Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Crexendo, Inc. (NYSEMKT:EXE)

Q1 2013 Earnings Conference Call

May 15, 2013 17:00 PM ET


Steve Mihaylo - CEO

Jeff Korn - Chief Legal Officer

Ron Vincent - CFO

Doug Gaylor - President & COO

Satish Bhagavatula – CTO & CIO

David Krietzberg - Chief Administrative Officer



Good day and welcome to the Crexendo First Quarter Earnings Conference Call. (Operator Instructions). At this time I would like to turn the conference over to the Chairman of the Board and Chief Executive Officer Steve Mihaylo. Please go ahead.

Steve Mihaylo

Thank you Anthony and good afternoon everyone. Before I get here I want to let you know who is on the call with me. We have got Doug Gaylor, our President and Chief Operating Officer, Satish Bhagavatula our Chief Technology Officer, Ron Vincent, our Chief Financial Officer, David Krietzberg, our Chief Administrative Officer, Jeff Korn, our Chief Legal Officer and the newest member of our team Kim Wrights (ph) who happens to a CPA and along with of course Ron Vincent and she is our new controller. She joined the company approximately 2.5 weeks ago and we’re really proud to have her on the team and before we get started I would like to have Jeff Korn read our Safe Harbor statement. But I would like to make just one comment, I’m not going to really talk much about the numbers today. I’m going to tell you about some of the things we have accomplished since I came on board here and then I’m also going to give a very, very high level overview and then we will have Ron Vincent go through the numbers and then we will open it up, well actually I think we’re going to change the format just a little today. I would like to have each of our officers C-level officers talk about what they are doing so you can go get a flavor of the new Crexendo which is no longer StoresOnline.

And with that I’m going to turn it over to Jeff to read our Safe Harbor Statement.

Jeff Korn

Thank you, Steve. I want to take this opportunity to remind listeners that this call will contain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1935.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. All statements made in this press conference call other than statements of historical fact are forward-looking statements.

Forward-looking statements include, but are not limited to words like, belief, expect, anticipate, estimate, will and other similar statements of expectations 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 more detail in the company’s filings with the Securities and Exchange Commission, including the Form 10-K for the fiscal year ended December 31, 2011 and the Form 10-Qs for the year 2012, as well as the Form 10-K for the year ended December 31, 2012 when filed.

Crexendo does not undertake any obligation to publicly update or revise any forward-looking statements, whether result of new information, future events or otherwise.

I’d now like to turn the call back to Steve. Steve?

Steve Mihaylo

Thank you, Jeff. Well as you can see from our press release we’re just about totally out of the StoresOnline business. We still got about slightly over $2 million in unearned income or receivables to collect from that and once that occurs probably by the end of June or July we will be in the new business model.

We view ourselves as a hosted services or managed services company. We host websites, we host all your voice telecommunications capability and we do have the capability to do video on our current products as well.

We also are hosting data services for a few of our big telecomm customers and we’re looking at the opportunity that exist in the data storage and retrieval business, and then last but not least we partner with companies like Time Warner and others to resell their services. So on a single bill we can get a customer that’s now paying 4 or 5 maybe even six vendors a single bill for all of their web hosting, all of their telecommunications including the lines as well as the phones and their data storage and their Internet all on a single bill.

As you can imagine the savings in just accounting alone dealing with one vendor versus five or six is a huge benefit to these companies as well as the fact through our technology we have been able to drive the cost down and in most cases we can not only save the money on all these services we can also drive the productivity up which means either fewer people or doing more with the people that they have.

At this point in time I’m going to turn it over to Ron Vincent to talk about the numbers and give you some granularity and then I’m going to have each of our C-level officers talk about what they are doing just briefly and then we will open it up for questions. Ron?

Ron Vincent

Thank you Steve. For the three months ended March 31, 2013 we have consolidated revenue of 3 million compared to 3.1 million for the fourth quarter of 2012 and 5.3 million for the three months ended March 31, 2012. As you’re aware a decrease in revenue on a quarter-over-quarter and year-over-year basis is primarily due to the suspension of our direct mail seminar sales channel (inaudible) StoresOnline. Although we continue to collect our StoresOnline receivables from extended payment term agreements. Entered into prior to July, 2011 these agreements typically have a 24 to 36 month payment terms and we anticipate those running out over time. Our StoresOnline revenue will continue to decrease over time as customers complete those payment obligations.

During the three months ended March 31, 2013 cash collected on extended payment term agreements was 1.3 million compared to 3.1 million for the prior year quarter. StoresOnline segment generated revenue of 2.1 million for the first quarter of 2013 compared to 2.3 million for the fourth quarter of 2012 and 4.4 million for the first quarter of 2012.

The decrease quarter-over-quarter and year-over-year was 9% and 52% respectively. StoresOnline revenue is generated from web hosting services and cash collected on accounts receivable balances. Web hosting generated 640,000 for the first quarter of 2013 compared to 693,000 for the fourth quarter of 2012 and 859,000 for the first quarter of 2012.

The increase quarter-over-quarter and year-over-year was 8% and 25% respectively. Cash collected on EPTA generated revenue of 1.4 million compared to 1.2 million for the fourth quarter of 2012 and 3.1 million for the first quarter of 2012.

Increase quarter-over-quarter was 17% and a decrease year-over-year was 55%. Revenue generated from StoresOnline segment will continue to decrease over-time as we collect our receivables from EPTAs. Based on our current collection rates we expect to collect approximately 1.8 million in revenue from our StoresOnline receivables over the next 12 to 18 months.

Interest income from EPTAs receivable was 206,000 compared to 259,000 for the fourth quarter of 2012 and 762,000 for the first quarter of 2012.

The decrease quarter-over-quarter and year-over-year was 20% and 73% respectively. We will continue to collect interest on EPTA receivables at a decreasing rate as the accounts receivable balance decrease on cash collected.

Crexendo web services segment generated revenue of 533,000 for the first quarter of 2013 compared to 468,000 for the fourth quarter of 2012 and 770,000 for the first quarter of 2012. Increase quarter-over-quarter was 14% and the decrease year-over-year was 31%.

We continue to maintain strong backlog of 1.3 million at March 31, 2013 compared to our backlog at December 31, 2012 of 1.1 million, an increase of 200,000.

Crexendo Network Services segment generated revenue of 385,000 for the first quarter compared to 327,000 for the fourth quarter of 2012 and 75,000 for the first quarter of 2012. The increase quarter-over-quarter and year-over-year was 18% and 413% respectively.

We continue to see growth in our backlog which grew to 3.4 million at March 31, 2013 compared to our backlog at December 31, 2012 of 2.4 million an increase of 1 million. We’re excited about this positive trend in our network services segment revenue which primarily relates to hosted telecommunication products and services. The majority of our network services contracts are 36 month contracts, as such the revenues associated with those bookings in the quarter we’ll recognize it over the next 36 months.

Additional financial highlights, at March 31, 2013 we had cash and cash equivalents excluding restricted cash of approximately 5.6 million compared to 7.4 million at December 31, 2012. Including restricted cash of 1.4 million we had cash at 7 million at March 31. For the three months ended March 31, 2013 we used 1.8 million for operating activities we use 54,000 for investing activities and we use 3000 for financing activities. Approximately 800,000 of the cash used for operations was related to the settlement of our outstanding lease obligations or our prior corporate office space in Utah which was abandoned in November 2012.

We continue to have a strong working capital at March 31, 2013 at 6.4 million compared to 6.3 million at December 31, 2012. Working capital excluding deferred revenue at March 31 was 8.3 million compared to 9.4 million at December 31, 2012. For the first quarter we had a loss before income tax provision of 635,000 and a net loss of 398,000 after income tax benefits of 237,000. With that I will turn it over to Doug Gaylor, our President and COO for additional comments on sales and operations.

Doug Gaylor

Thanks Ron. I’m excited to say that we have a very strong first quarter in sales with bookings of over $2 million which was a 39% increase over our previous high water mark of 1.5 million that was achieved in Q4 of 2012. Sales bookings for the quarter were comprised of 34% network services and 36% web services and helped increase our backlogs to very strong levels. Telecomm backlog increased 42% or 3.4 million and our web backlog increased 16% to 1.3 million. We’re seeing some really nice traction there. We continue our focus on variable (ph) markets and association trade shows and events and we participated in 19 events in Q1 that generated $210,000 in sales and over $1 million in proposed opportunities. We currently have 16 additional events scheduled for Q2 with more to come.

Our new dealer partner sales program gained additional momentum during the quarter, we currently have 18 dealers registered for the dealer program and have a tremendous amount of interest in the program from telecomm dealers, data bars and B2B service providers. Current bookings on the program are 125,000 with rapidly growing pipeline of opportunities.

We have monthly webinar and marketing campaigns each month that reach out to the potential partners and we continue to build on the early growth of the program. Once a partner does sign up for the program a thorough training program and an onboarding process begins that includes sales presentations, product positioning and a live demonstration kit. The partner program is a residual based commission model that pays our dealer, partners, upto 25% as a recurring monthly spend of customers that they sell on Crexendo services.

We also implemented an activation fee on our telecomm accounts that will further improve our margins and revenues for the division. We introduced a new low end telephone model the Crexendo 230 set that replaces the Crexendo 200 set. This new device has advanced features at a price point 50% higher than the previous low end model, that will help contribute to improving margins and revenues for the division. We have also seen greater than anticipated demand for our new high end color display set that was introduced in the fourth quarter of 2012. The increase in the percentage of high end phones compared to lower end phones has helped increase our average sale amount per transaction as well as the increase in the average contract term due to more five year customer contracts been sold.

We continue to manage our cost and efficiencies with numerous cost cutting moves during the quarter including consolidating departments and renegotiating service and support cost. The effective results of these measures reduced our G&A expenses down to 1.438 million for the quarter which was a 64% reduction from Q4 and a 53% reduction from Q1 of 2012.

As Ron pointed out this includes a onetime $600,000 favorable adjustment due to the litigation of the lease station Orem. So if we exclude that affect our G&A expenses have decreased 59% compared to Q4 and 33% from Q1 last year.

We are constantly reviewing additional cost saving options in the organization as you would expect and we will continue to do that going forward. On the marketing front we began a remarketing campaign centered on our telecomm and web offerings. The effect of this campaign is brand recognition for Crexendo as well as lead generation through the Google Ad Network. We also will continue investing in marketing programs like these as well as targeted trade shows and association memberships as they all are providing positive returns on investment.

So all of these efforts in Q1 resulted in our strongest sales bookings quarter combined with our lowest expense quarter as we build momentum for the future. This momentum combined with the prospects of the potential acquisition and continued growth from our partner program have laid the foundation for continued improvements in our top and bottom lines.

I’m proud of our start that we have had in 2013 and I’m extremely excited to lead our company into the future which is extremely ripe with opportunities. I’m reflecting back now because this is the end of our first year as me as President of Crexendo and we have accomplished a lot as we have completed changed the direction of our organization. We have only just begun to recognize the success of all of our efforts exerted over the last year and I’m excited about the tremendous future that we have in front of us and look forward to reporting on more successful growth in the quarters ahead. Thank you to everybody on the call here for your continued support and with that I’ll now turn it over to our CTO, Satish Bhagavatula for an engineering and technology review.

Satish Bhagavatula

Thank you Doug. Greetings everybody. I’m glad to report that we made great improvements to our products and technologies during Q1 of 2013. All these enhancements have been with respect to improved features and functionality both in web and telecomm platforms. Increased scalability and ability to our technology infrastructure. As we continue to increase our telecomm customer base we continue to make more improvements to our infrastructure to adapt for the growing needs of storage and computing. We continue to gain more run time in Arizona data center. I’m glad to report we have been successfully running smooth technical operations with Orem (inaudible) out of our Arizona data center. We improved our storage backup and the vast record solutions still in this quarter.

We started creating separation of telecomm and infrastructure which we believe enables us to provide certain resiliency to our telecomm and web customers. We consolidated many of our carrier contracts last quarter and see great improvements in our cost structure this quarter. We continue to evaluate various Tier 1 telecomm and internet carriers to improve our presence reach and cost. We have seen increased load and utilization cost systems due to considerable growth in the telephone deployment. Our goal is to preserve and maintain the state of the art data center.

I’m glad to report that our new web engineering team is upto speed under the leadership of our new Director of Web Engineering who was brought on during Q4 of last year. I’m also happy to report the team is fully contributing on our existing web platform. We made great progress in migrating our six (inaudible) web customer base to our latest and greatest solution of the 7.0 builder.

We continue to support our existing customer base on 7.0. Our customers previously on 6.0 have been running on 7.0 platform for many weeks now and have been stable. This is a very important milestone as we invest heavily in the design and development of our new builder and pave the path for future web platform releases. Our new web builder will be completely based on HTML 5, the concept such as responsive design contemplating to allow for greater developer adoption and mobile friendly websites both on mobile phones, smartphones and tablets.

On our telecomm platform we started controlled introduction of our 7.0 switching platform early in the quarter. I’m glad to report that 7.0 is now fully rolled out to all our telecomm customers. Our customers have seen great improvements. In the 7.0 release we made considerable improvements to our facts offering by adding support for T38 protocol which makes (inaudible) more reliable on Voice over IP networks. This new platform also offers a framework that helps us scale our offering greatly. In addition to the core switching platform improvements we added ACD wall boards, reports and other enhancements that may cause center deployments very productive for our customers.

We also made considerable improvements to our automatic call recording functionality which is included in our standard product offering unlike much of our competition. We believe this is an important value add to our customers. This was a highly requested feature for many of our customers and prospects. Although many of these features were improvements with some of our current customer requirements they are available to all our customers immediately which is one of the tremendous benefits of our hosted platform and technology.

We also added IP 230P a low end monochrome PoE form with programmable buttons. This new form replaces our IP 200 endpoint. We continue to look into synergic (ph) technology partnership opportunities to help us grow our product portfolio. We continue to adapt most well technologies to allow for greater automation of our business and IP division which in-turn increases efficiencies and how we deliver our services to our customers and improves our margin. With that I will now turn it over to David Krietzberg our CAO.

David Krietzberg

Thank you Satish and good afternoon everyone. My primary focus going forward is looking at M&A activity and business development primarily targeting recurring revenue opportunity focused on a core business of providing cloud business services. Our objective would be to acquire customer base of the current revenues with little overhead that can be either rolled in our existing structure would be accretive on a standalone basis within our mission of providing cloud services to business customers.

And we also consider technology acquisitions that will be opportunistic in terms of a build versus buy scenario that would accelerate our product development efforts.

We currently assigned letter of intent to targeted businesses that fits nicely with our core competencies and we expect to close that deal during this quarter. Thank you and I will turn it over to Jeff Korn, our Chief Legal Officer.

Jeff Korn

Thanks Dave, I’m going to try and be brief which is a rare skill in counsel. As Steve said we as a company set far much time on legacy issues but the good news is I’m the only one really still doing it and that does take some of my time but primarily I get to in managing legal compliance, regulatory functions and ethics as you know we are see like in most states that requires a lot of reports that are filed, do SEC compliance, SEC issues, sales issues and negotiate contracts, or have strategic partnerships, work with sales, marketing and on M&A activity and now I would like to turn it back to Steve.

Steve Mihaylo

Great. Well thank you Jeff, thank you Satish, Dave and of course Doug and Ron. You know before I open this up for questions I’m going to make few other comments. We have continually talked about the possibility of additional capital required in the company. As you will note from the last couple of quarters we have even stated that I’m willing to put up to $2 million more in the company, the only reason for this is really because of the regulations and accounting pronouncements that require our auditors to look every quarter at whether or not we’re growing concern or not and I’m here to tell we’re growing concern. We think that we will probably won't need more capital, however in order to keep our auditors happy I will be stepping up to the plate for probably another $2 million to $3 million of capital in order to get us over the hump. We have looked at several different opportunities with agreed financer building. We’re currently looking at that but banks and lending institutions are really unbelievable these days. If you borrow a couple million bucks from them they want to have a couple of million bucks set aside for them. Well that doesn’t do any good; the net result is still zero.

So I’m not too optimistic about that, a sale lease back of this building makes sense but that’s quite a bit of time if you dig out potential buyers and do all the paperwork there is probably months involved. So that leaves one person with deep pockets unless any of you want to join to do a sale lease back on this building and then the third option would have been a rights offering. Here again very, very expensive to do a rights offering and it would take valuations and opinions and investment bankers and lawyers and all kinds of extraneous cost which would eat into whatever proceeds we got.

So the main thing we’re looking at is the sale lease back on the building which could probably be done in 30 or 45 days. I haven't talked to Jeff about this but that’s my gut feeling about how long it will take, maybe a little bit longer because we’re public company which requires our board to approve anything and make sure it's in arm’s length transaction. However, this won't be delusion to any of our small shareholders by doing at this way and that’s the thing I’m very sensitive about.

Having said that I would like to add two more notes here to what our guys have said and one of those is the fact that we have totally automated our accounting. One of the reasons for bringing Kim on board and Ron Vincent on board was to make sure that was a smooth transition. We expect to have our accounting process about 96% or 98% automated by the end of this month or the first week or two in June. That’s allowed us to take our accounting department from 35 people when we were StoresOnline (inaudible) doing everything manually to only eight people today and we might be overstaffed by even one although I doubt it because we intend to grow this business.

But that’s a tremendous productivity gain there and it's because of the hard work that Ron and Kim and actually Satish have been doing because this is required an awful lot of software coding and help on his part and databases so and so forth to accomplish it.

Last but not least I have asked Jeff Korn to look into increasing my bid on stock under my 10b5-1 program which currently stands $2.35 per share and I’m going to up it by about 9% to $2.55 a share. I’m not sure I will be able to market to buy it in the open market, I’m not even share one to have a 10b5-1 plan if you can do that but I will tell you this my confidence level is even higher than the last telephone conference call that we had and I’m feeling very positive about the job that all of the team is doing, it's the best team I have ever had in my 45 years of business and I’m proud to be associated with everyone sitting in this room with me.

Having said that Anthony we’re going to open it up to questioning, so if you would do that I would really appreciate it.

Question-and-Answer Session


(Operator Instructions). We will take our first question from Jeff Bash [ph].

Unidentified Participant

I think you did a good job this past quarter, backlog was up the largest it has been ever actually and you cut the losses roughly in half. So I think that’s a really good progress. I have a bunch of questions. So Ron, you said that there was 1.3 million of cash collected from the StoresOnline receivables in the quarter, the 2.1 million of revenue. So that suggest 800,000 came from I suppose ancillary services and might we continue to see ancillary service revenue continuing after the end of the receivables collection?

Steve Mihaylo

Can I just add some color to that, the difference the delta is the payout on the lease in Orem.

Ron Vincent

As well as the 640,000 that we collected on our hosting services is also part of our StoresOnline segment.

Unidentified Participant

So there isn't, so once that we see those all are collected then that line of business really sort of goes away?

Ron Vincent

They will not go away; it will still have 640,000 or approximately of revenue from hosting. At that time if that’s the last remaining components for that segment we will consider rolling that into our web services segment to consolidate it.

Unidentified Participant

All right, but you’re saying that we’ll have 640,000 of revenue from hosting from StoresOnline going forward? That is a reason included in web services.

Steve Mihaylo

We expect that to get a little bit more attrition but once we have our new web builder built, we are going to put the pedal to the metal and grow that business, that hosting business. We feel there are somewhere between 500,000 and 600,000 of core hosting business there that we should have going forward. The reason that is winding down a little bit is because as you know under the StoresOnline model a lot of those customers weren’t able to create businesses and they stopped hosting as well but we do have a core of about 6000 customers or so that are hosting with us and that are viable businesses and they will continue to host with us.

There will be some changes in that business model to charge for services that we currently give away for free and customers that have more volume than others will be charged a little bit more than customers that are just basically hosting a very generic or simple website with us. So we are looking at every piece of our business and we’re going to start modeling it like a lot of our competition does but we had to of course get the legacy issues behind us before we can start doing them.

Unidentified Participant

I understand, now with respect to the lease, savings 600,000 is really quite a nice savings and congratulations for achieving that for shareholders.

Steve Mihaylo

You can thank Jeff Korn and his legal folks on that one, they did a wonderful job.

Unidentified Participant

Great. Is that 600 in the number spread throughout all the line. So web and network and StoresOnline you just pick up a piece of that 600, it is non-recurring.

Ron Vincent

Yes, spread throughout the three segments.

Unidentified Participant

So mentally or roughly speaking it could be like 200,000 per line.

Ron Vincent

Roughly speaking, it's allocated based on revenues.

Unidentified Participant

Okay. Now Steve would you say that expenses are pretty well rationalized now at this current…?

Steve Mihaylo

No, as Doug Gaylor pointed out we still think there is somewhere between another - I’m just, this is a real wide range here so bear with me but we think it's somewhere between 0.5 million and maybe as high as $2 million a year we can still find in reductions but I will guarantee you we will find 0.5 million.

Unidentified Participant

Okay. Now just for my general education, you’re a CLEC with an internal engineering staff and I gather you - all your software’s are all your own. Would you contrast that with what you can do for customers, the advantages or even the disadvantages that has versus someone who licenses a platform from a company like BroadSoft and is really more or a less a e-seller?

Steve Mihaylo

I will be happy to do that, we do have a full-blown staff of engineers. I’m not exactly sure of the number, I know we have got three web designers which are - and most of our engineers by the way have their masters degrees and probably a minimum of 10 or 15 years of experience. So these are very expensive people.

We also have about 12 or 13 telecomm engineers for a staff of 15 to 20 right now and those people cost us somewhere in the neighborhood with all the tools (inaudible) to FICA and healthcare probably a $150,000 a piece. So they are not inexpensive people, they are very experienced and our core team came from Inter-Tel; they worked on our big switch department. Satish was actually heading that up and I’m going to have Satish comment on what having and owning the technology does for you but the phone instrument itself is pretty much a dumb device. There is a little bit of firmware in there that controls a few buttons that are standard like hold and conference and a few things like that, the rest of the buttons on the phone are all database programmable and that’s done in our data center with the software that we have created.

Right now we’ve pushed out new features and capabilities to our users about every four to five weeks. You don’t get that with that BroadSoft; BroadSoft controls the pace of what they are doing. In most cases those features are just part of our service; you don’t get that with BroadSoft, 8x8 and others. So we have a distinct advantage in the marketplace.

The other thing that makes us different than everyone else is the fact that we have our own data center. So if there is an upgrade that has to be done or if there is an issue one of our engineers can walk into the data center and either correct it electronically over even as simple as a handheld device like a smartphone while he is only about 20 or 30 feet away from the security doors that go into our data center. Most of our competitors don’t have that.

I think there is probably dozens of additional advantages to the way we do it but I’m going to let Satish say if I missed anything to comment on. He is smiling in case you’re all wondering.

Satish Bhagavatula

Thank you Jeff for the question and Steve I think you pretty much covered everything.

Steve Mihaylo

Okay you’re kind.

Unidentified Participant

Okay next question, you had approximately an operating loss on two of the significant lines of business at 1.15 million or 1.9 million in this quarter and I’m not counting the StoresOnline. And yet sales on increase on a 123,000 quarter-over-quarter. So at that rate of sales growth the basic arithmetic meaning with existing quarters to wipe out the loss if expense stay flat which you said they are going to go down and that’s really too long a time. I assume from your comments that you really are highly confident with this latest sales growth is going to grow, the rate of revenue growth.

Steve Mihaylo

Yes. Let me just go back to what Doug Gaylor talked about. We have now got 18 dealers that are signed up in various stages of training and the various tools they need to sell our products. By and large only two or three of those 18 are currently producing any revenue. It's just a trickle right now. But we have a webinar in all of you are more than welcome to join in next week and what days are those going to be?

Ron Vincent

Next Tuesday and Wednesday if you go to, you will see a personalized video greeting from Steve and inviting you to the webinar. We’re doing one on Tuesday and Wednesday of next week.

Steve Mihaylo

And you know what frankly I think we ought to do a press release on that so there is no mistake on how you should get into it but we’re very (inaudible) around here try not to spend any of your money until we can really justify it but that’s one of the things I think deserve a press release as quick as we can get it out and we will try to get it out tomorrow. But that may not sound like much but we are in the first go around we have targeted about 600 or 700 potential partners. If we just get a 100 of them that’s like putting on about 300 sales men and it does take time to ramp that but it will start ramping a lot quicker once we have the training and now we have got all the support tools that we can ship to them rather correctly. So you’re going to start seeing a nice ramp there.

We have also identified some weaknesses in our sales force. We need to do more formalized sales training. The product training is pretty good but the sales training still needs a little bit of attention and it turns out our sales force is going to be selling a lot bigger deals than our partners will probably sell. We have already captured at least a dozen companies that are currently using our products every single day with a 100 or more telephones. That’s not to say our average is a 100, our average is probably more like 20 or 30 phones but we have customers now that have been using our services for as much as six months with a 1000 telephones. We’re able to scale much larger than that.

We have got some prospects with 2000 or 3000 telephones and we feel confident that we can handle those. So that gives us a leg up, we’re also starting to ramp up our marketing efforts. We didn’t want to do that until we had our accounting system fully functional and automated so that we don’t get a rash of orders and then we can fulfill it properly and they wind up getting debugged. I have seen that happen in my previous business.

So there is a lot of chicken and egg stuff that has to occur before we can scale sales. I’m confident that we will be able to start scaling them. I don’t want to give you an absolute here but I think we can scale our numbers year-over-year by at least 50% to 100% in the telecomm area and the web hosting and data services and so on that’s going to take a little longer but you will see sales start to ramp nicely maybe even faster than that, I don’t know. We will have to see where it goes then you’re going to see our expense come down, I would expect with another $2 million to $3 million injection into this company we will be able to make it to breakeven sometime in the next 12 to 24 months and I expect in any going concern issues that we have will be totally erased and eliminated.

I’m absolutely confident in those capabilities. So that’s where we stand on that issue, Jeff.

Unidentified Participant

Okay I got two more questions for Dave. Can you say anything about this targeted acquisition like rough revenue I think for the company or maybe prefer not saying anything at all that would be fine too?

David Krietzberg

Yes at this point I would rather not disclose it since it's a critical point. I can tell you that as an asset purchase agreement outstanding, we’re just about finished with our due diligence on both sides and it's really at the point of timing relative to the seller and us.

Steve Mihaylo

I would like to make comment about that Jeff, regardless of the size of this deal it's more to get the process down so that we could cater this in the future and we’re going to be looking at more and more of them I would suspect that this will help is in the future to get more visibility in that area because we’re definitely looking at that as another way to grow our revenue whether it's a very tiny company with just a couple of $100,000 or year in revenue or one with millions of dollars a year in revenue it can be done very easily by bringing those services into our data center we can reduce the cost, we acquire customers instead of acquiring liabilities and employees and something that will be accretive from day one.

So that’s the more significant thing that you should be focusing on. Not the size of the deals, the fact that we will have the process down path and totally nail before we start to scale in that area.

Unidentified Participant

Good I want to say how delighted I’m say the lease back approach looks like it can generate some neat revenue for the time being at least we can avoid stock instruments and I have one final comment on your buyback for Jeff, I believe that Steve during his opening period would not have to be subjected to a 10b5-1 program and it could buy only one in the open market if you choose and then have a new 10b5-1 for each quiet period. That’s my historical experience with these programs when unless Steve wanted to be completely fixed with a 10b5-1 program well for the time I think he could have more flexibility if he wanted.

Jeff Korn

You’re correct Jeff, Steve entered into a two year 10b5-1 program the reason you’re aware, we expect in the M&A business and depending upon the size of the complexity of what we’re looking. I maybe slapping a quiet period of executives who are aware of the transaction. So Steve wants to be proactive and make sure he has a plan that was out there in the events I was unwilling to allow him to trade in the stock and that’s why he has the extend one but you’re right at the present time Steve should be in a position to change and if he wishes to could make some multi-purchase.

Steve Mihaylo

And Jeff there is quite frankly there is another reason, right now I’m the only bid that’s sitting there. I instructed my lawyers to raise the bid to $2.55 a share that allows our current shareholders other than myself liquidating in the stock. I’m considered an insider so I have no liquidity but every one of our outside shareholders will have liquidity plus I want leave a large enough float that our shareholders can acquire stock if they want and sell stock if they want with the bid being covered and I don’t want to artificially drive our price up. I want it to be based on performance; I want to give other folks an opportunity. I know there is a large shareholders that are long suffering and including yourself and other shareholders and I think it's about time that you guys experience some the opportunity. But I will look at that, if a big enough lot comes my way I will look at it. I definitely will.


(Operator Instructions). We have no further questions at this time, so I would like to turn to Steve.

Steve Mihaylo

Anthony I really appreciate, Craig Samuels you have a question.


Yeah Craig you can go ahead.

Unidentified Participant

Can you comment on the number of sales guys I’m not sure if I was disconnected that you had addressed that, as well as our average sales for the quarter and then what kind of productivity. I know clearly sales and sales execution has been lately issue here despite all of the legacy problems that I didn’t hear you talk about. So maybe if you can provide some color with regards to the sales and productivity.

Steve Mihaylo

I’m going to provide some color, it's going to be a little more general than I think you would like. But I wouldn’t focus on the size of deals or any of that, I would focus on the results. Our results have been very impressive but we weren’t in a position to start scaling this business until we got our software for our accounting software completely automated. I’m confident that we will have totally automated in the next three to four, weeks or actually two to three weeks, and then we can really start scaling this. I have spent a lot of time with Doug Gaylor and his sales management group and we have identified a few weaknesses in our direct sales force but the fact that we’re in a position now to scale our partner program or our dealer program is like adding sales people. These are already experienced telecomm sales people that know how to sell telecomm products; they know how to get it up and running fairly quickly with people that know how to close the deal.

A lot of the sales people that we have had and currently have, have great product knowledge but they don’t have quite the sales skills that I would like them to have. So you’re going to see affiliate programs with customers that have a website hosted with us or even don’t have hosted with us that has a link back to us. If they got enough business customers that we will take them on as an affiliate. You’re going to see partner programs, we’re starting with about 600 or 700 telecomm partners that we have targeted whether we get all 600 of them probably not but we will probably get a couple 100 of them, then we are going to start going after data virus and computer virus and network virus and it could be high as high 40,000 or 50,000 that we will be able to handle but we got to get the ability to fulfill up and running smoothly before we can scale all these other opportunities. And that’s the answer unless Doug wants to add anything to it.

Doug Gaylor

I think Steve hit it on head is that if you look at scaling the sales group we got a core group of sales folks right now, I think we finished the quarter at 18 sales reps for the quarter, currently at 20 sales reps right now and so if you look at our average productivity per sales rep it was up considerably to about an average of 30,000 – 35,000 per month at the end of the quarter. So we’re heading in the right direction if you would have asked the same question on our average sales per sales rep six or nine months ago that number was down in the high teens and the low 20s. So we have seen considerable increase in average sales per sales rep, our productivity has continued to increase our proposal dollar amounts and our pipelines have continued to increase and that’s why you saw such a nice pop from Q4 to Q1 in our sales result.

Unidentified Participant

Dough can you suggest that maybe user capital hasn’t (inaudible) 30 grand a month. They can day trade 10,000 shares every day and do better than 30 grand a month. I was joking with you Steve.

Steve Mihaylo

Not everyone steals (ph) Craig.

Unidentified Participant

I’m joking, it sounds like off the 18 these are the surviving guys. I mean these are 18 bringing (ph), right? We have been talking about sales for at least three quarters now.

Steve Mihaylo

I would say at least half of them are pruned. The other half you know we’re still working bringing their numbers up. At Inter-Tel (ph) the top 20%-25% were producing about 50,000 or 60,000 a month so double that and I think that’s the kind of production we can get out of these folks. Our top sales people at Inter-Tel (ph) were all doing over a million a year. Now you have to remember that was a sale that was accounted for on the day they closed the transaction and then we installed it. In this business if we get a $1 million backlog it's fulfilled over monthly over 36 or 60 month period. So it's a little different but I expect our backlog to continue to grow and that’s what I would be focusing on as our backlog and then just divide it by 36 and you can see what the monthly increase will be.

Unidentified Participant

And another question I have heard you talk about the $2 million to $3 million cash injection but where do you guys see the little watermark for cash? I mean it's now probably greater turn for investors looking at…

Steve Mihaylo

That injection if our partners ramp a little quicker and we get a little bit higher productivity out of our sales people I would expect their cash to be higher than the number I’m going to shoot you. But I expect a number to be somewhere around a $1 million that will be low watermark.

Unidentified Participant

Or just about what everybody thinks you’re not going to make it as when you’re going to lift blast off?

Steve Mihaylo

Well there is no question that we’re going to blast off in my mind. We have already blasted off but this is a very expensive business to get into the right way, you know and there is a lot of competition out there that’s going to fall by the way side that doesn’t have the resources that we have and that I have personally. We’re going to blast off, there is just no doubt in my mind at least and I think everyone at this table I see them all shaking their heads up and down and not sideways. So they agree with me. Any other questions if not I’m going to close with the promise that we will continue to work hard and we look forward to being with you next quarter around this time. Thank you very much and good afternoon everyone.


Again this does conclude today’s conference. We thank you all for your participation.

[Type text]

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!

Source: Crexendo's CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts