Crexendo, Inc. (NASDAQ:CXDO) Q3 2023 Earnings Call Transcript

Crexendo, Inc. (NASDAQ:CXDO) Q3 2023 Earnings Call Transcript November 12, 2023

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

Jeff Korn: Thank you, Mike, and good afternoon, everybody. Welcome to Crexendo Q3 2023 conference call. On the call with me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; Jon Brinton, our CRO; and Anand Buch, our CSO. In a moment, Jon will read our safe harbor statement. After that, I’ll give some brief comments on our performance for the quarter. Ron will provide more detail on the numbers, before handing over the call to Doug to provide a business and sales update. After that, we’ll open the call up to questions. Jon, would you please read the safe harbor?

Jon Brinton: Yes, thank you, Jeff. I want to take this opportunity to remind listeners that this call will contain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. All statements made in this conference call, other than statements of historical fact, are forward-looking statements. Forward-looking statements include, but are not limited to, words like believe, expect, anticipate, estimate, will, and other similar statements of expectation identifying forward-looking statements. Investors should be aware that any forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today.

These risk factors are explained in detail in the company’s filings with the Securities and Exchange Commission, including the Form 10-K for fiscal year ended December 31, 2022, and the Forms 10-Q as filed. Crexendo does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Back to you, Jeff.

Jeff Korn: Thank you, Jon. I think by now most of I’m pretty direct, and I don’t intend to change that, but this is one of the times where it works very well. This was an excellent quarter across the board. We exceeded my expectations. We exceeded the team’s expectations, and we exceeded external expectations. As a matter of fact, last quarter I was asked if I thought we might reach GAAP profitability anytime during 2023, and I said, I did not believe so. I’ve never been happier to be wrong. In the third quarter, we continue to drive strong growth, with a sustained focus on executing against our long-term strategic roadmap. Consolidated total revenue for the quarter was $13.9 million, a 52% increase over the prior year period.

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Q&A Session

Year-to-date, our revenues have increased 49% to $39 million compared to $26.1 million in the same nine-month period last year. This is really an amazing turnaround from how we started the year. In addition to the increases in revenue, we importantly achieved GAAP profitability in the third quarter. This has been a key focus of ours for a long time, and is a significant milestone for the organization. For several quarters, we have discussed our growth strategy, cost management initiatives, and operational efficiencies, and this achievement serves as validation to much of the work and strategy that we have put together. Furthermore, we now stand on an increasingly sound financial footing, especially after the successful sale of our building.

As we have previously discussed, we’re not bogged down by debt on our balance sheet, which allows us to remain opportunistic in the capital markets, rather than being forced into transactions out of necessity. This prudent approach not only sets us apart from most of our competitors, but also ensures that we make decisions that align with our long-term goals and maximizes value for our shareholders. Organizationally, in the third quarter, we continued to make remarkable progress in reorganizing, integrating, and streamlining our companies to more efficiently operate as one cohesive unit. Additionally, throughout the integration process, we’ve remained committed to installing a company culture that enhances the collective spirit amongst our team members, and we continue to prioritize employee satisfaction as our teams join forces.

On the sales front, we continue to see significant growth from our dealer and partner channels, which has increased the scope of our sales opportunities and our network of resellers. Anecdotally, we recently held our annual user group meeting, which included our licensees and vendors from five continents and was the largest and most dynamic partner gathering in the history of the platform user group meetings. It was great to see our ecosystem come together in person, and we’re already looking forward to next year’s event. In a similar vein, during the third quarter, we also continued with the accelerated migration of customers off our Crexendo Classic System, to our industry-leading VIP platform. I’m happy to say the end is now in sight for this consolidation, which will ensure that our customers are hosted on one single, superior platform, in turn reducing costs substantially on our end as we sunset the legacy platform and transition valuable engineer and support staff to other parts of the business.

With our teams now functioning properly, our top and bottom-line results delivering on levels that we expect, and our balance sheet continuing to provide us with increased operating leverage, our focus will remain on three key items moving forward. First, aggressively driving organic growth through securing larger SMB and certain enterprise deals. Secondly, more intensely evaluating potentially accretive acquisition targets. And third, transitioning a significant portion of our Software Solutions revenue to MRC rather than perpetual license. In conclusion, we are very encouraged by the third quarter results. We acknowledge that our vision of what this organization can do, and it’s still a far cry from where we are today. We will continue to work hard on our targets and look forward to what future quarters will hold.

With that, I’ll turn the call over to Ron for more details on our numbers. Ron?

Ron Vincent: Thank you, Jeff. Good afternoon, everyone. Financial highlights for the third quarter are as follows. Total revenue for the third quarter increased 52% to $13.8 million, compared to $9.1 million for the third quarter of the prior year. Service revenue for third quarter increased 68% to $7.5 million, compared to $4.5 million for the prior year. Software Solutions revenue for third quarter increased 21% to $4.7 million, compared to $3.9 million for the third quarter of the prior year. And our product revenue increased 119% to $1.6 million compared to $760,000 for the third quarter of the prior year. We also had strong margins for the quarter. Telecom Services came in flat with the prior quarter Q2 of this year at 58%.

Software Solutions margins expanded from 67% in Q2 2023 to 72% for the third quarter. And our product margins improved from 38% in Q2 of 2023 to 45% for the third quarter of this year. Overall, gross margin expansion to 61% from 58% in Q2 of this year. Operating expenses for the third quarter increased 40% or $3.8 million to $13.5 million compared to $9.7 million for the prior year. The company reported net income of $1.7 million for the quarter or $0.07 per basic and $0.06 per diluted common share, compared to a net loss of $696,000 or $0.03 loss per basic and diluted share for the third quarter of the prior year. Non-GAAP net income for the quarter of $3.3 million, that’s $0.13 per basic and $0.12 per diluted share, compared to non-GAAP net income of $713,000 or $0.03 per basic and diluted common share for the third quarter of the prior year.