Crexendo, Inc. (NASDAQ:CXDO) Q1 2023 Earnings Call Transcript May 13, 2023

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

Jeffrey Korn : Thank you, Mike. Good afternoon, everyone, and welcome to the Crexendo Q1 2023 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. Also joining us today is Steve Mihaylo, our Chairman of the Board. And I don’t know how the hell you got in here, Steve, because I changed the locks.

Steven Mihaylo : [indiscernible] gave me a key.

Jeffrey Korn : Now I know who I should start firing. I mean I’m only kidding, obviously, I’m very grateful that Steve came here to show his support for me and the team on our first call going solo. So what I’m going to do is ask Luke to go ahead and read the safe harbor statement. After that, I’ll give some brief comments, Ron will provide more detail on the numbers, and Doug will provide a business update after that, and then I’ll open up the call for questions. So Luke, would you please read the safe harbor?

Unidentified Company Representative: Thanks, Jeff. Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will and other similar statements of expectation identify forward-looking statements. Specific forward-looking statements in this conference call include information about Crexendo, believing the top line performance in the first quarter was the result of continued execution from our legacy business as well as recent acquisitions, remaining concentrated on successfully integrating the acquired companies and leading new initiatives designed to drive greater organic growth and bottom line results for our combined organization, continuing to make great strides in improving the operational efficiency of the business and building a lean infrastructure that is capable of supporting growth, increasing both the quality and quantity of offerings, supporting expanded sales efforts to drive additional revenues through new sales to new customers and add-on sales to existing customers, prioritizing the profitability of the business and cutting expenses were necessary to maintain a strong financial footing and looking forward to building on the momentum and further cementing its position as a leader — leading provider in the UCaaS industry.

For a more detailed discussion of risk factors that may affect Crexendo’s operations and results, please refer to the company’s Form 10-K for the year ended December 31, 2022, and quarterly Form 10-Qs as filed with the SEC. These forward-looking statements speak only as of the date on which such statements are made, and the company undertakes no obligation to update such forward-looking statements, except as required by law. I will now turn the call back over to our CEO, Jeff Korn. Jeff?

Jeffrey Korn : Thank you, Luke. Overall, we are very pleased with our results for the quarter, particularly the top line, but we recognize that we need to increase our profitability and be more intentional with where we are allocating capital. I will speak more about this shortly. I tend to be a straight shooter, so I will discuss bluntly what we need to do better and what changes we’re going to make. Our non-GAAP net income of $625,000 or $0.02 per basic and diluted common share as well as our 53% increase in total revenue year-over-year show that we are poised for substantial growth, but we are spending too much cash on items that do not directly drive increases in our top and bottom line. With this in mind, I’ve imposed a hiring freeze with the exception for necessary replacement and have implemented widespread restrictions on discretionary spending for all departments.

Thankfully, we grew the legacy business correctly and are not limited by mounting debt obligations and overstaffing. We, unlike many in our sectors grew strategically and careful. In this position, we have flexibility with our long-term strategy, and we are able to run a lean and effective organization. Throughout the year, our primary focus has been and will continue to be on driving organic growth and integrating our acquisitions fully into the company. And we will continue to strategically expand while optimizing our operations in future quarters. Regarding profitability, we are still working through some of the lower-margin business that was inherited from the acquisition of Allegiant. This is natural as an MSP has more result services and thus varying margins.

We also believe that we can expand the MSP to get more telecom business, which is an initiative that will be rolling out in carefully a meticulous manner. Allegiant has enjoyed a smooth integration into our business and the team members have assimilated well. While there are some residual processes and logistical matters that we are still ironing out, we have been exceptionally impressed by the performance of ease we literally have come on board. We are focused on integrating the acquisition into both our corporate and direct operations and expect to see significant financial and operational efficiencies over the next 3 quarters. We also are working on targeted cost realignment and reporting structure realignment to really — to fully recognize the synergies in Allegiant and all the acquisitions and across the board in all the divisions.

These initiatives are with the intent to ensure that we are maximizing efficiency and operations of the business, which will ultimately result in a smaller cost basis. In terms of personnel, we now have a hybrid workforce, which has proven to be more productive in our digital-based line of work because of the decreased need for physical space, we are in the process of listing and selling our corporate office in Tempe, after which we will lease the space back before a year. We are, as a part of that and as a process, moving all of the classes customers to VIP. This will provide substantial cost savings as they will no longer be the need to maintain 2 exceptional operating systems and allow us to continue to make sure that Crexendo powered by NetSapiens Systems remains the absolute best operating system on the market.

All these actions are intended to make us a better company, increase efficiencies and result in substantial cost savings. Organically, we are starting the process of integrating artificial intelligence into our work streams. The engineering team is already using AI to supplement a [indiscernible], and we are working on additional AI systems into customer service and other functions. This will result in additional cost savings and improved customer experience. AI is also helpful in crafting marketing messages and expanding sales funds, which will increase lead generation and free up more time for our team to sell. To wrap up my portion, I am very encouraged by our top line results, but I remain focused on the material changes to the business that need to happen in order to improve our bottom line.

We have set ourselves up for success. We are the right team with the right initiatives in place. I expect substantial long-term profitability. Our primary goal for the remainder of the year is to drive improvements in revenue, cash and profitability. And I believe that we have built the proper foundation to do that. I am extremely excited about our future and remind the team every day that our obligation is to drive shareholder value. Thank you for your support and interest in Crexendo. And with that, I’ll turn the call over to Ron for more details on the financials. Ron?

Ronald Vincent : Thank you, Jeff. All right. Financial highlights for the quarter. Total revenue for the first quarter of 2023 increased 53% to $12.5 million compared to $8.2 million for the first quarter of the prior year. The Allegiant acquisition contributed $3.1 million of the increase in total revenue and organic revenue of $1.2 million increase was 15% for the period-over-period comparison. Service revenue for the first quarter of 2023 increased 63% to $7.2 million compared to $4.4 million for the first quarter of the prior year. Allegiant acquisition contributed $2.6 million of the increase in service revenue. Organic revenue — service revenue increase of 4% or $184,000 for the period. Software Solutions revenue for the first quarter increased 26% to $4.1 million compared to $3.3 million for the first quarter of the prior year.

And product revenue for the first quarter increased 149% or $1.2 million compared to $492,000 for the first quarter of the prior year. Allegiant contributed $526,000 of the increase in product revenue, while organic growth contributed 42%. First quarter gross margins, telecom service margin of 57%, excluding Allegiant, Q1 gross margin was 69% compared to 67% for the first quarter of the prior year. Software Solutions gross margin, 71%, product gross margin, 32% and overall gross margin 59%. Operating expenses for the first quarter of 2023 increased 47% to $14.1 million compared to $9.6 million for the first quarter of the prior year. The Allegiant acquisition contributed $3.4 million of those additional operating expenses. The company reported a net loss of $1.6 million for the first quarter or $0.06 loss per basic and diluted common share.

That’s compared to a net loss of $1.2 million or a $0.05 loss per basic and diluted common share for the first quarter of the prior year. Non-GAAP net income was $625,000 for the quarter or $0.02 per basic and diluted common share as compared to non-GAAP net income of $405,000 or $0.02 per basic and diluted common share for the first quarter of the prior year. EBITDA for the first quarter was a loss of $666,000 compared to a loss of $774,000 in the first quarter of the prior year, but our adjusted EBITDA for the first quarter increased 749 — to $749,000 compared to $302,000 for the first quarter of the prior year. Our cash, cash equivalents at March 31 was $3.7 million compared to $5.5 million at December 31, 2022. Cash used for operating activities for the 3-month period of $1.6 million compared to $1.7 million used for the same period in the prior year.

Cash used for investing activities for the 3-month period of $9,000 compared to $34,000 used for the same period of the prior year. Cash used for financing activities for the 3-month period of $203,000 compared to cash provided by investing activities of $3,000 for the same period of the prior year. That concludes the highlights. With that, I’ll turn it over to Doug Gaylor, our President and COO, for additional comments on sales and operations.

Doug Gaylor : Thanks, Ron. As shown by the results, we have started the year with impressive momentum, highlighted by significant organic growth in our core business. Our 53% year-over-year revenue increase was highlighted by our 26% organic growth in the Software Solutions segment, combined with greater-than-expected revenue contributions from our Allegiant acquisition, which saw a 17% organic growth from their Q1 2022 revenue numbers. The $12.5 million in revenue for the quarter, combined with our 11% increase in our backlog, which does not include Allegiant’s backlog gave us a solid foundation to build on for the remainder of the year. As a reminder, our backlog is with some of the remaining contract values for our telecom services and software solutions customers that will be recognized on a sliding scale over the next 36 to 60 months.

We anticipate that the Allegiant backlog will include, be included in our Q2 report and will add significantly to our existing numbers. As Jeff mentioned, our revenue numbers were solid, but we remain focused on further optimizing synergies from our acquisitions as well as managing costs to continue to grow the business. We have identified substantial cost savings that we can recognize over the next 3 quarters and are executing on these initiatives as we speak. Against the backdrop of broader macroeconomic uncertainty, we continue to see strong demand and growth in the UCaaS industry. I believe that recessionary times actually benefit our industry as businesses look for ways to cut costs and improve efficiency and productivity, and that is exactly what our solutions offer.

The widespread migration to the cloud for small, midsize and enterprise level businesses helped us eclipse 3 million users on our platform in the first quarter and has put us on target to double the 1.7 million end users we had in June of 2021 by the end of Q2. This growth has been facilitated in part due to the strong sales bookings we continue to see from Crexendo licensees and agents. Our licensees — as our licensees grow, they also need additional services from Crexendo, which in turn drives organic software solutions and cross-selling opportunities. We added 5 new licensees for the quarter, which is on track with our internal expectations, and we anticipate a significant number of additional licensees that come on board throughout the remainder of the year.

Our Telecom Services segment also posted impressive results for the quarter, resulting in a record number of quarterly new customer installations driven by increased cloud adoption by end users. Our traditional Crexendo agent program continues to grow meaningfully as well. Our 2 large master agent partnerships with Talaris and OTG Consulting have strong performances for the quarter, and we also added Jenne Distributors as our newest master agent during the quarter. We continue to build our roster of partners, and we look forward to working with a growing number of companies as the program continues to scale. As Ron mentioned, our Telecom Services margins and product margins declined to 57% and 32%, respectively, for the quarter, which was driven by lower margins from Allegiant service revenue contributions.

Allegiant offers additional managed and network services along with their UCaaS offering. Some of these services are lower margin but ultimately help in pulling in a much higher customer spend through a complete bundle of service offerings. Our Telecom Services margins without Allegiant’s numbers increased from 68% to 69%. And we expect the Telecom Services margins to quickly return to the 70% range as we continue to integrate the company and improve profitability on certain offerings. Our Software Solutions margins increased nicely to 71% for the quarter, fueled by a 26% organic growth rate. Because our technology stack is proprietary, we do not have the typical growth costs associated with increased usage and therefore, expect to see these margins continue to improve as we add new logos and licensees.

Our award-winning technology continues to be recognized as a leader in the space, being recognized in Q1 by G2, which is the premier business software and services review site as the leader in the 2023 spring VoIP, Voice-over-IP report, along with awarding us multiple awards, including the Easiest to Do Business With, Best Usability and Best Support awards. During Q1, we released our Insight Management Application for the Software Solutions platform and have had great reception from our licensees in terms of order numbers and performance reviews. Also on the technology front, we installed multiple instances of our newly released Contact Center as a Service or CCaaS offering during the quarter. Our CX offering, which stands for customer experience, provides omnichannel customer engagement for call centers, including text, e-mail, chatbots and automations for larger call center applications.

Our strong revenue growth, combined with the execution of our game plan and strategy has helped us set — has helped set us apart and set us up for what we anticipate being a banner year for the company. We are committed to improving our margins and we’ll continue managing the fundamentals of the business. We believe we have the best UCaaS offering in the industry, and that will continue to attract new customers and partners and allowing us to deliver strong returns for our shareholders. With our combination of the fastest-growing platform solution in the country, along with our growing licensee network and direct end-user offerings, we are positioned extremely well, and we’ll keep executing against our strategic road map in the quarters to come.

I will now turn it back over to Jeff for any further comments.

Jeffrey Korn : Thank you, Doug, and thank you, Ron, for your comments and the additional information. At this point, I’m just ready to open the call up for questions.

Q&A Session

Operator: [Operator Instructions] And our first question comes to us from Eric Martinuzzi from Lake Street.

Operator: Next, we have Josh Nichols from B. Riley Securities.

Operator: Our next question is Chris Sakai from Singular Research.

Operator: We now hear from Mike Latimore with Northland Securities. [Operator Instructions]

Operator: We have reached the end of our question-and-answer session, and I will now turn the call over to Jeff Korn for closing remarks.

Jeffrey Korn : Well, I want to thank all of you for calling in and listening to our call this quarter, and we look forward to our second quarter results. And thank you very much.

Operator: This concludes today’s conference call, and you may disconnect your lines at this time. Thank you for your participation.