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

Crexendo, Inc. (NYSEMKT:EXE)

Q2 2013 Earnings Conference Call

August 13, 2013 5:00 PM ET

Executives

Steven Mihaylo - Chairman and CEO

Jeffrey Korn - Chief Legal Officer

Ron Vincent - CFO

Doug Gaylor - President & COO

Satish Bhagavatula - CTO & CIO

Analysts

Craig Samuels - Samuels Capital Management

Robin Walter - Private Investor

Austin Hopper - AWH Capital

Operator

Good day and welcome to the Crexendo Second Quarter Earnings Call. Today's conference is being recorded. At this time I would like to turn the conference over to Chief Executive Officer Steve Mihaylo. Please go ahead.

Steven Mihaylo

Thank you, Elise. Good afternoon everyone. Before I get here, I would like to introduce you to the folks that are on the call here with us, and then who are in the room with me, and then have Jeff Korn, our Chief Legal Officer read our Safe Harbor statement.

In the room with me is Doug Gaylor, our President; Satish Bhagavatula, our Chief Technology Officer; Ron Vincent, our Chief Financial Officer; Kim Reitz, our Controller; and last but not least, Jeff Korn, our Chief Legal Officer.

Jeff, would you like to read our Safe Harbor statement please?

Jeffrey 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 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, 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 material 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, 2012 and the Form 10-Q for the period ending March 30th, 2013, and Form 10-Q for the period ending June 30, 2013 when 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 Steve. Steve?

Steven Mihaylo

Thank you, Jeff. Before we get started here, I'd like to just go over a few of the highlights, then I am going to have Ron Benson and Kim talk about the granularity in the numbers. We will then turn it over to Doug Gaylor, to speak about the operations and finally, Satish will talk about the advancements we have made from an R&D standpoint, and after that we will open it up to general discussion.

Consolidated revenue for the second quarter of 2013 decreased 45% to $2.7 million compared to $4.9 million for the second quarter of the prior year, and all of the decrease was due to the contracts we had in our legacy business StoresOnline. Net loss for the quarter of 2013 was $1.1 million or $0.10 per diluted common share, compared to net loss of $117,000 or $0.01 per share per diluted common share for the second quarter of the prior year.

Cash used for operations for the second quarter of 2013 was $585,000 compared to cash used for operations of $1.8 million in the first quarter of 2013, and cash provided by operations of $759,000 for the second quarter of the prior year. Ron, would you like to add some color to these numbers?

Ron Vincent

Thank you, Steve. The trends we have seen in the second quarter are positive, as we continue to see growth in our services segment. We continue to maintain a strong backlog for both our services and web services segment. We had StoresOnline revenue of $1.7 million, Crexendo Web Services revenue of $569,000 and Crexendo Network Services revenue of $491,000.

Revenue for the quarter decreased 9% or $285,000 to $2.7 million compared to $3 million for the first quarter, and decreased 45% or $2.2 million compared to $4.9 million in the second quarter of 2012. StoresOnline segment, as you are aware, the decrease in revenue on a quarter-over-quarter and year-over-year basis is primarily due to the suspension of direct mail seminar sales channel. Although we continue to collect our StoresOnline receivables, when we extend the payment term agreement, entered prior to July 2011. These agreements typically have a 24 to 36 month payment term. Our StoresOnline revenue will continue to decrease over time, as customers complete their payment obligations. Our StoresOnline revenue as expected, decreased year-over-year to $1.7 million for the second quarter, compared to $4.1 million for the second quarter of 2012.

StoresOnline segment generated revenue of $1.7 million, a decrease of 19% from the first quarter, revenue of $2.1 million and a 59% decrease over the second quarter of 2012, which was $4 million.

StoresOnline revenue is generated from web hosting services and cash collected on our accounts receivable balance for its extended payment term agreement. Web hosting was $550,000, a 14% increase from the first quarter revenue of $640,000 and a 31% decrease from $794,000 for the second quarter of 2012. Cash collected on our EPTAs generated revenue of $826,000, a 41% decrease compared to the first quarter revenue of $1.4 million, and a 69% decrease over the second quarter of 2012 revenue of $2.6 million. Revenue generated from StoresOnline segment will continue to decrease, as we collect our receivables from EPTAs. Based on our current collection rates, we expect to collect approximately $1 million in revenue from our StoresOnline receivables over the next 12 to 18 months.

Interest income from EPTA receivables decreased 42% to $120,000 in the second quarter compared to $206,000 for the first quarter, and it decreased 76% from $504,000 in the second quarter of 2012. We will continue to collect interest on EPTA receivables, at a decreasing rate as the receivable balances decrease from cash collected and write-offs.

Our Crexendo Web Services segment revenue increased 7% to $569,000 in the second quarter, compared to $533,000 for the first quarter, and decreased 18% from $692,000 for the second quarter of 2012. We continue to maintain a strong backlog of $1.2 million at June 30, 2013 compared to our backlog at June 30, 2012 of $1 million, an increase of approximately $200,000.

Crexendo Network Services segment revenue increase 28% to $491,000 in the second quarter, compared to $385,000 for the first quarter, an increase of 192% from $168,000 for the second quarter of 2012. We continue to see growth in our backlog. At June 30, 2013, our backlog is approximately $4.3 million, compared to our backlog at June 30, 2012 of $1.3 million, an increase of approximately $3 million.

We were excited about this positive trends in our Network Services segment revenue, which primarily relates to hosted telecommunications products and services, the majority of our network service contracts are 36 to 60 month contracts, and as such, the backlog is expected to be recognized as revenue over the next 36 to 60 months.

Some financial highlights; at June 30, 2013, we had cash and cash equivalents, excluding restricted cash of approximately $4.9 million compared to $7.4 million at December 31, 2012, including restricted cash of $1.4 million, we had $6.3 million in cash and cash equivalents at June 30, 2013. For the three and six months ended June 30, 2013, we use $585,000 and $2.4 million for operations. We used $56,000 and $110,000 for investing activities, and $6,000 and $3,000 was provided by financing activities respectively.

Cash flows used for operating activities decreased $585,000 for the second quarter, compared to $1.8 million for the first quarter of 2013. Cash flows used for investing activities increased to $56,000 compared to $54,000 for the first quarter of 2013. Cash flows provided by investing activities of $3,000 compared to -- cash flows used for investing activities were $3,000 in the first quarter of 2013.

We attribute the overall reduction in cash flows to various cost cutting measures implemented during the first quarter of 2013. We continue to have a strong working capital at Jun 30, 2013 at $5.3 million, compared to $6.3 million at December 31, 2013. Working capital excluding deferred revenue as of June 30, 2013, with $6.7 million compared to $9.4 million at December 31, 2012.

Approximately $2.2 million of the $2.7 million decrease relates to $2.2 million of EPTA receivables collected during the six month period. For the second quarter, we had a loss before income tax provision of $1.1 million and a net loss of $1.1 million after income tax benefit of $26,000 and that's a loss per share -- per diluted share of $0.10.

With this, I will turn it over to Doug Gaylor, our President.

Steven Mihaylo

Before Doug talks, this is Steve Mihaylo again, I'd like to discuss a recent resignation of one of our Board members, Craig Rauchle. Craig has been a long term Board member and we really appreciate his service. He is leaving the company for personal reasons, and we are also going to be putting forth the name of one of our shareholders to come on to our board, which will be scrutinized by our Board of Directors and our governance committee. By the name of Jeff Bash, and he resigned after our Board meeting -- Craig did.

With that I am going to turn it back to Doug Gaylor to go through the operations of the company.

Doug Gaylor

Okay. Thanks Steve. Well, we continue to have strong revenue backlog for both telecom and web as Ron was talking about, with solid bookings for the quarter. Our telecom backlog increased 27% from the first quarter and now it sits at $4.3 million, while our web backlog had a slight decrease, but is still strong at $1.2 million. The decrease that we had in web backlog was anticipated, as we have shifted our focus to larger spend customers for SEO services, because they are better positioned to achieve the positive results from their investment.

During Q2, 75% of our sales were from the telecom sector, and 25% of the sales were from web marketing services. The increase in percentage of telecom sales continues to drive our telecom backlogs at a greater pace than web backlogs, and that is a trend that I expect will continue as we see our telecom sales from the dealer and partner programs kicking during the second half of this year.

The 28% increase in telecom revenues from Q2 over Q1 on the heels of a 17% increase that we have from Q4 to Q1, highlights the dramatic shift that are occurring in the telecom industry, with more and more businesses adopting the clouds for their communication needs.

Crexendo is excited to receive two preferred partner of the year awards from two significant organizations, that have already produced sales in significant pipeline opportunities. We expect these relationships to continue to bolster our telecom and web revenues. These organizations had 600 and 200 partner members respectively in the organizations, and they have launched co-branded marketing campaigns endorsing Crexendo's telecom and web offering, and they have generated over $1 million in proposed opportunities just during the last few months.

We continue to invest in our dealer-partner program, and we are extremely excited to announce the addition of Cassandra Anderson to our sales team as our new Director of Channel Sales. Cassandra comes to us with a very extensive successful experience, helping build ShoreTel, and prior to that, MiTel and Inter-Tel's dealer channels, and their industry experience and expertise and sales acumen will be a tremendous addition to our dealer-partner initiative. We increased our dealer-partners from 18 to 32 from Q1 to Q2, and we have successfully onboarded the majority of these new dealers into the program. Our dealers proposed pipeline of opportunities added nearly $2 million worth of proposals during the quarter with a great deal of excitement from that channel.

Since launching the program at the beginning of 2013, we have fine tuned our training, our support, our marketing efforts with our dealer channel, and to gain more [minds] over their existing product offering. The dealer-partner channel is critical to our success, and recent additions and the momentum that we have got in the channel, and the momentum that we have experienced there is extremely promising.

In addition to our dealer-partner channel, we also launched our affiliate referral program on a controlled introduction basis during the quarter, and this allows businesses and individuals to get compensated by referring potential clients to Crexendo via affiliate links on their website. The initial response of this program has been encouraging, and we are extremely excited about the initial opportunities that are developing from the program.

We continue to have nice success with our marketing efforts as it relates to trade shows and association membership. We average six events per month during the quarter, generating interest in all of our Crexendo offerings and services. Our marketing efforts also produce the suite of new marketing materials and proposal tools during the quarter, and we will be launching our new Crexendo corporate website in the weeks ahead.

Our remarketing campaign with Google continues to increase and improve Crexendo's brand recognition, and we continue to generate lead opportunities and that will be enhanced in the months to come with the launch of our new websites.

We saw great acceptance of our new low end telephone set that was released at the end of Q1 and we also saw greater margins on our telecom sales with the addition of activation fees to our pricing model during the quarter. In addition, enhanced features continually being developed and launched by our fantastic products and technology group, help secure some nice size multi-location accounts during the quarter.

Our acquisition of PBX Central during the quarter was an exciting addition to our organization. The steady stream of high margin revenue from their hosted customers and their long time reseller partners should be a nice addition to our top and bottom line. The opportunity to have PBX resellers pick up all or some of Crexendo's product offerings should also add additional value to the acquisition and to their customer base.

We hosted the PBX resellers at our office here in Phoenix in July, and we are extremely excited about the opportunities to expand our partnership with resellers.

We continue to have constant focus on managing costs in the business, and that resulted in trimming our sales expenses by 21% during the quarter. Our general and administrative expenses decreased by 7% for the quarter, and R&D expenses decreased by 14% during the quarter. We have made additional efforts and cost savings moves, as we begin Q3 and we will continue to manage our expenses diligently in our efforts to cut costs and manage our efficiencies. And we still have much work to do in growing our revenue streams, the momentum and excitement that we see in our dealer programs and our affiliate programs is an exciting trend, which I believe will add tremendous value in the future.

Our successful growth with midsize companies, enterprise level companies, and multi-location clients should also continue to help build a rapidly growing revenue backlog. We have exerted a tremendous amount of effort over the last year to completely change our business model and focus, and now we are excited to see the rewards of those efforts finally beginning to take shape.

So now, I will turn it over to our Chief Technology Officer, Satish Bhagavatula for a products and technology review.

Satish Bhagavatula

Thank you, Doug. Greetings everyone. I am glad to report that we made great improvements to our infrastructure products and technology during Q2 of 2013. These enhancements have been particularly in the areas of increased operational efficiencies of our cloud services, improved features and new functionality in our telecom platform. We also spent considerable effort to improve the high availability and resiliency of our technology infrastructure.

As we continue to increase our telecom customer base, we continue to make more improvements to our infrastructure, to adapt to the growing need of storage, computing, POS and high availability of our telecom and web offering.

I am glad to report we have been successfully running smooth technical operations for over three quarters now, part of our Arizona data center, and have been pleased with the results.

Our efforts to separate core telecom and web infrastructure have proved to be fruitful in providing higher levels of services to our customers, telecom and web alike. We improved our data and telecom carrier relationships, thus providing better resiliency to our solutions. We consolidated many of our carrier contracts last quarter, and we have seen great improvements in our cost of service. We continue to make additional cost improvements as our traffic, presence and customer base increases throughout the United States. We made additional investments in the area of security and implemented a DDoS protection service from Prolexic. This prepares us to handle large DDoS attacks, which is a commonplace for search providers in the industry.

We have seen increased load and utilizations on our systems, due to the considerable growth in telecom deployment. Our goal is to preserve and maintain state of the art data center and infrastructure.

I am glad to report that our new web engineering team, under the leadership of our Director of Web Engineering is making great contribution to our existing and new web platforms. We have migrated our legacy 5.0 web customer base, to our latest version of the 7.0 builder. All our current customers that were previously running on 5.0 and 6.0 have been (inaudible) on 7.0 platform for a few months, and have been very happy.

We continue to maintain a 7.0 builder and minor improvements, while we heavily focus on our next generation web builder, dubbed Slingshot. We have been investing heavily in the design and development of our new builder, to pave the path for our future platform releases.

Our new builder leverages the strong foundation of our existing e-commerce platform, and builds on aspect such as design, template and mobile friendly websites, that's enabling our partners and customers to build great looking functional web sites, regardless of the verticals.

On our telecom platform, we have achieved greater stability after the introduction of our 7.0 in Q1 telecom platform. This new platform has enabled us to add features more rapidly. Since then, we have made considerable improvements in the areas of bulk provision, local number portability and multi-location awareness, thus enabling Crexendo to deploy and roll out geographically distributed business customers, with the same ease as the small single location business customers.

We also made many user interface improvement. This greatly helps and improves our operational costs. It also enables our large customers with in-house IT staff to manage their deployment for simple ad moves and changes.

Other areas of improvements included [ACD] statistics, reporting and inbound EPABX solutions with greater levels of support for local numbers. As we enroll more channel partners, we are seeing increased demand for some legacy PBX features. I am glad to report that we have enhanced our scalable [VLS] solutions to our customers. This feature was extremely [well], even for large customers with locations dispersed geographically. This was a highly desired feature by many of our prospects, and it is now available to all our customers, which is one of the tremendous benefits of our cloud communications platform.

The integration of PBX Central acquisition is progressing well. We continue to identify additional synergies and technical operations, and the technology platform called (inaudible) platform. We continue to look into synergistic technology partnership opportunities to help us through our current portfolio. We continue to adopt more call technologies to allow for greater automation of our segment, which in turn increases efficiencies in how we deliver services to our customers, and improves our margins.

With that, I will now turn it over to Steve Mihaylo.

Steven Mihaylo

Thank you, Satish. Let me just recap some of the things that we are doing. The various channels that we have and that our affiliate partners or dealer partners and our direct sales, on the revenue side, as well as our hosting for websites and the telecom hosting. In addition, we are looking at acquisitions. Of course we made the PBX Central acquisition, but we are also actively looking at additional acquisitions in the future. And last but not least, with the introduction of Slingshot or 8.0 web builder, will be something that we feel should be quite advantageous for the developer community. So this would be on the additional revenue channel.

With that I am going to open it up to questions to Elise.

Question-and-Answer Session

Operator

(Operator Instructions). We will go first to Craig Samuels with Samuels Capital Management. Please go ahead.

Steven Mihaylo

Hi Craig. How are you this afternoon? Are you there, Craig?

Craig Samuels - Samuels Capital Management

I am here, I am on mute. So I guess I am not doing as well as I thought I was. How are you doing?

Steven Mihaylo

We are doing well. Thank you.

Craig Samuels - Samuels Capital Management

First question, I heard that you recently hired somebody from ShoreTel, who is that?

Steven Mihaylo

I am going to let Doug.

Doug Gaylor

Hey Craig, how are you?

Craig Samuels - Samuels Capital Management

I am doing well, how are you?

Doug Gaylor

Great. So we hired Cassandra Anderson. Cassandra Anderson was in the dealer channel area for Inter-Tel and MiTel for at least close to 10 years and the most recent two years was in the dealer-channel partner area for ShoreTel. So she comes with a tremendous amount of experience, and a tremendous amount of context with the dealer channel for both MiTel, Inter-Tel and ShoreTel.

Craig Samuels - Samuels Capital Management

Got it. As, at least you know, Steve, I have been involved with ShoreTel for quite some time as well as 8x8, so I am quite familiar with it. My next question is, how many sales reps do you guys presently have, and what is their contribution during the quarter?

Steven Mihaylo

Well, I am going to give you a little bit of background on that, and then I am going to let Doug talk about it. We have currently got about --

Craig Samuels - Samuels Capital Management

18 total and two producing.

Steven Mihaylo

We have got 18 sales reps and what we are seeing, Craig, is that our direct sales reps are tending to work on bigger deals, which take anywhere from 12 to 16 weeks.

Craig Samuels - Samuels Capital Management

It feels like 12 to 16 months, Steve.

Steven Mihaylo

Excuse me, I am laughing, I apologize. But it does take longer, and they are posing deals that are over 100 phones. Some of which have been as (inaudible) as 1000 phones, and I am going to let Doug talk about some of the color there. With our dealers and affiliates, that's where we see some rapid growth. But here again it's so new, we are up to 32 dealers on the dealer side, and Cassandra is now starting to go out and help the dealers and help them get set up and so on and so forth. We have had a couple of deals that have gotten sold, that haven't been implemented yet. They tend to be a little bit larger than we expected as well, and then last but not least, our affiliate program is depending a lot on Slingshot, to get those folks on websites and what have you, but we signed up a very nice affiliate here in the last month or so -- that's actually a magazine. They own a magazine. In fact, they own several magazines. So there's good potential there, then last but not least, one of the customers of our share in the Valley of the Sun, Phoenix is the charity, and they have agreed to come on board as an affiliate. But here again, all of that is dependent on Slingshot, which is very close to release.

As Satish mentioned, our web builder that we had, has a very-very strong e-commerce component, and we are pretty much leaving that alone, but the front end, we have really redesigned the front end with our new design team, and it's so simple, it's all drag and drop and it's really simple to build a website with it, and we think it will be a strong competitor out there in the field, especially with developers, and it will allow us to have even channels for revenue.

I am going to let Doug talk about the accounts that we closed recently, but haven't installed.

Doug Gaylor

So Craig, as you look at the contribution to the direct sales team. The direct sales team is averaging about $35,000 per rep per month, and when we look at the bigger opportunities, as Steve said, we do have a lot of bigger opportunities in the pipeline. Those bigger opportunities tend to have a longer close cycle. But we have got a couple of vertical markets that we've really attacked and attacked extremely well. We have got some installations going in currently in some of these verticals that are 400, 500 station implementations, and those are leading to a lot of great referrals to other organizations within the same verticals. So we have got huge pipeline of opportunities in some of these verticals. So I anticipate that we will start seeing some nice size opportunities hitting the sales booking for us in Q3 and Q4.

So as we look at our direct sales channel, we haven't grown our direct sales channel much. In the quarter, its 16, we are at 18 sales reps currently. Big focus on our dealer channel. When we talk about the dealers that we are bringing on, some of the recent dealers that we got on board is within the last 30 days. It will have sales teams of seven, eight, nine sales reps a piece, and so as we look at the onboarding efforts, we are going out to organizations that already have established salesforces, already have established customer lists and clients that are already part of their organization, and so we are really looking for their low hanging fruits, once these guys get onboarded. So we are seeing great activity from these new dealers that are onboarding with big customer bases, and we are seeing proposal activity, right out of the gates when we bring these guys onboard.

Craig Samuels - Samuels Capital Management

But do these dealers also represent your peers?

Doug Gaylor

Many of them do, some of them do not. So as an example, we are going out there, and bringing on existing telecom sector dealers. Existing telecom sector dealers typically have a relationship with an existing DTE provider, whether that be a Inter-Tel or MiTel or ShoreTel and Avaya, but we have also brought on individual dealers that are non-telecom related, more data VARs or service oriented VARs that don't have a telecom offering. So for those VARs, we are the first on in their stable that is a telecom provider. So those are businesses that realize the benefits for the cloud, and so they have got single relationships when it comes to telecom, and that's Crexendo.

We are seeing good traction there. We had a sale in the last week from one of those resellers that has no telecom background, no telecom experience and we got a three location deal that's about $30,000, that has the potential to be -- may be $0.5 million by the end of the year, with getting to the rest of their location.

Craig Samuels - Samuels Capital Management

Have you actually gone up against ShoreTel Sky, the old M5 networks or 8x8's offering and beat them out on any deals.

Doug Gaylor

We have. So more so on 8x8 than ShoreTel Sky, and ShoreTel's resellers out there are primarily still selling the ShoreTel CPE products. Their dealers have a little bit of a challenge with the Sky product, and the fact that the Sky product doesn't even support the ShoreTel phone. So a lot of the ShoreTel dealers out there haven't really adopted the Sky platform yet. We see a lot more hosted challenges from companies like 8x8 and RingCentral that we do from ShoreTel's hosted platform. We do see ShoreTel a lot, from a CPE perspective. Their dealers haven't migrated over to the cloud much yet, which is good for us, because it gives us great selling tool, when we go out there and talk to them about our cloud offering. But when we do run into an 8x8 or a RingCentral, we are extremely competitive and are winning a lot more than we are losing those particular instances.

Craig Samuels - Samuels Capital Management

Right. Then how do you comment on this metric? I think in the last quarter, in the June quarter, ShoreTel did about $19 million in Sky business, and I believe they have 24 sales reps as well as a pretty well defined dealer network? Given those numbers, you have got 18 reps, they have got 24. They did 19 in the quarter, you did, 17? One, if I back out legacy business. How do you quantify that huge discrepancy?

Doug Gaylor

I would highlight it fairly easily. I mean one, M5 has been around for, I believe since 2001-2002, so it has had a pretty tremendous headstart on us. I mean, our telecom offering has been out there now for a little bit over a year. So when we look at that comparison, they definitely have a huge headstart on us in that perspective. Their dealer channel is fairly well established. Our dealer program kicked off in January. So when we look at where we are with our dealer program, having the amount of dealers on board that we do today, takes time to get these guys on board into developing the product and platform. So are they ahead of us, absolutely. Do they have a headstart? Absolutely. Will we catch them, absolutely.

Craig Samuels - Samuels Capital Management

So on that note, maybe Steve, you could jump in with regards to cash. Obviously under $5 million, it becomes an increasing concern for those of us that have been around, and maybe it's a detriment to new shareholders combined, fearing a financing or running out of cash. Do you guys own any real estate or any other assets that can be disposed off to generate some cash?

Steven Mihaylo

We are not going to dispose off anything per se, but --?

Craig Samuels - Samuels Capital Management

Say a leaseback or other?

Steven Mihaylo

Yeah. We do have currently, at the end of June, we had $4.9 million, that's about $5 million in cash, plus we had $1.44 in restricted cash. Since then we have freed up $1 million of that for -- we had a bond with the state of Arizona, and that has been released. So we had just slightly under $6 million. Our current projection show us, breaking even in the first -- probably in the first quarter of 2015, but that doesn't include any of the potential sale --

Craig Samuels - Samuels Capital Management

2015 or 2014?

Steven Mihaylo

2015, but I --

Craig Samuels - Samuels Capital Management

So six quarters away?

Steven Mihaylo

It's about five quarters away. But that does not include any sales from dealers, affiliates and getting our direct sales force that are trained. So I would expect that would probably hit breakeven, sometime around the end of next year, or the beginning of 2015, at least a quarter earlier than we projected, once we recast our projections.

With the cash we have on our balance sheet, it looks like we are probably going to need about $2 million more, which I have already agreed to put into the company, when it becomes necessary. The quickest thing that we can raise cash from, is for me to do a sale on leaseback on the building we are in, and that could be done very quickly, and the ramp would be very modest.

Craig Samuels - Samuels Capital Management

What are you waiting for, I mean, why not do it now and at least improve the balance sheet, especially when current or new investors are looking at Crexendo as a viable player, looking from a valuation perspective against ShoreTel or 8x8?

Steven Mihaylo

This is a (inaudible) company, so we have set up special committee to look at that. Right now they are reviewing the appraisals we have, and they will probably take place before the end of this year.

Craig Samuels - Samuels Capital Management

Sounds good then. Based on that growing backlog which is pretty encouraging, would you say Steve, are you ready to say that the June quarter may have marked the low quarter for you guys in this multiyear turn?

Steven Mihaylo

We still have about $1 million in legacy receivables that comes in, in the form of revenue. I would say the low quarter will be the fourth quarter, because that's when the bulk of those receivables will have been collected. There still will be a couple hundred dollars left in 2014, but the bulk of them will be collected by the end of this year, so that fourth quarter should be the lowest quarter of all sales wise. We are still working on our G&A and we expect to save a couple, maybe $100,000 or $200,000 more there, per year. So we should start to see an improvement in the losses, and an improvement in sales in the first quarter of the next year. As I said, after that, it's going to ramp very quickly, and I know this is not quite what we projected originally, a lot closer to our goal now, and we can see a lot more clearly.

The bad news is, and it has been frustrating that the sales in the cost and all the rest haven't come into view, exactly how we expected them, but they are coming into view. We have got the proverbial light at the end of the tunnel now, and it's not a train. So you can rest assure that we are not going to be obliterated here. But with all the things that we are doing, R&D wise, sales wise, channel wise, we are confident that we are going to have enough money between the building, and the cash on our balance sheet to get us to profitability here. Then, it's going to start moving on a pretty fast path.

Craig Samuels - Samuels Capital Management

Then, can you comment on -- I think I heard Steve say something about storage, and can you comment on that strategy, to add storage before you got a salesforce that can confidently sell telecom?

Steven Mihaylo

I will tell you what's happening. We have added more functionality. One of the things that makes us different than our competitors, and Satish can add color to it in just a minute, is that we are releasing functionality to our base about every six weeks. It takes us about four weeks to write the code, and about two weeks to test it, and then we release it on a limited basis for a week or so, and then we release it in general availability after that. And one of the things that we have added in the way of functionality is call recording, and several of our customers like to record every single call that goes in and out of their facilities, and one likes to start real time for 90 days, and then archive it for another year or so, and that takes a tremendous amount of data, and we pointed that out to the customers that are doing it.

And we're finding this happens with telemarketing organizations, or organizations that sell their products and services with the call center. They want to make sure that orders are taken correctly or customer complaints are handled correctly, and we also find it with law firms, accounting firms, anybody that potentially may have some liability, who likes to record those costs. And we can either do it on demand, which is initiated by the user or we can set it up as a systemwide feature for the user, and they can do it themselves by going into the portal, on the cloud, and just designating that particular feature.

It is a data in terms of storage, in terms of feature, and we have told them that if they want that, they are going to have to pay by the gigabit or the terabyte or whatever. And I am going to have Satish, just fill in the blanks here. So you can see -- we are charging people currently that we weren't charging prior to that feature.

Satish Bhagavatula

And you see, those are applying those (inaudible), we did a pretty good job. Just one quick comment on that Craig is that, and thanks for asking the question is that, our strategy has been to be able to add the functionality that's right for the customer base, and if you see in a lot of the competition out there, you will see our call centers, or even automatic call -- many of the call recording functionality for the call center, are all extra premium features that customers would have to pay for and stuff.

So what we are trying to do here is, through the PBX-C acquisition or the other (inaudible) ACD, and the call centers we are doing, [EPABX] solution or whether it would be through the call recording functionality, on-demand or automatic. What's happening, is the customers are going to start continuing to use their storage, storage on infrastructure, and then the idea is that, if you want to be able to not necessarily charge for the feature, but be able to, based on the individual customer's needs, based on how they use the functionality, or how they use storage, how much they use, it's going to be metered, then we are able to provide competitive plans, whereby that brings an additional stream of revenue. And those are some of the (inaudible) that I was talking about from a pricing perspective that we have added, which allows us to be able to deliver these things, and be able to get certain amount of storage for free, but also be able to sell plans, much similar to what traditional telecom people do, with respect to the usage of minutes along with (inaudible) stuff. So I think that's where the emphasis has been with respect to storage.

This also paves the path in the future, as we start to come out with additional products and services, for us to be able to optimize sales, manage and optimize the storage solution, so that we can actually come up with better products for the businesses out there, to be able to allow them to do other storages.

Steven Mihaylo

By the way, one of the things that we are looking into the feasibility with our auditors, is to give you guys a flash on our numbers within about two or three weeks after the close, even a couple of weeks before we have our conference call. So this will give you more transparency and visibility into what we are doing.

Craig Samuels - Samuels Capital Management

Sounds good. Last question Steve, are you still an opportunistic buyer in the open market?

Steven Mihaylo

I am. I am. Unfortunately, there hasn't been any stories out there, if you consider 500 shares size --.

Craig Samuels - Samuels Capital Management

Looks like the stock is finally starting to look ahead, given some of the metrics as reported seem to be better than on prior quarters?

Steven Mihaylo

I think you are right.

Craig Samuels - Samuels Capital Management

Good job and look forward to continuing to track your progress.

Steven Mihaylo

Thank you, Craig.

Craig Samuels - Samuels Capital Management

Thank you.

Operator

Thank you. (Operator Instructions). We will go next to Robin Walter, private investor. Please go ahead.

Steven Mihaylo

Hi Robin, how are you?

Robin Walter - Private Investor

Hi, I am fine. Thank you. The last color after a lot of the questions that I had, there will be much (inaudible). There has been a legal dispute with a former landlord in Utah, has that been resolved, and are there any other unresolved legal disputes that are still pending?

Steven Mihaylo

I am going to let Jeff Korn handle that, but with the landlord, yes, that has been completely resolved.

Jeffrey Korn

Yes Robin. We disclosed that last quarter, within our Q last quarter, we discussed it on our conference call.

Robin Walter - Private Investor

Okay. Any other unresolved legal disputes?

Jeffrey Korn

They are all these small legal disputes, but there is nothing that was significant which required disclosure. So yes, it's a (inaudible).

Robin Walter - Private Investor

Okay. Then, you've appropriately kind of trained us to focus on the 36-month backlog, that's probably the most significant specific in measuring your progress. So this quarter, the backlog looks like it went up by about $900,000. Given all the activity that you have talked about on this call, would it be a fair expectation to assume that each quarter going forward, the increase in the 36 month backhaul will be a larger number, so the next quarter the backlog will increase by more than $900,000 in the quarter; after that, the number will be larger. There will be sequential increases, basically for the foreseeable future?

Jeffrey Korn

Yeah, thanks Robin. Obviously with sales -- sales adds to that backlog tremendously, and so when we look at our onboarding of the new dealers and we look at the fact that our dealer program is really starting to hit its stride, as we speak. I would anticipate that that backlog revenue will continue to increase, and increase nicely. So we have seen almost $1 million increase three quarters in a row now in our backlog, and that's without contributions from the dealer channel, or very significant contributions from the dealer channel. So by getting these dealers onboarded and getting that number ramped up, even at a higher pace, is what I would hope and anticipate.

Robin Walter - Private Investor

Okay. That's all I had for today. Thank you.

Steven Mihaylo

Thanks Robin.

Operator

(Operator Instructions). We will go next to Austin Hopper with AWH Capital. Please go ahead.

Austin Hopper - AWH Capital

Hey guys, thanks for taking my question. Follow-up on the backlog issue, [with this] topic. So your network services backlog was $4.3 million, and that's over the next 36t o 60 months, is that right?

Doug Gaylor

That's correct yes.

Austin Hopper - AWH Capital

Okay. So in the past you disclosed a 36 month backlog. So is it different like a longer term backlog, or is it a different deals or?

Doug Gaylor

I don't think we ever really said it was a 36 month backlog. I think it was dated in the past, is that a majority of our contracts in the past were 36 months contracts. We are seeing more acceptance of doing 60 months contract. So in that backlog today, we have got probably a combination of 36 and 60 month contracts, and we have got a lot of contracts that are now a year and half old, that are customers that have been in the process for a year and a half now, or have been using the service for a year and a half. So obviously, their contribution to the backlog continues to go down, as they continue to pay off their contract.

Austin Hopper - AWH Capital

I am looking at our Q1 release, and I think its $3.4 million over the next 36 months. So now you are talking 36 to 60 months. So it's -- I didn't know if there was an apples-to-apples to understand what the 36 month number would be in the quarter?

Steven Mihaylo

Let me add a little bit of color to that. As Doug said, a lot of it is running off as we are adding to it. So each quarter, three months we are running off. And it's probably on average of 48 months, if they want to use an average, because some of the contracts are 36 months, and more of them lately have been in the 60 month area. But one of the things that we have is an advantage over our competitors, is the fact that this is a very dynamic system that we are always adding functionality to. And even though our contract may run out, the likelihood of our customer leaving us is very-very slim. At Inter-Tel we had less than 2% attrition per year, and I would expect the same sort of attrition rates here. In fact, if anything, I would expect -- as the economy gets stronger for customers to actually add seats, not subtract them.

Austin Hopper - AWH Capital

Steve, I was just trying to understand what the apples-to-apples backlog comparison will be in Q2 versus Q1. It looks like, you had a 36 month backlog and now you are talking more like a 36 to 60 month. So it's a really different metric.

Doug Gaylor

I think if we look at -- I mean, we were --

Austin Hopper - AWH Capital

Presumably, if you issued a 10 year backlog, that would be a much larger number?

Doug Gaylor

We were in the office selling 61 contracts as well. So I will verify with Ron, but I think our backlog number has always been outstanding revenues due to the organization. So in Q1, probably the higher majority of these contracts were 36 months, that they were probably 60 month contracts that were still in that number.

Ron Vincent

They were primarily contract. Contractual term was 36 months, and I think in Q2, we move to more in line with operating the 60 month agreement at the initial.

Austin Hopper - AWH Capital

Okay. And did PBX have any impact on the revenues or the backlog in the quarter?

Steven Mihaylo

Not the backlog. I am going to let -- not the backlog, because most of their customers are on a month to month. But that goes to show you how sticky a customer is in this business. But it did add about $38,000 in revenue for the one month that we have them, which was June. This coming quarter, led over $100,000 per quarter. But we see some very good opportunities there which we are exploring there as we speak, that could increase the revenue. So it's a process, it's not a big bang theory, it's more of a process.

Ron Vincent

And again to reiterate, those numbers are not our telecom or web backlog, the extension numbers right now, are just revenue numbers that are hitting (inaudible) backlog.

Austin Hopper - AWH Capital

Great. It sounds like you are making a fair amount, and more privatized on the network services side. I was just curious on the Crexendo Web Services side, why is that business declining?

Steven Mihaylo

No, it's not actually declining, we made a conscious decision to only handle larger customers with bigger budgets. As you can appreciate, Web Services is more of a subjective sort of a sale, where as telecom is objective. And on the subjective side, when you are dealing with a smaller customer, if they don't see results in 60 to 90 days, they get very dissatisfied. With the larger customer, they know that it takes a while to drive traffic to their website, and so we are only concentrating on larger customers. Maybe you'd like to add some color to that, Doug?

Doug Gaylor

Yeah, we obviously are still selling web services. We are concentrating on the larger customers. Larger customers tend to have a bigger budget, they tend to get it more. The smaller customers are the one that want to limit their budget to $200 or $300 a month spend, especially if they are going after a larger market or a more aggressive term. $200 a month spend, they go after Phoenix dentists, takes a lot of pain to start to seeing that right impact. We are spending $1,000 or $1,500 a month to go after a Phoenix dentist, we will see a lot quicker result. So Steve's exactly right, if we look at where our efforts are best suited, it's obviously going after those larger clients.

You're also seeing, as we talked about my presentation, a much higher percentage of sales coming from telecom, as opposed to web, and that's because with telecom, you've got accretive ROI from day one for the high majority of these customers. So we go out to a customer and give them $200 or $300 or $500 month savings under telecom bill from day one. That's a pretty easy and fairly quick decision for them to make.

For businesses that haven't spent a lot on web marketing in the past, for them to spend any dollars is the capital outlay. And so, that tends to take a little bit more sales in (inaudible) and tends to take a little bit more due diligence on the customer side, because it's a capital outlay as opposed to an ROI perspective.

Austin Hopper - AWH Capital

Great. Thank you.

Operator

(Operator Instructions).

Steven Mihaylo

Okay, well it sounds like we answered the bulk of the questions out there. We are excited about what we are doing, and we look forward to meeting with you some time in -- I am looking at Ron, probably early November, the fact that I will be on vacation, you guys can carry on without me. Anyway, I hope that all of you have a nice evening, and we look forward to being with you next quarter. Thank you.

Operator

This does conclude today's program. We appreciate your participation, you may disconnect at any time and have a great day.

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 www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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

Source: Crexendo's CEO Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts