Crexendo's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Crexendo, Inc. (CXDO)
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Crexendo, Inc. (EXE) Q3 2013 Earnings Conference Call November 12, 2013 5:00 PM ET


Steve Mihaylo - Chairman and CEO

Doug Gaylor - President and COO

Jeffrey Korn - CLO

Ron Vincent - CFO

Satish Bhagavatula - CTO and CIO



Good day and welcome to the Crexendo Q3 2013 earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Chief Executive Officer and Chairman of Board, Steve Mihaylo. Please go ahead.

Steve Mihaylo

Thank you. Good afternoon everyone. I am Steve Mihaylo, CEO and Chairman of Crexendo. I want to welcome all of you to Crexendo’s third quarter conference call.

With me here today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; Satish Bhagavatula, our CTO and CIO; Jeff Korn, our CLO, Chief Legal Officer; and Kim Reitz, our Controller; and I am going to ask Jeff to read the Safe Harbor statement after than I will have some brief general overview comments relative to the quarter. Ron will provide some additional granularity on the numbers, Doug will provide a basic business and sales update and Satish will give an update on technology and then we will open the call to question.

Jeff, would you please read the Safe Harbor statement?

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 and listeners 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, 2012 and the Form 10-Q for the period ending March 30th, 2013, and June 30th 2013. 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.

With that, I would now like to turn the call back to Steve. Steve?

Steven Mihaylo

Thank you, Jeff. I assume everyone has copy of our press release, so I am not going to read that to you and besides Ron Vincent is going to give you some granularity on the numbers. Obviously, the results of the third quarter are not the results that our shareholders they will be excited about -- these are trends that I'm very pleased with.

First, we continue to strategically but aggressively reduce cost. I have been very encouraged with the cost reduction result. As we discussed in the press release, we have made the strategic decision mix with non-enterprise SEO market while this will reduce out top line revenue and it does help us reduce cost and allow us to focus third quarter objectives of business of cloud based telephony as well as our soon to be released new website development software platform.

We are also reducing our other cost. As you know we have the limited position of CAO and we have further reduced executive cost as Jeff Korn is now working at a reduced schedule which is a win-win as we still get full covered with substantial cost savings and Jeff gets to accept some consulting work. We watch all of our cost carefully and make appropriate strategic reduction. I am pleased with the progress of our sales force. I think we have made significant headway in having a good and effective sales force and we continue to make tweaks and improvements.

Our dealer-partner channel continues to improve. They are holding our first partner conference this week and I see excitement with our dealer partners. I have significant expectations for the future of this program. We are also actively aware of our cash balance as I am working with the Board to assure our continued liquidity and we are looking at various depth and equity option. It is too early on the process for me to make any specific comments but I expect we should have a plan in place by the end of this year or the middle of January. I continued to be very excited and confident in our future and I am amazed by the quality of the product that we have put out and the quality and enthusiasm of our very talented people.

I know we’re in the right space and I also know we are second to none in quality of products.

With that I will turn the call over to Ron, Ron would you like to give us some granularity on the numbers please?

Ron Vincent

Thanks Steve. We continue to see rapid growth in our network services segment revenue and backlog. We have also experienced better than expected collections on our stores online, extended payment term agreements. Consolidated revenue for the third quarter decreased 11% or 300,000 to 2.4 million compared to 2.7 million for the second quarter and decreased 37% compared to 3.9 million for the third quarter of 2012.

Crexendo Network Services segment revenue increased 42% to 696,000 for the third compared to 491,000 for the second quarter of this year and increased 196% from 235,000 for the third quarter of 2012.

We continue to see positive growth in our backlog, this is the third sequential quarter we have seen growth of at least 23%. At September 30 our backlog is approximately 5.2 million compared to a backlog at June 30, 2013 of 4.3 million, an increase of approximately 1 million which is consistent with prior quarters we are excited about this positive trend in our network services segment revenue, which primarily relates to hosted telecommunication product and services. The majority of our network services contracts are 36 months to 60 months terms and the backlog is expected to be recognized as revenue over this period.

Crexendo Web Services segment revenue decreased 6% to 533,000 for the third quarter compared to 569,000 for the second quarter and decreased 7% compared to 575,000 for the third quarter of 2012. We anticipate that our revenue from our web services segment will continue to decline due to our strategic decision to limit the provision of web services to our enterprise sized customers.

As a result of this shift in focus, our backlog has decreased 400,000 to 800,000 as of September 30th compared to 1.2 million at June 30th 2013. This shift in focus will allow us to focus on a rapidly growing network services segment, in connection with the expected decline in our web services revenue; we recognized a good will impairment of 265,000 during the quarter.

StoresOnline segment as you are aware the decrease in revenue 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 term. Our StoresOnline revenue will continue to decrease over time, as customers complete their payment obligations.

Our StoresOnline segment revenue decreased 29% to 1.2 million compared to $1.7 million for the second quarter and decreased 61% compared to 3.1 million for the third quarter of 2012.

StoresOnline revenue is generated from website hosting services and cash collected on our extended payment term agreement. Website hosting revenue decreased 25% to 581,000 compared to 777,000 for the third quarter 2012.

Cash collected on our EPTAs resulted in revenue of 534,000, a decrease of 35% compared to 826,000 for the second quarter and 75% compared to third quarter of 2012 which was 2.1 million. Revenue generated from StoresOnline segment will continue to decrease as we collect our receivables from EPTAs. Based on our current collection rate we expect to collect approximately 600,000 in revenue from our stores online receivables over the next 12 to 15 months.

Interest income from EPTA receivables decreased 28% to 86,000 for the third quarter compared to a 120,000 for the second quarter and decreased 79% from 409,000 in the third quarter of 2012. We will continue to collect interest on EPTA receivables at a decreasing rate as the accounts receivable balance decreases from cash collected in write-offs.

In additional financial highlights, at September 30th we had cash and cash equivalents, excluding restricted cash of approximately 3.5 million, compared to 7.4 million at December 31st 2012, including restricted cash of 1.4 million, we had 4.9 million at September 30th 2013. For the nine months ended September 30th we used 3.9 million for operations. We used 105,000 for investing activities and financing activities provided 88,000. Working capital decreased 30% or 1.9 million to 4.4 million at September 30th compared to 6.3 million as of December 31st 2012. Working capital excluding deferred revenue decreased 41% or 3.9 million to 5.5 million as of September 30th, compared to 9.4 million as at December 31st 2012. The decreases related to the use of our cash and cash equivalent for operating activity.

For the third quarter we had a loss before income taxes of 1.6 million and a net loss of 1.6 million after an income tax provision of 23,000.

For the nine months ended September 30th we had a loss before income taxes of 3.4 million and a net loss of 3.1 million after income tax benefits of 240,000 related to statute of limitations expiring on some uncertain tax position. With that I will turn it over to Doug Gailer, our President, COO for additional comments.

Doug Gailer

Thanks Ron, thanks everybody for joining us. During our third quarter we continued to see very positive trends for our percent of telecom, increasing our revenue by 42% and increasing our backlog by 23% over the prior quarter. Our continued success in this division coupled with a tremendous growth into cloud communications industry underscores the fact this is the where the emphasis be focused. Based on these factors during Q3 as we already talked about, we made an important decision to exit the web marketing and SEO sector of our business expect for Enterprise and National Account, so that we can focus 100% of our efforts on our telecom and hosted services offering.

During Q3 our total sales bookings increased 22% over our sales in Q2, Q3 was our second best booking quarter ever, just shy of our high watermark that we achieved Q1 of this year. Our telecom sales increased 47% during the quarter while our webmarketing sales decreased 51% during the quarter compared to Q2. The decline in the webmarketing sales was expected due to the decision to cease the non-Enterprise level sales of the webmarketing services that we did this quarter.

The significant increase this quarter over quarter in our telecom division are due to improved efficiencies in our sales program as well as improving results from our direct sales team and increasing sales from our dealer channel.

Last quarter we announced we received two preferred partner of the year award from two significant organizations and since that time we’ve had considerable sales being generated from those programs.

Last quarter we also announced the addition of our new Director of Sales, Cassander Anderson to our team and I'm pleased to see the growth interaction that we're beginning to see from that channel. We continue ramping up our partner dealing program and we currently have 47 dealers signed compared to 32 at the end of Q2. We're beginning to see consistent activity and orders being generated from the partner channels. We've now sold orders from over 50% of our dealer partners and have our proposal activity increase considerably. We're thrilled as Steven mentioned earlier, we’re thrilled to be hosting our first annual business partners conference this week here in Phoenix and have over 30 dealers attending our two day event. When a partner signs up to be a Crescendo dealer they purchase a demonstration kit and go through a series of training session and then use their own efforts to sell our product.

Our business partner conferences intended to help further solidify their partnership with Crescendo by providing them additional tools, additional training and resources to increase their sale. Our affiliate partner program has been successfully launched and we currently have 17 approved affiliates as well as several pending affiliates lined up. Affiliate partners could compensate it by referring potential clients to Crexendo via affiliate [indiscernible] on their website. We currently have some very nice high profile affiliates, so that we can generate these opportunities for.

During Q3 we fully integrated the PBX Central acquisition in Crexendo and we’re currently working on enhancing our partnership with PBX Central resellers as well as their direct customers. The revenues and margins from the acquisition have been consistent and in line with the expectations and we’re very encouraged with the opportunities that generate additional revenues from the resellers and from the direct client. With one acquisition completed and integrated we are now better positioned to review, analyze and potentially integrate additional acquisitions in the future.

Our marketing department successfully deployed Crexendo’s new website during quarter and we are very pleased with the unified look message that our new website convey. Our new website also provides a new enhanced partner portal that gives all of our partner immediate access to all of the tools and resources that need position, present, sell and process sales opportunities for the Crexendo.

As Steve had previously mentioned we continue to reduce cost and overhead in the organization and we’ll recognize additional cost reductions in the current quarter from the reductions related to our web services group. As we start our Q4 we are excited to have recorded record sales bookings in the month of October and have a very strong bookings forecast for the remainder part of Q4. This combined with the solid sales bookings in Q3 will help our implementations team keep extremely busy as we activate increasingly higher amounts of desktops quarter-over-quarter.

Transforming our business over the last 18 months has been a tremendous undertaking and the challenges we have overcome have been very significant. As we focus on the future and to the growth and the potential of the cloud communication and hosting services offers and we see the continual double digit growth we are experiencing in both telecom sales and telecom revenues quarter-over-quarter. It’s very exciting to watch this division and our products continue to grow and expand. I realize that our growth has not happened as quickly as anticipated but we are well positioned to continue our momentum and will be excited to review that growth in the quarters ahead.

With that I’ll now turn it over to our Chief Technology Officer, Satish Bhagavatula, for an engineering and technology review. Satish?

Satish Bhagavatula

Thank you, Doug. Greetings everyone. I’m glad to report that we made considerable improvements of our products technology during Q3 of 2013. These enhancements have been particularly in the areas of increased operational efficiencies of our cloud services, production of cost of service, improved features and new functionality in our telecom platform. We also spend considerable effort in improving the security and protection from data network, denial of services -- distributed denial of services attacks that our technology infrastructure.

As we continue to increase our base of telecom customers we see remarkable growth in the traffic and stress on our system thus requiring us to make constant improvements and additions to our infrastructure. We continue to make more improvements to adapt to the growing needs of storage computing, quality of service and high availability of our solution. Our efforts to separate core telecom and web infrastructures have proved to be fruitful in providing higher levels of service to our customers, telecom and web alike.

To improve our data network connectivity and route propagation with our upstream daily carriers thus providing better resiliency to our customers in the event of outages at the public internet upstream from us. We continue to make additional cost improvement as our traffic, presence and customer base increases. We rolled out distributed denial of service protection solution to our production environments in August which is already proving to be great enhancement to our cloud offering and protecting us and our customers well. This prepares us to handle large DDOS attacks which is known-risk for service providers in the industry. Our goal is to preserve and maintain the state of the art cloud infrastructure.

I’m also glad to report that our web engineering team continues to roll out updates to our existing web hosting customer base every three to four weeks. All our customers that have been migrated from earlier versions of our e-commerce platform have been running smoothly for over a quarter now. Our web product development team has ramped up its efforts on developing our next generation web filter. We have been investing heavily in the design and development of our new builder and this will pave the path for the future web platform releases. Our new builder leverages a strong foundation of our existing e-commerce platform. We hope this platform will enable us to increase our webhosting presence and also help improve our partner relationships through affiliate marketing while we build our channel program.

On our telecom platform, we continue to roll out new updates every four weeks. During Q3 of 2014 we made considerable improvements in the areas of multi-location awareness, group mail boxes and mobile thus enabling Crexendo to deploy and roll out geographically distributed business customers, with the same ease as smaller single location business customers.

We made major improvements in the areas of E90, E911 thus decreasing our cost of service to offer E911 solutions which is mandatory in the industry. We also made numerous user interface changes and dashboard improvements in call center offerings thus creating great visibility for our customers into their call center update.

During Q3 of 2014, we rolled out the much requested electronic cloud fax solution called eFax. This feature is very robust fax solution. It is as easy to use as sending an email and allow the user to deliver a fax to any fax machine simply from their desktop or an email capable smartphone or a tablet. This capability combined with our inbound electronic fax delivery to a desktop makes our cloud fax solution ideal for businesses that still fax often.

Outbound cloud fax was a highly desirable feature for many of our prospects. It is now available to all our customers which is one tremendous benefit of our cloud communications platform.

The integration of PBX central acquisition is progressing well. We have identified additional synergies and technical operations. Those improvements when made will not only offer us better margins but also better service levels to our PBX partners and customers. We are working very closely with the partners and customers that use the [KD] platform to transition to Crexendo methodology and infrastructure. We continue to look into synergetic technology partnership opportunities to help us grow our cloud portfolio.

We continue to adopt more cloud technologies to allow for greater automation of our business which in turn improves our margins and enables us to better serve our customers.

With that I will now turn it over to Steven Mihaylo.

Steven Mihaylo

Thank you, Satish. Now at this point if we have any questions, we’ll be happy to answer them. And we’re changing the format just a little bit here. You’ve become aware of all of our team members and what their functions are, so if you have a question that applies to Ron, [indiscernible] and if you one that applies to Doug and [Korn] and if there is something that you’d like to ask of me, feel free to do that. Thank you.

Question-and-Answer Session


[Operator Instructions]. Mr. Mihaylo, it appears we have no questions at this time, I’ll turn it back to you sir.

Steven Mihaylo

I guess we did a good job of answering and anticipating what the questions might be. I know we’re in general comments that might be of interest to everyone. As you know I’ve had a 10b5 plan in place for the last year and it expires at the end of this month and on Monday I’m going to be increasing my share purchases and increasing the price of the $3.10 share. So, if there are any shares out there that become available and they are others in the market. Hopefully I’ll get some. And the quantity that I’ve got in place will be 40,000 shares a month. So, with that, if there are no questions, we thank you participating in today’s conference and look forward to talking to you sometime in the new year about our fourth quarter. Thank you Elisa.

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