Crexendo, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Crescendo third quarter 2021 earnings call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Steve Mahalo. Sir, the floor is yours.

Thank you. Thank you, Matthew. I'm sorry if I stepped on you. Good afternoon, everyone. I'm Steve Mahalo, chairman and CEO of Crescendo. I want to welcome all of you to the Crescendo Third Quarter 2021 Conference Call. On the call with me today are Doug Gaylor, our President and COO, Ron Vincent, our CFO, Anand Butch, our CSO, and Jeff Korn, our General Counsel. I am going to ask Jeff to read our Safe Harbor Statement. After that, I will give some brief comments. Ron will provide more detail on the numbers. Doug will provide a business and sales update. And then we will open the call up to questions. And what I'd like you to do is to ask the specific person you want to answer the question instead of us parsing them out, which will move this call along a little quicker. Jeff, would you please read the safe harbor statement?

Yes, sir. 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 believe, expect, anticipate, estimate, will, and other 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, 2020, and the Forms 10-Q as filed. Rescendo does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. I'd now like to turn the call back to Steve. Steve?

Thank you, Jeff. First, since Veterans Day is right around the corner, I want to take this opportunity to thank everyone who has served our country. We never take for granted the freedom that we have as individuals and as a company is due to the sacrifices and dedication of those who have served and their families. We thank you and are grateful for your service. This quarter was an excellent quarter and exceeded even my optimistic expectations. Consolidated revenue grew by 113% for the third quarter, which is very remarkable. Our record revenue of $8.8 million for the quarter proved that we are fully engaged and what we are doing is working. Our non-GAAP income of $800,000 for the quarter, or $0.04 per basic and diluted common share, is a testament to our hard work. We have continued to execute on our plans with precision. We turned the company profitable. We organically uplisted to the NASDAQ. We were able to do an effective offering, and more important and accomplished a major game-changing accretive acquisition. The merger with NetSapiens is going exceptionally well. The teams are working very closely, and the week at the senior management of, let's back up here a minute, and this week, All the senior management of NetSapiens is here in the Tempe office to work with the Crescendo team. This is an ongoing process of the teams and together working together more efficiently. We are increasing efficiencies, managing cross-reporting and functionality and achieving substantial benefits from the merger. The benefit will be realized by shareholders and equally as important to all the Crescendo and NetSapiens constituencies. We are making both the Crescendo and NetSapiens service better and more effective and more efficient. We intend to work diligently the rest of this year completing operational efficiencies. between the teams and continuing to realize shareholder value from the merger. We are continuing to maximize savings by merging accounting systems, by moving Crescendo customers to the award-winning VIP platform, and by having the teams share resources. This will continue to provide benefits and value to our shareholders, the teams, our customers and partners, licensees, and end-user customers. We will continue to grow the business organically. We will also look for appropriate accretive acquisitions. Increasingly, CAS, CPAS, and UCAS companies, including NetSapiens resellers, are contacting us, indicating that they might be interested in the partnership or acquisition. And this also adds the possibility of an exit strategy for any of our partners. We will review these carefully and closely, and I expect that the right opportunities will come along which will only accelerate our growth. I continue to see substantial growth and a very exciting time for Crescendo and our shareholders. I am highly optimistic about our future. And with that, I'll turn it over to Ron.

Thank you, Steve. Good afternoon, everyone. As Steve highlighted, we had a great quarter. This is the first quarter we're reporting three full months of operating results from our NetSapiens acquisition, and I'm very pleased with the results. Total consolidated revenue for the third quarter increased 113% for 4.7 million to 8.8 million as compared to 4.1 million reported for the prior year. Our cloud telecommunications segment service revenue for the quarter increased 18% for 670,000 to 4.3 million compared to 3.7 million reported for the third quarter of the prior year. The software solutions segment contributed from the NetSapiens acquisition for the quarter was $3.8 million. Product revenue for the quarter increased 43%, or $212,000. That's $701,000 compared to $489,000 reported for the third quarter of the prior year. Gross margin for the quarter were strong. Telecommunications services gross margin, 72%. Software solutions, 56%. Product gross margin, 34%. And overall gross margin, 62%. Consolidated operating expenses for the quarter increased $4.8 million, or 120%, to $8.8 million, compared to $4 million reported for the third quarter of the prior year. The net savings acquisition contributed $3.5 million of the additional operating expenses. Pre-tax income of $12,000 for the third quarter and a net loss of $125,000, or $0.01 loss per basic and diluted common share, as compared to net income of $131,000, or $0.01, basic and diluted common share for the third quarter of the prior year. Non-GAAP net income for the quarter of $800,000 or $0.04 per basic and $0.03 per diluted common share. That's compared to $290,000 or $0.02 per basic and diluted common share for the same period of the prior year. EBITDA for the quarter of $622,000. That's compared to $212,000 for the same period of the prior year and our adjusted EBITDA The quarter was $1 million as compared to earnings of $348,000 for the same period. For the nine-month period, our consolidated revenue increased 58% to $19.1 million compared to $12.1 million for the same period of the prior year. Our cloud telecommunications service segment for the nine-month period increased 19% or $2.1 million to $12.8 million. Our software solutions segment revenue contributed from the NetSapiens acquisition for the nine-month period was $4.8 million. Product revenue for the nine months increased 15% for $192,000 to $1.5 million compared to $1.3 million for the same period of the prior year. Consolidated operating expenses for the nine-month period increased 89% to $21.1 million compared to $11.2 million for the same period of the prior year. The net savings acquisition contributed $4.8 million of the additional operating expenses Additionally, we incurred $1.1 million of acquisition-related general administrative expenses during the nine-month period. Net loss for the nine-month period of $1.8 million, or $0.09 per basic and diluted common share, compared to $779,000, or $0.05, per basic and diluted common share for the same period of the prior year. Non-GAAP net income for the nine-month period of $1.1 million, or $0.06 per basic and $0.05 per diluted common share. That's compared to $1.2 million, or $0.08 per basic and $0.07 per diluted common share for the same period of the prior year. EBITDA for the nine-month period was a loss of $1.1 million compared to earnings of $1.1 million for the same period of the prior year. Adjusted EBITDA for the nine-month period, $1.1 million. That's compared to $1.4 million for the same period of the prior year. Our cash, cash equivalents, and restricted cash at September 30th was $7.7 million. and that's compared to $17.7 million at year-end December 31, 2020. We used $473,000 for operating activities during the nine-month period, used $10.6 million for investing activities, primarily business acquisitions, and financing activities provided $1.1 million of cash, cash equivalents, and restricted cash, primarily from stock option exercises. With that, I'll turn it over to Doug Gaylor, our president and CEO, for additional comments on sales and business. Thanks, Ron.

I'm ecstatic about the results we were able to post in our first full quarter after the acquisition of NetSapiens, highlighting what a strong combination these two organizations has become. Our organic growth of 22% on the Crescendo Classic side of the business, complemented by the strong revenue contributions from our acquisition of NetSapiens, propelled us to a 113% increase in total revenue compared to Q3 of 2020. Our impressive growth on revenue combined with our diligence in effectively managing the business and expenses allowed us to post strong non-GAAP income of $800,000 for the quarter. The UCAS industry continues to grow at a rapid pace, and that has helped increase the number of end users using our NetSafeguards platform to over 2 million. As our NetSapiens partners continue to benefit from the rapid migration by small, mid-size, and enterprise-level businesses to the cloud, they need additional services from Crescendo, which is clearly evident by the large amount of add-on expansion orders that we received from our partner community during the quarter. Those 2 million plus end users continue to benefit from our award-winning solutions as we recently announced our highly anticipated version 42 software release and are diligently working on enhancing our capabilities and solutions associated with our next release. Our unique sessions, not seats, pricing model continues to drive new NetSapiens partners to our platform and allows us to differentiate ourselves from our two largest competitors, Cisco's BroadSoft and Microsoft's MetaSwitch platforms, offerings which are significantly higher priced based on their cost per seat model of pricing. We recently attended three live industry conferences and were very, were highly Very pleased with the amount of excitement and interest that we continue to receive from UCAS and MSP businesses looking for a platform solution for their business. Our traditional Crescendo agent program continues to grow and flourish as we had our strongest quarter of the year from our agents spurred on by our Crescendo VIP offering powered by the NetSapiens platform that we recently introduced to the market and has a 100% uptime guarantee along with a lifetime warranty on our Crescendo phones. We continue to add new and larger agent partners to the program and are excited about the opportunities in the funnel that these new agent partners are bringing to the table. Our backlog continues to grow and is now north of $30.7 million at the end of Q3. This number only represents the Crescendo direct customers and does not currently factor in the term obligations from our NetSapiens partners. In addition, our UCAS service margins increased to 72% as we continue to be actively focused on cost management. We continue to work diligently to integrate the two organizations together and have already started recognizing many operational benefits and synergies from the combined company. Our tremendous engineering talent on both teams are already working well together and benefiting from best practices. We've seen immediate synergies from consolidating our marketing efforts and had a tremendous turnout of over 200 attendees at our most recent NetSapiens user group meeting in San Diego last month that our marketing team executed flawlessly on. Our sales teams are benefiting from the exceptional industry knowledge and experience both organizations bring to the table and are complementing each other extremely well. We're in the process of consolidating all of our accounting systems and our personnel and our operations and customer service departments are executing on our plans to maximize efficiencies, productivity, and cost. I'm very pleased with how our two organizations are coming together, and I'm very excited about our go-forward plans to continue to grow and prosper. With the acquisition costs associated with the merger and the amortization of intangible assets, we're primarily concerned with our non-GAAP earnings, and I'm very pleased that we were able to generate strong non-GAAP earnings of $0.04 per share. Our results this quarter are strong proof that our combined organization has been able to quickly leverage the power and opportunity we have to grow and succeed together. And I'd be remiss if I did not acknowledge the hard work and effort from every one of our great team members. We believe we will continue to see these efficiencies and cost synergies as we continue to grow and merge the organizations. As we sprint towards the finish line for 2021, I couldn't be more excited about the future direction and opportunity for Crescendo. combination of tremendous demand for our product offerings, great solutions with disruptive pricing, and a phenomenal, talented combined workforce positions us perfectly for the future. We're committed to delivering the best UCAS offering in the industry for our customers and our partners and the best returns for our shareholders. We're confident that synergies of combining our two great organizations will make us a major force in the industry and fuel our continued growth. I'll now turn it back over to Steve for any further comments.

Thank you, Doug. I have no further comments except I want to point out that our accounting department is working very, very hard, all of them, especially our CFO and our controller and our division controller, as well as the other people in accounting. With that, Matthew, would you open it up to questions, please? And remember, I want you to direct it towards the person you'd like to answer it.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Your first question is coming from Andrew King from Collier Security. Your line is live.

Hi, guys. Thanks for taking my question. Really great quarter this quarter. I just have a couple questions for Doug and Ron. Just wanted to get an idea within the organic crescendo business, Really looks like that growth this quarter was really propped up by product revenue, which is up really significantly with services revenue, just pretty flat quarter over quarter. Can you give us a little bit more color into what dynamics caused that and how you see that going forward?

Yeah, organically, great question, Andrew, and thanks for joining the call. Organically, we continue to see strong growth. We did see an increase in product revenue for the quarter. Obviously, we've got a lot of customers that have been with us for quite some time. As you know, we've got a very low churn rate within our organization. And so, for a lot of our existing customers, we do what we call a technology refresh, where we're offering newer phones when they come up to the term of their agreement to move forward with a longer term. And so a lot of that technology refresh means that we've got some one-time equipment sales going out the door when those customers come up for renewal. So that, combined with some larger sales that we did for the quarter that had a significant upfront equipment cost, bumped up that equipment increase just a little bit. And I'll have Ron add any more color.

Yeah, I'll add, Andrew, that we did have 18% growth in our service revenue for the quarter. And so we've been bouncing back and forth between 16 and 20. And so we would have liked it to have been 20 like it was last quarter, but 18 is still a solid performance. Got it.

Great. And then, Ron, I guess just one quick question on are you seeing any pressure from supply chain issues given that you guys supply your own hardware? Is that not really an issue for you? And if so, can you talk about how you mitigated that?

Yeah, we're not really seeing much issues there. We order in advance to make sure that we're going to have enough phones on hand for our demand, and we haven't had, other than a couple-week delay in getting the product out of the water and on the dock, that's really been the only challenges we've had. Great. Appreciate you taking my questions, and congrats on a good quarter.

Thank you. Thanks, Andrew.

Thank you. Your next question is coming from Josh Nichols from B. Reilly Securities. Your line is live.

Hey, guys. This is actually Iman jumping in for Josh. But, hey, congratulations on a really good quarter here. I guess my first question will probably be for Doug or Steve here. You keep talking about, like, some of the puts on takes on OpEx. I mean, clearly you were able to accelerate growth while keeping sales and marketing in check here. Was that largely due to the synergies From the acquisition, any color on that would help.

Yeah, great question, Aman, and good hearing from you as well. Yeah, when you look at the synergies that we're able to realize between the two organizations, that allowed us to keep our expenses in control. I mean, as you know from following us for quite some time, Cost management is something that we're constantly looking at, and so the synergies of putting the two organizations together, lots of synergies, and when we look at the opportunities for growth, the management teams are working extremely well. When we look at opportunities like overlaps in subscription costs and overlaps in services, and we both use AWS for functionality. And so a lot of those things we can consolidate. A lot of the network costs that we've got out there, we've been able to consolidate. As we continue to grow, we've got more leverage to go out there and negotiate better agreements. And so that really helps our operating expenses. And so we continue to see that happening. And so if you look at our margins on our service side. Again, 72%. That was a 3% increase from a previous quarter. So, again, we're just managing the cost and making sure that we can continue to grow those margins.

And, Josh, there's one other thing I'd like to add. Organically, one of the reasons we hired John Brenton is to increase our organic growth. And we have... two new salesmen from NetSapiens, two new salesmen on the East Coast, and we've added a lot of new salespeople here in the direct side as well as the channel side, and we'll continue to grow that. So we're very, very interested in organic growth.

Got it. That's helpful. And then Yeah, that sort of is a good segue to my next question about gross margins. You know, services gross margins over 70%. Software solutions was like 55, very robust there. Is that the sort of cadence we should expect from those two segments going forward?

We're still working through the software solutions. Last quarter it was 48% gross margin, you know, up to 56% this quarter. And so as we're forecasting the business, we're looking at the trends in that. And so at this time, we don't have a can't say that's going to be the number going forward. But, you know, somewhere in that range is going to be consistent.

That's helpful. And then can you talk about the launch of Crescendo VIP platform? How has the reception been for that platform been so far?

Yeah, great. And, Aman, I would just highlight that when you talk, we're getting a little crackling on your phone, so the VIP platform would be a perfect solution for B. Riley. So we can call you afterwards, and we'll set up a meeting for that sales opportunity. But all kidding aside, the VIP platform has been received extremely, extremely well. When you look at the opportunities out there, you know, the 100% uptime guarantee, a lot of our competitors during the previous quarter had outages. Ring Central, 8x8, Nextiva all had outages associated with the interruption of service that bandwidth.com had. So when we look at some of the opportunities out there, you know, we have 100% uptime guarantee because we're that confident in our redundant and resilient setup and our geo-redundant setup that we have for our VIP platform. Plus, we offer a very unique lifetime warranty on all our Crescendo phones. So the VIP rollout has been extremely, extremely well received. I'll have John Brinton, our CRO, just add a little bit more color since he was the main guy in rolling that program out and getting everybody excited about it.

Yeah, hi, Iman. So understanding what we've done with VIP platform, I would tell you that our team last week was at the joint team. So with our NetSafe and Crescendo sales employees, channel employees, at the channel partners conference. And it was great to have a product there that was a real differentiator for Crescendo with what we can do with video and interactions and phone. And kind of playing off an earlier question, I would tell you our customers embracing that and moving, migrating to the VIP platform is part of what drove part of the product sales growth that we saw as well. So we've had great market acceptance with channel partners and customers, and we'll just continue to drive the theme of being the largest independent channel community in America and driving a great technology platform that came to us through the merger with NetSapiens.

And one other thing that I'd like to add, and that's the VIP end users all have access to video, which means that we do video and collaboration. That's helpful.

Last question for me I think will likely be for John. Can you maybe talk about the growth you're experiencing in your direct channel versus your reseller channel?

know we don't give great granularity between those two but in our direct sales area there are just some customers and transactions that are more transactional and so we do cover those off with the direct sales team and we've had good performance from that group as well our mix is to be primarily channel oriented and continue to expand those partnerships and if you've seen some announcements We're working to a mix in our model, and while it might fluctuate from month to month, we're generally within our targets for direct and channel performance.

Thank you. I'll pass it on.

Thanks, Iman. Appreciate it.

And once again, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone at this time. Your next question is coming from Michael Cosman from MK Investments. Your line is live.

Hi, Steve and Doug. It's really a breath of fresh air to see incredible growth and financial discipline in a technology company. So I applaud the whole team for pulling this off. And I guess some of these questions were kind of asked a little bit, but I'm interested in the, now that we have much more solution revenue and what's the long term expense to revenue ratio and gross margin expectations and how is that going to grow over time. So I know you don't have it now, but if there's a way that we can get some insight in that in future calls, that would be very helpful. And the other thing is that this is the best kept growth secret I've seen. So, what are you doing in the way of introducing the community, introducing the company to the financial community?

Yeah, let me have Ron answer the first part of the question related to, you know, where we see the growth at and margins on the software solution side. We do break that down into the different departments now, so you'll see the UCAS

Division you'll see the software solutions division and then product so Ron can expand on the margins and what we expect to see there And then I'll wrap it back up with what you'll see from us getting our word out there with the investor community I'm Michael Julie noted that you'd like to see that information going forward I think we'll we'll be tracking that as it normalizes and we understand the business and the changes from the one-time revenue items and the reoccurring revenue items that come from the software solution segment and So we'll watch that closely, and we'll hope to be able to report some normalcy to you as the margins become normalized.

Go ahead.

Thank you.

And from an investment perspective, you know, we continue to do investment conferences. We did the LD micro, micro cap conference recently. Last month in Los Angeles, we were actually out of 150 presenting companies. We were the most requested company to have investors meet with. We had over 35 meetings in two days out there. So we're doing investor conferences. We've got some virtual non-deal roadshows lined up over the next couple of months. So We're getting our word out there. I agree with you, Michael. I think that we are the best kept secret in the technology play. You know, I think these earnings speak for themselves on what the opportunity is ahead for us, and we're excited to get that message out there to the investment community.

Is there anything you can do to at least have on your website some of these conferences? Because most companies do have that, and that's a way for – you know, busy investors to keep track of a company they're interested in. Yeah, we can do that.

We do have an event page, but we haven't been posting that. We do usually put out a press release anytime we're doing a conference, so I'll make sure that we're diligent about getting that onto our website as well. But we do put out press releases, so if you've got any Google alerts out there on Crescendo, you should see any of the press releases when we have conferences or road shows that we're going to be doing out there.

That would be very helpful because it would all be in one spot. While I'm looking at it, somebody should go in and revise your Yahoo page. You're still showing, I think, 85 total people in the company.

Okay, we will do that. I think they pulled their information out of our filings. And so sometimes I know in the past when we've tried to get Yahoo to change anything, it takes an act of God sometimes. But we will try and push the envelope. But they typically pull that off of our filings. And so our headcount is probably pulled off to 10K, I would imagine. So we'll see if they can update that in the interim. But we're sitting at about 118 employees total as we speak.

Thanks again, and good luck, and I think you're doing a great job.

Thanks, Michael. Greatly appreciate it.

Thank you. Your next question is coming from Aram Khan from Aram Khan and Partners. Your line is live.

Good afternoon, guys. Hope everything is good. Just a really quick question. I got on late, but I've been pretty plugged into this story, so I know it very well. Just a really quick question regarding the acquisitions. There was a small acquisition of Centric Telecom recently alongside NetSapiens that came in. I look at your cash position that you still have and that you're about break even with some cash flow potential. Can you sustain these kinds of small acquisitions? Obviously, people are going to think about the larger mergers that you can do, and that's certainly something we look forward to, but the smaller ones, With the cash position you have and the cash you can generate, you know, can you get busy with deploying capital and bringing in, you know, three, four, five different central telecoms bolted on alongside anything else you do?

Yeah, absolutely, Arham, and good hearing from you as well. Absolutely. When you look at the opportunities that are out there, as Steve mentioned in his comments, you know, the door has been knocked on quite a few times since the NetSapiens acquisition. And so some of these are smaller in scope. Some of these are larger in scope. So absolutely, the deal that we did with Centric Telecom, you know, if we find those size opportunities, those could easily be managed with cash on hand. And again, you know, we anticipate post-merger now that cash flow, positive cash flow should be a given. And so You know, with the balance sheet where it is with $7.7 million in cash, you know, we can go out there and find small acquisitions and pull those off without having to do any kind of additional capital raise. And then larger acquisitions, obviously, when they come to the table, you know, are going to be very appealing to us as well, and we've got lots of opportunities to make those happen as well.

I'll just add that, you know, right now through the fourth quarter, we're laser focused on the integration of NSAPIENs identifying synergies, and so we want to focus to the end of the year on our current acquisition that we have at hand and getting that company integrated with our operations.

And last but not least, you know, we're always going to underestimate what we can do and probably over exceed what we think we can do, but we're not going to make that a forward-looking promise our idea is to just do a good job and we look at everything we look at productivity we look at expense ratios we look at everything got it okay perfect uh yeah i look at the i look at the position you're in i look at you know how you return capital as of late and i feel very good about it uh

you know, really good results. Thank you for taking my question, and I'll talk to you guys soon.

Thank you.

Thank you. There are no further questions in the queue. I will now hand the conference back to Steve Mahalo for closing remarks. Please go ahead.

Well, once again, I want to thank all of our veterans, and last but not least, I want to wish all of you a happy Veterans Day, a Very good Thanksgiving. And for those of you that celebrate the holidays in December, happy holidays to all of you. And with that, we look forward to presenting the fourth quarter and year end probably in early March. Thank you and good day.

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.