across that area -- just generally across that business, now there is a bit of lumpiness to that. So, I wouldn't like build that into the model necessarily for 35% software solutions growth, but we do believe we're going to continue to have strong double-digit growth in that part of the business. And I don't know, Anand, if you have anything you want to add to that.

And Ron had a look of relief on his face when he told you not to build that into your model.

I mean, I think Jon nailed it pretty well. I think just to emphasize the other area, yeah, I think the idea is to -- and we've spoken about this before to Mike, is to kind of get a little bit more predictable with the shift from perpetual to licensing. It's a little lumpy like what Jon said, but we're also seeing quite a bit of growth in the ecosystem revenue that comes from all of the other services that we add on top of the platform. So, it's a bit across the board. And like Jeff said, I sighed a little bit of relief not to build that 35% into your model.

We do, just as a follow-on, we do provide the breakdown on point in time versus recurring revenue in the Q. And if you look at that, you do see that the recurring has continued to build consistently quarter-over-quarter, and we're very pleased about that.

That’s great. Excellent. And the gross margin on the software business remained very healthy. Is that something that is fairly consistent going forward here, sustainable or will that move around a little bit?

The short answer is yes, but I'll let Ron give you more detail.

Yes. Mike, as we focus on gross margin, we've been able to leverage our existing staff. And as I mentioned in my comments, compared to Q2 of the prior year between consultants that we use third-party resources for customer service and engineering-related work, as well as the addition of 12.5 FTEs, we've continued to invest in our team to leverage that team for this growth that we have been experiencing recently. But there is a very high margin business. It's -- software is typically anywhere between 75% and 80% margins. And so coming in at 73% margin, we're starting to see that increase. Quarters ago, we were lagging, and we were in the low 60s, and now we're up to 73% margin. We think we can continue to improve on that.

Yeah, that's fine. Okay, congrats again. Best of luck this year.

Thanks, Mike.

Thank you, Mike.

Thank you. Our next question is coming from Josh Nichols with B. Riley. Your line is live.

Hi, Josh. How are you doing?

Doing great. And it's great to see such a strong report from top to bottom. One thing I just wanted to touch on just because this is like the biggest sequential increase I've seen in the backlog for a while going -- I think did you say [$71.2] (ph) million?

Yeah, $71.15 million.

Who's counting? But we are -- I'm kind of curious like what's driving such a rapid acceleration in the backlog growth? And if you could provide some context into that or the services that are building into that, that would be great.

Yeah. Obviously, as you know, the backlog number consists of all of our contractual obligations and most of our customers are on 36 or 60-month agreements. And so, as we continue to have strong sales, those numbers go into our backlog immediately. And so, that number just continues to compound because of the strong sales that we've got both on the Software Solutions segment and the Telecom Services segment. So that number, as we continue to grow that number, I think I said it was up 39% year-over-year. That's great growth, and that's because strong sales on both segments continue to add to that backlog number.

And then just curious, I appreciate the context about the software piece, healthy double-digit growth. I understand it's a little bit lumpy and the queue is not out yet, I think. But what's the breakdown in terms of recurring versus point in time for that, just trying to build in expectations for the future?

Yeah. So, on the Software Solutions side, 74% is recurring revenue versus our onetime.

Appreciate it. Thank you guys.

Thanks, Josh.

Thank you. Our next question is coming from Ryan Koontz with Needham & Company. Your line is live.

Hi, Ryan. How are you?

Hey, I’m great. Quick clarification if I could. I didn't hear your response to Mike's question about your growth in Software Solutions, if you saw more of that coming from customer expansions or new customer wins?

It's actually both. But Ron can give you more detail on that.

Yeah. During the quarter, we had four new logos that were added to our partner, and we had eight upgrade orders.

Nice. And on the step-up in gross margins, can you remind me kind of where you are in your migration over to Oracle there? What percentage is done? And it sounds like there's some further opportunities to see some gross margin lift on the solution side?

Ryan, it's a very small number at this point because we just started the integration with Oracle. We're putting a few new customers on it to make sure we understand their platform, and we can do it seamlessly. You really won't see much of a migration until Q1 or Q2 of next year.

I see. Got it. And what's the competitive environment like there? Obviously, it’s tilting very much in your favor with your success, I'm guessing. And how big is that Metaswitch installed base that you can go after, do you estimate?

Fairly large. We think that there's probably 500 or so licensees out there on the Metaswitch platform. When Microsoft bought them four years ago, they spent about $270 million acquiring Metaswitch. So, it's a fairly decent sized organization. And Microsoft's announcement of retreating out of the telecom platform space, just creates opportunity for us. So, we're excited about it. I think we brought on in the last six or nine months, quite a few Metaswitch licensees that have migrated over to the Crexendo platform. So, we're extremely excited about their removal from that part of the business and -- or they're retreat from that part of the business and the opportunities it's going to create for us.

Got it. Thanks. And can you remind me how much kind of technology and R&D synergy there is between the Software Solutions side and your subscription VoIP side. Is it all built on the same base? Or are you still kind of pulling together -- what's that road map look like between the two sides of the business?

Yeah, it's all on the same -- the NetSapiens platform that is our platform -- software platform solution is also branded as our VIP platform for our direct end-user business. And we've got 90% of our customers that are on the VIP platform today. We still have some of our classic customers on our older platform that we're migrating over to the VIP platform, and we anticipate, as Jeff mentioned earlier, all of that migration to be complete by the end of Q1. So, when we look at that, we're just getting our last customers off of our classic platform and giving them the nice upgrade to the VIP platform, which gives them enhanced capabilities, enhanced features for the same price.

And the synergies between the two is not an unimportant thing that you mentioned. One of the things we like when we acquired NetSapiens was the fact that all of a sudden, our retail engineers would be working hand-in-hand with the wholesale engineers who really understand what drives market needs. So, it's been a very synergistic opportunity. We eat our own dog food. All of the Crexendo customers are going to be on the same platform, and that's why we work every day to make sure the platform is second to none.

Perfect. Just one last housekeeping one. I kind of read between the lines in terms of your expanded backlog. It sounds like maybe your new contracts are kind of increasing in duration? Are you doing a little more five-year deals than threes, than you were previously maybe?

Yeah. Most of our software solutions licensees are on three-year agreements, but the churn on that is almost negligible. So, very little churn on the licensee platform side of the house. On the direct end-user customers, on the retail customers, probably the higher majority of those customers are on 60-month contracts. That's where they get the best pricing terms with us. Secondarily to that would be 36-month contracts.

Great. Thanks for all that. It's really helpful. I'll jump off.

Thank you.

Thanks, Ryan.

Thank you. Our next question is coming from Mark Hagen with Lake Street Capital. Your line is live.

Hi, Mark. How are you doing today?

Hey, great. Thank you for taking my questions. I was just wondering if you could put any color around the legacy Phoenix data center and kind of where that's at. My understanding was it was going away, and with the OCI investments?

Well, it's a two-step process or it may morph to a one step, but we're moving everybody off of our classic platform onto our VIP platform, which is on our hosted one, which will be morphed over to hosted two. But as we said by the end of Q1, we do not expect to be running a separate legacy platform.

Perfect. I thought I'd gotten the answer a little early, but I just want to make sure. Thanks for taking my question. Thanks.

Thank you.

Thank you. Our next question is coming from Chris Sakai with Singular Research. Your line is live.

Chris. Good afternoon.

Yes, hi. Good afternoon. Just wanted to get an idea about you've got Software Solutions revenue growth and margin growth. What sort of -- how can we -- what should we be expecting in the next quarter as far as that's concerned?

We expect continual growth, Chris, as Anand and John explained previously. We're not going to commit to 35% growth, but all trends look for continual strong growth in that market. I don't have a number for you, but it will be less than 35%, but it will be a damn good number.

Do you foresee one day that software solutions would outpace telecom services?

Absolutely.

Yeah, if you look at the growth rate that we're seeing now, Software Solutions is growing at three times the rate of our retail division. So, there's just a lot of pent-up demand for service providers looking for a platform. So, we see that segment of the business continuing to grow. And so right now, it's close to 40% of the total revenue stream. Within a year or two, it could be the majority.

Okay. Interesting. And how is expansion in Australia going?

It’s -- I'll let Anand answer that. It's a harder market for us, but we're making some great inroads.

Yes. I mean, I think, as Jeff spoke to, our UK operation actually handled our international operation. We've actually added another resource on the Street, even in Australia because we continue to see some of our existing partners grow. We've had a handful of partners that were there. And then a number of the logos that Ron referred to as well, do come from that region. There's a lot of interesting change. Any of these international markets have consumed the product ever so slightly differently. So, we have to keep an eye on that. But at the core, it's still the same core platform, the core licensing and whatnot. And then as Jeff mentioned as well, some of these larger service providers, we're also operating in those regions, larger platform providers, specifically folks like Cisco and BroadSoft. And we're seeing quite a bit of interest there. And you probably read some of the partners that have actually moved over from BroadSoft. So, we continue to see good progress in those areas.

Okay, great, Thanks.

Thank you, Chris.

Thank you. Our next question is coming from [Igor Tomecek] (ph) with Freedom Broker. Your line is live.

Hi, Igor. How are you?

Fine, thanks. Just wanted to ask about your future plans. Maybe given your strong performance for the first half of the year. Maybe you can give us some guidance about your full year guidance. [Technical Difficulty]

I'm sorry, Igor, you were breaking up. Apparently, you don't have a Crexendo telephone. If you could repeat the question, we would appreciate it.

So, I was talking about your full year guidance. Previously, you mentioned that you would expect double-digit organic revenue growth, maybe something changed?

Nothing has changed, except I expect it will be more than the low double digits, more than 10%. We're not ready to give specific guidance, but nothing has changed in our expectation of double-digit or better growth.

Okay, got it. And I also wanted to ask a little bit more details about your Oracle partnership. Maybe you can give some numbers on magnitude of cost benefits do you expect?

Well, as I indicated before, we're testing and learning the process. We expect to move -- over the course of next year, all of our hosted customers over to the OCI platform so that we no longer have to maintain any data centers, which will be a huge cost savings for us. And as I said, it has ancillary benefits as it increases our response time and increases the amount of time in which we can set up the connection. So, it will be a win-win. But over the course of next year, we expect to be closing all the data centers and moving everything over to OCI.

Okay, thank you. I’m out of questions.

Thank you, sir.

Thank you, Igor.

[Operator Instructions]. Our next question is coming from Sam McColgan with Breakout Investors. Your line is live.

Hi, Sam, how are you?

Yeah, yeah, very good, very good. Thank you. Yeah. Brilliant quarter, you guys are really killing it. Great improvement, revenue, gross margins, everything, lovely to see OpEx coming down, great cash flows, balance sheet. You're killing on all cylinders, I think. Just one question for me on top of everything else that got asked, which is when you're looking at your backlog, I was just curious in terms of how it breaks down in terms of kind of domestic versus international, if you can give any color to that.

I'm not sure we have that handy, but I'll let Ron answer that.

Yeah. Currently, we disclose our backlog by segment. We don't have a backlog disclosure by US versus international. I'll consider adding that to future reporting.

As I mentioned prior, Sam, international has begun to become a material part of our business, which will trigger certain reporting requirements. So that one, not necessarily, but it is something that we will track and we should be able to start answering for you.

And to just give you a little color on that, Sam. So, at the halfway part of this year, we currently have $20.245 million in backlog remaining for this year, for 2024. For 2025, we already have $24 million in backlogs queued up for revenue for 2025. And then that number is $15.172 million for 2026, $8.589 million for 2027, and a little bit over $3 million for 2028. So, you can see how that backlog is critical for our future success, 2025 already having $24 million in revenue queued up for it.

Yeah, those are brilliant numbers for the backlog. Thanks for sharing. I look forward to hearing the breakdown maybe in the future. Yeah, thanks again guys, well done. That's all from me.

Thank you.

Thank you. Our next question is coming from Michael Kaufman with MK Investments. Your line is live.

Hello, Michael. How are you this afternoon?

How are you doing, Jeff?

I am doing great, thank you.

I want to really thank the team for an incredibly balanced attack on the business opportunity. And all of the metrics, as people have said before, seem to be perfectly aligned and running in the right direction. And two areas, this is the best kept secret in Wall Street, I think, in terms of the opportunity and how perfectly you're attacking it. And I'm wondering what you might be doing in terms of generating more outside exposure for the company in terms of investors. And the other thing is that you were talking about some possible small tuck-in acquisitions now that really small companies in the financial environment. We really don't see an exit strategy, and there might be an opportunity, not the companies that think they're worth the moon, but really small companies were strategically either in the geography or somewhere else makes sense to just tack on.

All right, Mike. First, let me thank you for the compliments to both me and the team. It is much appreciated. Secondarily, let me go with your last question regarding acquisitions. Even small tuck-in, as I mentioned in my comments, private equity at the moment is paying multiples that are just not supported by Wall Street Sanders in our field. So that's making it difficult. Now private equity does not have much of an interest in some of our smaller licensees in the $2 million to $5 million range. So, you would think that would make it a better multiple. But at the moment, even the small licensees are looking at what the larger licensees are being paid, and they have that multiple in their head. Eventually, all acquisitions in Wall Street become rational and we believe the market will come back to us and people will understand what a rational multiple is. We also have the advantage for somebody who wants to sell. We can make a portion of the purchase price and stock and they can ride with us in the future and to the acceleration we expect. But we're keeping our eyes open. And if we see the right tuck-in acquisition, we will grab it, but we are not going to do an acquisition for the sake of an acquisition, or get anything that is not going to be accretive or enhance our numbers or enhance our business.

And on the other part of the question, Mike, on getting our message out there. We continue to do investment conference after investment conference. We've got summertime. There's not as many investor conferences going on, but they're starting to get queued up over the course of the next two months. You'll see us up in New York City quite a few times with different investor conferences, telling our story to investors. And then over the course of the next couple of days, we've got quite a few virtual meetings lined up with a lot of retail sites that have picked up on Crexendo's story and are trying to get it out there to the masses. So, the more times we continue to tell the story, the more people will pick up on the fact that we are a diamond in the rough and appreciate you acknowledging that.

Best of luck. I'm sure you'll do a great job. And so far, you've exceeded all my expectations.

Well, if only I can get somebody to tell me that at home. But thank you, Michael.

Good luck guys.

Thank you.

Thank you. As we have no further questions in the queue at this time, I will hand it back to Mr. Korn for any closing comments.

I, again, want to thank everybody for joining us and for the questions and for your support. I, again, want to thank the team with me here in the room and the team in all of our offices who are working every day to make sure these results continue and that we make all of our investors and customers proud. So, we look forward to talking to you about our Q3 results, and have a great afternoon.

Thanks, everybody. Bye-bye.

Thank you. This concludes today's call, and you may disconnect your lines at this time. And we thank you for your participation.