Good day and welcome to the Crexendo Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks there will be a question-and-answer session. I would now like to turn the floor over to CEO and Chairman, Jeff Korn. The floor is yours.

Thank you, Kelly, and good afternoon everyone. Welcome to the Crexendo Q3 2024 conference call. I’m as Kelly just told you Jeff Korn, Chairman of the Board and CEO. 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, Jon will read our Safe Harbor statement. After that, I will give some brief comments on our performance for Q3. Ron will then provide more detail on the numbers before handing over the call 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?

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 these 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, 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 pleased and excited to report that Crexendo again delivered exceptionally strong financial results for the third quarter of 2024. This reflects our commitment to providing premier cloud communication software and services and continuing our organic growth trajectory. Consolidated revenue grew 13% year-over-year, driven by a remarkable 25% growth in our software division. Our year-to-date numbers are equally strong, well ahead of internal and external expectations, and I am excited about the momentum we are seeing. This performance reflects the dedication of our entire team to deliver the best cloud communication software and customer service in the industry. Our scalable software platform and relentless focus on meeting the rising demand for comprehensive cloud solutions continues to drive our growth. I am also proud to mention that we maintained our streak of GAAP profitability now for the fifth consecutive quarter and non-GAAP net income for the 24th consecutive quarter. G2 continues to rank us number one in 18 customer satisfaction categories in G2 Spring 2024 Reports, marking the fifth consecutive quarter that Crexendo has led in multiple satisfaction categories. This is a very competitive advantage to us as we tend to rank much higher than our competitors and our customers know that support is exceptionally important to us and they were putting our resources behind the support, so we are there when our customers need us. Our focus on customer service should be a strong growth driver now and into the future. This quarter’s financial results includes revenue of $15.6 million, up 13% year-over-year, GAAP profitability of $1.2 million, and non-GAAP net income of $5.7 million for the nine months ended September 30, 2024 or $0.22 basic common share reflects our focus on regularly delivering profitable growth and creating value for our shareholders. As we look ahead, we…

Thank you Jeff. Good afternoon everyone. I will go over our financial results for the third quarter. Total revenue for the quarter increased 13% to $15.6 million compared to $13.9 million for the third quarter of the prior year. Service revenue for the quarter increased 6% to $8 million compared to $7.5 million for the third quarter of the prior year. Our software solutions revenue for the quarter increased 25% to $5.9 million compared to $4.7 million for the third quarter of the prior year. Product revenues for the quarter increased 9% to $1.8 million compared to $1.7 million. Consolidated gross margins for the quarter were 61%, consistent with 61% for the third quarter of the prior year. Software Solutions gross margins for the quarter were 71% consistent with 71% for the third quarter of the prior year. Our Telecom Services segment gross margins of 55% were consistent with 55% for the third quarter of the prior year. Service revenue margins were 58% consistent with 58% for the third quarter of the prior year and our product margins decreased to 40% compared to 45% in the third quarter of the prior year. Operating expenses for the quarter increased 15% to $15.5 million compared to $13.5 million for the third quarter of the prior year. And that’s due to the investment in our employees added headcount, additional investments in Oracle cloud infrastructure and our investment in our accounting system implementation. Net income of $148,000 for the quarter or $0.01 per basic common share and breakeven per diluted common share. That’s compared to net income of $1.7 million or $0.07 per basic common share and $0.06 per diluted common share for the third quarter of the prior year. And I’ll highlight that during the third quarter of the prior year we recognized…

Thanks Ron. Q3 was another strong quarter for Crexendo and I’m very pleased with our results for the quarter and for the first nine months of 2024. Our organic growth of 13% year-over-year in Q3 and 14% organic growth for the first nine months of the year, along with our five consecutive GAAP profitable quarters, are the direct result of our focus on growing the top line organically and managing the fundamentals of the business. Our GAAP net income of $148,000 for the quarter or $0.01 a share and our non-GAAP net income of $1.7 million for the quarter or $0.06 per share highlight that we are executing on our business plans extremely well. We are reinvesting back into the business with recent hires and customer support, engineering and sales during the quarter, so we can continue enhancing our product development and support but do so profitably. This was our 24th consecutive quarter with non-GAAP net income and our results for the quarter continue to highlight our improvements in processes, procedures and sales as well as our success in managing cost 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 increase to $15.5 million which is up 200% year-over-year and 13% from the prior quarter. We continue to see strong organic growth in both segments of our business. What’s particularly exciting is that our Software Solutions segment had another great quarter with 25% organic growth and we have seen a 28% organic growth so far this year, year-to-date in Software Solutions segment. The 25% organic growth in our Software Solutions segment for the quarter helped propel us past the five million user mark on our platform that we announced during Q3…

Thank you, Doug. I actually don’t have any comments at this time. So Kelly, I’d like to open the call to questions.

Certainly. The floor is now open for questions. [Operator Instructions] Your first question is coming from Mike Latimore with Northland Capital Markets. Please pose your question. Your line is live.

Hi, thank you.

Hi Mike, how are you today?

Hey, very good, very good. Thank you. So the quarter was great. Backlog growth looked really, really nice. Interesting on the new logo. You said eight new logos, I believe that was double sequentially, I believe. How did the – how are expansions? How many number of expansions did you have in the quarter?

Great question, Mike. So eight new logos for the quarter was significant for us. We, on top of that, had five expansions from our existing licensees, so overall on the software solutions side, again, just another stellar quarter. Nice to see all the new logos coming on Board, but also nice that we had five strong upgrades from our existing partners as well.

All right. Great. And then I know you’ve been working on some tools to help managed service providers accelerate their migration off of Microsoft and BroadSoft to you guys. Can you kind of give a status on those tools and the benefits that you see?

Mike, I’m going to let Anand give you some details on that. Go ahead.

Sure. Hi Mike, I think the progress continues. We’ve actually added a partner who actually does significant kind of work in terms of automating those migrations. It’s two-fold, right, for folks that are moving over, some that are doing cap and grows and some that want to accelerate even further. And then there’s probably a pipeline of a couple more partners as well that are in that space that are helping facilitate the migration off of some of these other platforms. So overall, it’s going quite well.

Excellent, excellent. And then just last on the kind of the application ecosystem, it was interesting to see all the companies at your users conference, lots of interesting new applications there. Can you just elaborate a little bit on the progress over the last year and sort of building up that portfolio? And then how do you think about the potential financial impact here in terms of win rates and upsells and revenue share?

Sure, sure, sure. I think a couple of things. Obviously, I won’t touch on the revenue because I don’t think we go with guidance on stuff like that because some of the stuff is seeds that we’re planting. The applications that you see across the Board are anywhere from automation applications to customer experience-related chatbots that are being built on the platform. AI usage of customized prompts for unified communications, and then also verticalized applications that are going into the different vertical markets that our service providers go after. In terms of the ecosystem itself, we probably had 50-plus vendors at our user group meeting. We look to probably continue to grow that. We have 10 to 15 that are being onboarded at the moment with respect to revenue shares and things of that nature that will add to the revenue line as we go forward. But the applications are across the Board. And step one is just the retention that we get and the stickiness and the differentiation that our providers get when they’re competing against the biggest players in the marketplace, and we’re seeing a lot of success there.

Great. Thanks very much. Best of luck for rest of year.

Thank you, Mike.

Your next question is coming from Eric Martinuzzi with Lake Street. Please pose your question. Your line is live.

Good afternoon, Eric. Hope you are doing well.

Congrats on the solid quarter there. Had a question regarding the – just kind of the macro environment here. The UCaaS revenue, the services revenue was up positive. It was up 6%. But I saw that it was essentially flat sequentially. I’m just wondering, is there a macro issue at play here? Or was there some unique circumstances on that services revenue sequentially in Q3?

Not a macro issue. We had a little bit of an escalation in churn during the quarter from one national account, but that impacted revenue a little bit. And then overall, the makeup between service versus product, and in the prior quarter, we had strong product. And so just from quarter-to-quarter, the top line on Telecom Services, whether or not it’s coming from our service line item or our product line item, that mix changes from quarter-to-quarter. So we’re still seeing strong sales channel, big funnel, and everything is moving in the right direction.

Okay. And I’m not looking for a specific number in Q4, but would we expect the services revenue to be up sequentially in Q4?

We don’t give guidance, but yes, it’s similar to current quarter or sequential growth.

Okay. All right. And then you talked about some of the investments that you’ve made in headcount. I did see the operating expenses there at around $15.5 million. The GAAP operating expenses at $15.5 million. That includes the cost of service and cost of software solutions revenue as well as the cost of product. But as far as the expectation, are we at kind of a run rate? Maybe let’s just talk kind of SG&A and R&D. Are those at kind of a run rate or is there a ramp that we should kind of bump that up?

Eric, on a macro basis, there will be the continued expense on both OCI and the Oracle accounting system. There will be some additional headcount. I’m trying to defer additional headcount as much as we can, considering the fact I discussed that once we’re on the – once we’re on OCI, we will have a number of employees whose functions we can move. And so we can – we’re trying to defer hiring as long as we can to move those people into the open positions we have. But we will make the necessary investments.

Got it. And then lastly, you touched on the competitive landscape and I was just curious from the NetSapiens user group meeting, just – the key takeaways, do you feel like versus a year ago that, I guess, the pipeline of people interested or maybe even just showing up at the user group meeting. Were there new faces there or is it kind of more enthusiastic response from people who’ve come in the past years?

Eric, it was both. We had the largest UGM we ever had. We had new faces, we had new logos and we had more people coming from people who’ve been there before. And as I said, the difference between last year’s UGM and this year’s UGM was just amazing.

I’ll just add a little bit to it, Eric, about over 30% of our attendees were first time attendees. One thing about that conference that you must be a licensee to attend. So it’s not a prospect event, but it from a community and enthusiasm level, like Jeff said. We had records across the board on every metric tons of first time attendees and just excellent feedback overall.

I think what we get the most out of that user group meeting, Eric, is that the excitement in the room is because everybody else is seeing that same level of excitement in their business and seeing increases in sales and opportunities. And so it really is an area for us to share best practices. And so when they get with the other members of the community and they talk about what’s working in Florida or what’s working in Idaho or what’s working in Texas, they can share best practices with all the other vendors and all the other licensees and then they go back and implement that and when their sales pick up, our sales pick up. And we did have attendees from eight countries and four continents this year, so it is becoming more of an international event as well.

Well, Eric, last year I felt like I had to hide. This year I was thrilled to go talk to anybody who wanted to talk to me.

I understand. It’s nice to see that reversal. Thanks for taking my questions.

Thank you, Eric. You have a great afternoon.

Your next question is coming from Ryan Koontz with Needham & Company. Please pose your question. Your line is live.

Hi Ryan, how are you?

I’m doing great guys. How are you?

Wonderful, thanks.

Super great quarter. With regards to the expense of the migration and kind of double paying for private cloud and public cloud migration. Can you quantify the gross margin headwind on COGS that you’re feeling this year or this quarter?

Ron, you want to take a shot at that?

Yes. So right now we’re in the process of continuing to migrate our legacy customer base to the VIP platform powered by NetSapiens. Once we get that completed, which we expect to be complete at the end of Q1 of next year, then we will be able to shut down data centers and start to see that cost savings which we expect to be 1%, 1.5% of those costs of – sorry, as far as quantifying as percentage of revenue, I think, we got about a 1.5% savings.

Okay, great. It’s about 100, 150 bps. That’s great. And with regards to the great results on the software solutions business, can you speak a little bit about where you’re seeing the most near-term traction there and remind me of your go to market approach? I assume that’s mostly U.S. rural. You’re seeing the most traction or where would that be coming from in terms of markets?

Yes. We did have – we’ve had good international growth. We had three new licensees internationally but we are seeing very thought – we always have a community of vendors that we take partners from. Nobody starts their first UCaaS offer with our platform, but we did see excellent growth in partners converting from the Metaswitch partner community last quarter and we’re continuing to see that. So of that new logo growth, the single largest chunk of them were customers that have a Metaswitch platform and they’re looking for a new home in a new long-term strategy for their business. But overall, we have several that we have shared donation from. We have good geographic coverage in that, also in our international business, Doug mentioned we had our first licensee actually in continental Africa last quarter. So we’re continuing to see good growth and expansion.

Got it. Great. Remind me, these are private label partners that are bringing solutions to market to go after Metaswitch instances.

These are people that are licensing our software and either having us host it for them or hosting it in their own infrastructure. So in many cases, they’re telecommunications carriers, MSPs or others, but they take the software. Think of the Nvidia inside in a computer stack, they take our software, deploy it in their infrastructure, put their own branding on it, have a billing engine behind it or have us host it for them. So we’re kind of the inside technology that’s operating their UCaaS offer.

Sure. And these customers are your channel to the end users themselves.

Yes. They own the relationships with the end users.

Perfect. Got it. Like a traditional operator. Great. And then on the service revenue side, any changes in the competitive landscape there? I mean we’ve seen – it feels like we’ve seen the U.S. market slow a bit here and teams certainly strong at the high end. Can you kind of touch on the competitive landscape and sounds like you’re making some inroads internationally. Maybe touch on it from that perspective, both U.S. and international. Thanks.

Yeah. And then telecom services, we only do telecom services on the U.S. side, so we don’t do direct retail offerings internationally. So just on the wholesale side is the international offering. So on the direct side, very competitive out there. We continue to see competition from RingCentral and 8x8, Vonage and then all of the licensees that are using BroadSoft and Metaswitch and even sometimes the Crexendo platform. But overall, I mean, our biggest competitors out there, we win way more often than we lose to them, because of our offering and our customer service and support. We highlighted the number one rankings in 18 different categories on G2.com, that’s significant. And most of our bigger competitors really are way down the list on the rankings on that. So a lot of – two years ago, Ryan, 80%, 85%, 90% of our customers were coming from legacy. Today, it’s probably maybe about 60% coming from legacy and 40% coming from other cloud providers. So as other cloud providers continue to struggle with good service and support, that creates opportunity for us. So the competitive landscape right now on both the wholesale and retail side are very favorable for us because we’ve got a lot of unhappy customers on both sides of the equation that are looking for alternatives. And when they’re looking for alternatives, Crexendo is the best solution for them.

Great. Thanks for the questions. Appreciate it.

Thanks, Ryan.

Your next question is coming from [indiscernible] with B. Riley. Please pose your question. Your line is live.

Hi, Matthew.

Hi. This is Matthew filling in for Josh Nichols. Thanks for taking my question. So, yes, I just had one quick question. Yes, thank you. So how does the company think about balancing direct sales versus leveraging the reseller channel?

I’ll let Jon answer that.

Yes, Matthew, we think of what we do through our direct sales and the Crexendo VIP brand is kind of the company store where we really interact with end customers and are able to sell them directly, get great customer feedback. But we’re looking, we, our plan is to have balanced growth across both businesses and obviously take advantage of driving our software solutions business wherever possible because of its high margin profile. Our ability to deploy that to service providers, this opportunity we’ve had in the Metaswitch community specifically is just we’re investing in that significantly. It’s an area where we can grow at a higher rate than the market. So from that perspective, I would say we have a balanced approach. We measure results tightly across every one of the go-to-markets within our business. But we’re investing heavily in growing our software solution sales because it does have ultimately the best margin profile and the highest software value for us overall.

Great. Thanks for taking my question. That was all for me.

Thank you. Matthew.

Your next question is coming from Jon [ph] McColgan with Breakout Investors. Please pose your question. Your line is live.

Hi, Jon, how are you?

It’s actually Sam here. Sam McColgan from Breakout Investors. Yes, I had a lot of my questions answered already, but perhaps just one last one is I was wondering, you had a webinar that was aimed at Metaswitch customers who are kind of going through their own transitions. I wondered if you can kind of provide any qualitative feedback you got through that session or after that session or any outcomes or things that happened thereafter?

Yes, as I mentioned, we had 180 people on the webinar, a number of customers who’ve migrated over to us who told everybody what a great job we have done and what impressive service we provide. There was a lot of excitement there. We have some of those in our queue to try and sell and we have almost all of them we’re working with. A lot of these are enterprise level solutions and those sales take a long-time, as do platform sales. But we are highly excited about the possibility and the probability, I would say of getting a number of them onto the NetSapiens platform, but I’ll let John give you a little more detail.

I will just fill in that. On that webinar three of the panelists that we had are actually Metaswitch partners who have deployed the NetSapiens platform. Now is the direction of the future for their platform and we continue to add more. We’ve added more partners from that community in this quarter. And our sequel [ph] webinar coming up is the Metaswitch Migration Playbook on November 19th, where we’ll have a couple more partners who have legacy Metaswitch experience and a couple Anand mentioned our ecosystem, a couple vendors in our ecosystem that help those folks to migrate to our technology. So we’re going to continue to drive that. You’ll see more releases, information about partners who have come over to us from that specific community. So this is – we’re going to drive this theme hard, like I said before, because it’s an underserved community that are looking for alternatives and we’re having great success in becoming the alternative that they choose for the future.

That’s it for me. Congratulations again on a great quarter. Yes, thanks very much.

Thanks Sam.

Thank you, Sam.

Your next question is from John Roy with Water Tower Research. Please pose your question. Your line is live.

Hi John, how are you?

I’m doing good, doing quite good, actually. So there’s been a lot of discussion about the uncertainty that Microsoft has created on the platform side. If you could take a step back and maybe give us an idea, how big do you think this opportunity could work out to be for you guys?

Well, there’s a number of ways to answer it. So let me say I think the possibility is as large as Microsoft. Now, obviously we’re not the only as long as Microsoft’s platform. Obviously we’re not the only platform provider who is trying to get people to move, but I think we’re the most advanced and in the best position to do so. Now understand, just because Microsoft end of life something doesn’t mean it’s end of service, so people don’t immediately have to move from that date. But I am very, very excited by the number of people who are looking at us and considering us. Some are going to move and move all of their people immediately. Some are going to move under a cap and grow circumstance where they will continue to put new people on and slowly migrate the people onto the platform and we will lose some of them. But the possibility and the probability of getting a large proportion of those I think is very high and we all here are very excited about that. But I can have Jon give you some more detail.

Yes. I would just say that opportunity is – the audience that we’re selling to in many cases are local exchange carriers or service providers that that market can have a very long sales cycle, but we’re excited about the funnel. We have the opportunities. Another anecdote I would give you is one of the Metaswitch partners that recently came to us had actually been in our sales funnel from becoming a marketing qualified lead for five years when they actually ended up purchasing. Others have purchased in three to six months. So this is a very long tail opportunity. There’s components of this solution that go end of life in April of 26. There’s other components that go end of life in 2029, and we’re just going to continue to work this and grow – grow our share of that market.

Great, thank you so much. Now I kind of switching maybe directions a little bit. Yes, I really do appreciate that you eliminated dividends so you can invest more in the company, and there’s been a lot of talk of investments. Maybe if you could just wrap it all up for us. What are your biggest investments that you’re going to be making over the next year, do you think?

Well, thank you, John. Our biggest investments and I think the best use of our proceeds are threefold. Obviously we are spending money on OCI, which is going to be a huge driver for us going forward. As I mentioned before, I mean especially as we’re trying to migrate Cisco and Microsoft customers onto us, we can turn up an instance in a couple of days so we can move as quickly as somebody wants to move. So that’s a huge competitive advantage to us. So we will continue to invest in that. We’re continuing to invest in the Oracle accounting system, which will funnel and enable us to grow as fast as we need to and have a county keep up with what we’re doing. Third, we continue to look at acquisitions. As you probably are aware, when I first took over as CEO, I stopped looking at acquisitions because we needed to do a good job of completing the transformation of the company into one company and getting all of the efficiencies out of the organizations. Now, while that’s always an ongoing process because there’s always more efficiencies you can get, we’ve gotten to the point where I think we’re ready to begin in earnest to look at substantial acquisitions next year. So having the amount of cash we have is very valuable for doing that. I mean, we used to look at certain opportunities and we couldn’t even get a seat at the table because they wanted to know how we were going to pay for it. And other than perhaps issuing cash, we now have sufficient cash that we can get a seat at any table to discuss an acquisition. So that’s a very important thing for us to have and to continue to have.

Great, and congrats on the quarter. Thanks so much.

Thank you, sir.

Thanks John.

[Operator Instructions] We have a question coming from Laura Vasquez [ph] with Crescendo. Please post your question. Your line is live.

No, I didn’t have one. I’m sorry.

Okay.

That’s okay. I wasn’t going to let you ask it anyway, so it didn’t really matter, but thank you.

There are no questions in queue at this time. I would now like to turn the floor back over to Jeff Korn for any closing remarks.

Thank you, Kelly. And thank you everybody for their attention and for listening to the call. I know many of you were up late last night watching financial results, so I appreciate you managing – election results, excuse me, and I appreciate you taking the time to join us. We’re very excited about this quarter and we’re very excited about Q4. We look forward to sharing that with you in March of next year and putting out press release is as is necessary. So thank you for your time and attention and we will see you soon.

Thanks everybody. Bye-bye.

Thank you everyone. This does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.