Good day, ladies and gentlemen, and welcome to the Crexendo Third Quarter 2020 Earnings Conference Call. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host for today, Mr. Steve Mihaylo. Sir, the floor is yours.

Thank you, Jess. Good afternoon, everyone. I'm Steve Mihaylo, the Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo third quarter 2020 conference call. On the call with me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; 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 general comments about the quarter. 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. Jeff, would you please give the Safe Harbor statement?

Yes, 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 such as 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 the fiscal year ended December 31, 2019 and the Form 10-Qs as filed. Crexendo does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, further events or otherwise. I'd now like to turn the call back to Steve. Steve?

Thank you, Jeff. We again come to you with the country and the world and the throes of the COVID-19 pandemic. We hope that we find all of you and yours healthy and that you are continuing to adapt to what has become the new normal. COVID is a trying time for everyone. But we believe that we, as a company are on the cutting-edge of technology that help our customers adapt to the – and operate in an uncertain time. We build our award-winning phone systems to allow our customers to work from anywhere seamlessly and to make as easy as unplug your phone from one internet connection to another, the new normal. We believe that our systems are exactly what is needed now. And what we will be needed in the post-COVID world. It is clear that how and where we work will continue to change and adapt as will our systems. It was a good quarter and a good year-to-date for our company. I discussed before that our systems are award-winning and this quarter was again confirmed by our receiving the prestigious 15th Annual Internet Telephony Excellence Award. Our Ride the Cloud systems are regularly recognized by outside organizations and it confirms that we have always said that there is no better solution you can get than the Crexendo solution. Not only do we get award-winning cutting-edge technology, when you join us and Ride the Cloud. In most instances, you will save a considerable amount of money by switching to Crexendo. I am pleased with the results for the year-to-date. UCaaS service revenue increased 15% compared to the year-to-date 2020, compared to year-to-date of 2019. This is the metric I primarily use to judge the company and these results are very promising. The results are even better…

Thanks, Steve. Consolidated revenue for the third quarter increased 15% to $4.1 million, compared to $3.6 million for the third quarter of the prior year. Service revenue for the third quarter increased 12% to $3.7 million, compared to $3.3 million reported for the third quarter of the prior year. Our Cloud Telecommunications segment service revenue for the quarter increased 14% or $425,000 to $3.5 million, compared to $3.1 million reported for the third quarter of the prior year. Offset by a 19% or $30,000 decrease in our Web Service segment service revenue for the quarter. Our product revenue for the third quarter increased 43% or $146,000 to $489,000, as compared to $343,000 for the third quarter of the prior year. Gross margin for the third quarter decreased 2% to 70% as compared to 72% for the third quarter of the prior year. Our consolidated operating expenses for the third quarter increased 22% to $4 million, compared to $3.3 million for the third quarter of the prior year. Net income for the third quarter of $131,000 or $0.01 for basic and diluted common share compared to $334,000 or $0.02 per basic and diluted common share for the third quarter of the prior year. Non-GAAP net income for the third quarter of $290,000 or $0.02 per basic and diluted common share, that’s compared to $454,000 or $0.03 per basic and diluted common share for the same period of the prior year. EBITDA the third quarter of $211,000 that's compared to $361,000 for the same period of the prior year. Adjusted EBITDA for the third quarter was $347,000 compared to $460,000 for the same period of the prior year. For the nine month period, consolidated revenue increased 13% to $12.1 million compared to $10.7 million for the same period of the prior year.…

Thanks, Ron. Q3 was a very exciting quarter for Crexendo. We were pleased that we were able to successfully uplist from the OTC to the NASDAQ exchange in July, we then followed that up with the accomplishment in September with a successful completion of our S1. In addition, we had a strong bookings quarter that helped propel us to our seventh straight quarter posting positive GAAP income. I’ll provide a quick recap on the quarter from the sales perspective and what impact we continue to see from COVID, but we'll also provide an update on our marketing efforts, as well as our R&D efforts and finish with an overall assessment on our current environment. We see a nice increase – we saw a nice increase in sales bookings from Q2 to Q3 as customers continued to adapt to the new digital transformation that has accelerated with the COVID pandemic. Our award-winning technology allows businesses to work from anywhere, anytime and on any device, which is what businesses are looking for as they adjust to today's new normal. If continued to offer incentives for our customers to make their migration to the cloud easier by waiving activation fees and offering free month of service. Our partner channel continues to grow and we continue to see increases in the sales contribution from that channel. We are encouraged by the larger transactions that our partners are selling as they accounted for numerous six figures total contract value sales during the quarter. Despite the economic headwinds from the pandemic, our sales bookings increase allowed us to post a 14% increase in our unified communications as a service revenue year-over-year and that resulted in GAAP net income of $131,000 or $0.01 cent per share for the quarter. Our telecom backlog also grew by $1 million…

Thank you, Doug and Ron. And thank you, Josh, I think we'll start taking questions now.

[Operator Instructions] We'll take our first question from Josh Nichols at B. Riley.

Yes. Thanks for taking my questions.

Hi Josh, how are you?

Things are going great. Working from home like most people are at this point. Good to see the continued UCaaS service performance despite some of the pandemic headwinds. Could you elaborate a little bit – exactly how many companies did you end the quarter with? And how much do you plan to ramp up hiring say over like the next 12 months to invest in growth organically?

I'd be happy to answer that, and I could, but I'm going to let Doug answer it.

So hiring is obviously a key critical component at the moment, Josh, so looking to add additional channel managers and looking to add additional salespeople, we've added recently additional engineering staff. So as we look at our growth, we obviously have to keep up with that growth by adding new employees to maintain and help that top line growth. So sales has been a constant focus for new channel managers and new direct sales reps. And we continued to enhance those efforts by adding back office staff on the engineering and support side. From a number of customer perspective, we did increase the number of customers, I don't have that number off the top of my head, but I can follow back up with you and give you the exact numbers.

No problem. And can you talk a little bit more about some of the actions the company is looking to take on the bar business? And so I know that's where most of the sales are coming from. Today and how long until you think that those actions are going to be materialized in terms of accelerating top line revenue growth?

We still see approximately 70% of the businesses out there that have it migrated to the cloud. So we're still seeing a lot of interest out there, the bars that we're bringing on board. I think we brought 10 bars on board during the quarter. So those value-added resellers are obviously coming on-board to pick up Crexendo to bring out to their customer base. The demand for work at home and work from anywhere type solutions has never been greater, as I mentioned in my statement. So we do see a lot of a need out there, I think the new partners that we're bringing on board recognize that as well, out of the 10 partners that we brought on board, I don't have the exact numbers, but quite a few of them don't have a telecom offering in their portfolio. So adding telecom into their portfolio, whether they were data bars or business-to-business opportunities, they're looking at telecom being a key component to their offering to be able to meet the needs of potential customers and existing customers out there. So our partner channel continues to grow and flourish and we're giving them a lot of incentives going forward to continue selling and leading with Crexendo.

Thanks for that and then I know the space has been dealing with a little bit of elevated churn as expected with the pandemic, but it seems that you've navigated that pretty well. Has that kind of leveled off or what are you seeing? How are your customers doing in the current economic backdrop? Any vertical or regional concentration that you could comment about?

Yes, I'm going to have Ron add some color on that, because he's been tracking the churn and now we actually saw a little bit of a decline in churn for the quarter, which is a positive. So I'll have Ron add some color to that.

That's right. So we saw our average churn – monthly churn rate come down back to pre-COVID levels. So I think we were at 0.66% per month average customer churn in third quarter, that's in line with 0.67% that we had for the average in Q1, and in Q2, we spiked up above 1% of month insurance. I think it was 1.07% average for each month during Q2. So the churn has receded back down to few one levels and so that's very promising and I think that we're going to maintain those levels and hopefully gets into that further decline back to 2019 levels as we move forward.

Thanks for the additional color on that. And last question for me, then I'll hop back to the queue and pass the baton. How would you describe the current M&A environment? I know that's new, relatively newer strategy that you were able to pursue now with the uplifting and the additional firepower, as far as liquid capital. Is it M&A rich environment? Do you think that that's something that could happen over the next like few months or do you think it may take a few quarters to find something that's a good fit?

Yes. I think that the M&A discussions that we've had probably are more prevalent now than they've ever been. I think we've got more discussions going, and I think there is more opportunities. I don't know if it's necessarily related to COVID, but I think that there is more businesses looking for opportunities to either have an exit strategy or look to partner with somebody larger that can take them to the next level. So I'm really excited about some of the discussions that we've got going. Obviously, I can't announce anything, we don't have anything concrete, but there are some good discussions going out there and we do hope that within the next six months, if though we could have some acquisition opportunities under announcement.

And Josh, I'd like to add a little color to that. One of the things that uplifting done for us is that gave us more credibility and more investors are looking at the company. But in addition to that, it's opened up some good opportunities as Doug just mentioned, and we intend to pursue every one of them going forward. 2021 is going to be concentrated on growth, and we feel secure in both the organic area and both the acquisition front.

Thanks for that. I’ll hope back in the queue.

We’ll go next to Andrew King at Colliers Securities.

[Technical Difficulty] Good afternoon, Andrew.

Thanks for taking my question. So first off, just wanted to look at the gross margins a little bit, I noticed that the product gross margin gets down to 35% about the first time in a while. Just wanted to get a little bit more of an idea on the trends that you see going through gross margins currently and going forward?

Yes. So as a result of COVID, we offer some very good promos for customers, so we offer no payments until 2021. And so the allocation of that revenue through the revenue guidance of spreading that over the total contract period resulted in a lower gross margin on our product revenue for the customers that were installed during Q3. So we anticipate that going back up into the 42% range from the 36% range that we ended with in the near-term, because we're not – the promo was through Q3 and we ended that promo at this point.

Okay, great. And then can you talk a little bit more to the linearity of the revenue through the quarter? Just wanted to see if there is any sort of meaningful pick up that you guys started to notice towards the end, as people may start to be getting prepared for another wave of COVID or might start even coming back with COVID precautions in place?

Yes. We haven't seen a dip from a sales perspective, which is a positive. So we saw fairly consistent sales through the quarter and that's continuing on. I think that businesses, even if there is a second wave, I think businesses are prepared for that or are preparing for that by implementing the right solutions out there. So I think when we talk to businesses out there, Andrew, a lot of businesses are telling us that, they got caught off guard first round and they made do with cell phones or forwarding to a home phones or whatever they might have had to do with their existing platforms. Now they've had a chance to breathe and plan ahead, they're implementing our type solutions. And so I think going forward, I think that's going to be the norm. I think that businesses are having to realize that we are in a new norm today. And so they're going to have to adapt. And so, I don't think they're going to wait for a second wave to make decisions. I think they're going to continue to make decisions as we've seen over the last three or four months. So, if you’ve asked me the same question back in April or May, that was a different scenario where people were not prepared, and today after six or seven months of people dealing with the waves coming and going, I think businesses have learned to adapt and we're seeing that in our sales processes – is that – businesses are ready, willing and able to implement our solutions.

Great. And just one last one for me. Sort of already touched on a little bit, but can you give us a little bit more color into any marketing initiatives that you guys have put in place as the promos or increased digital marketing, just to sort of offset some pandemic headwinds?

Yes, obviously we started with building a new website that was just launched last month, so we’re excited about that. On top of that, we've started some paid search campaigns, some social media campaigns to get our message out there. We've also put some additional incentives out there with – for customers and for our partners. So our partners have some nice new incentives out there to lead with our platform and have some extra incentive to get our opportunities sold and installed before the end of the year. So we've really tried to focus our marketing efforts on what's going to move the needle quickly, obviously paid search in SEO, paid search has a little bit quicker return, the SEO has got obviously a long tail return, but we're investing for the long-term and for the short-term. So we are seeing some good lead generation happening through our paid search campaigns, and we are seeing some good response on our social media campaigns and obviously with our incentives, our partners and for our customers, we're seeing good adoption there as well.

Great. Appreciate it.

We're ready for the next one, Jess.

Certainly. We'll go next to Arham Khan with Eden.

Hi everyone. How are you guys doing?

We're doing well. How are you?

Doing great. Just had two really quick questions for you. One, just wanted to follow-up on something I always ask. How is the backlog looking, where has that come to now in this quarter? And then finally just want to get an idea of the acquisition kind of the criteria for what you're looking at? You guys are obviously a little better positioned than most other companies. You're generating cash flow where many failed to do. When you're looking – obviously when a company is not generating cash flow, you can probably taste better prices for it. But the flip side of that is you're acquiring something that's not cash flowing. So I wanted to look what exactly you're looking for other than accretion in revenues.

Sure. Yes, so backlog had a nice increase quarter-over-quarter, so we increased backlog by right at $1 million to $28.3 million. So that's our sales backlog of sold opportunities. And again, just to reiterate that if you haven't been on one of our calls before that. Backlog is contracted revenue that hasn't been recognized yet, so increasing that by $1 million quarter-over-quarter was a nice increase. As we look at that increase year-over-year, that's also another nice positive. I think we've increased that by I think 12% or 14% year-over-year. So it's been a nice increase year-over-year in our backlog. As far as the acquisition strategies, what we're looking for out there, obviously, you hit the nail on the head, accretive acquisitions are critical for us. We're looking for a revenue stream that we can convert over to our platform. We're looking for opportunities where we can grow the business and grow it with cost synergies out there. So as we look at the opportunities out there that we're talking to, there's a lot of opportunities and a lot of opportunities that are really nice fits with what we are looking for. So when we look at those opportunities, we want customers that are under long-term agreements, we want customers that we can easily migrate over to our platform. And we want that relationship that the end users have with the potential acquirers that have good relationships there because we want that long-term relationship. When we look at our low churn, that's something that we look at in our acquisition opportunities is to make sure that there's very little churn because we want to buy a business that's got a very solid footprint going forward.

Okay. Okay, well understood. Thank you guys so much. Take good care.

You’re welcome.

Thanks Arham.

We’ll go next to Ronald Shaw, Investor.

Yes. Thank you. My question is about the general and administrative expense and the R&D, those were the biggest expense increases in the quarter. And Steve, you mentioned that some listing fees of stuff, but I thought the general and administrative was up a little more than I thought it would happen.

Well, I'm going to let Ron handle this one, but we had a lot of CapEx and some of the costs spilled over into the third quarter. But Ron, would you go through that please?

Sure, Steve. Yes, so from an R&D perspective, we had some adds – we added some FTEs during the quarter to backfill some positions that were lost as well as add some additional resources for development of our UI and our product offering. On the G&A, we did have approximately $100,000 and costs associated with the uplisting to the NASDAQ. We had some general and administrative, just general cost increases over the quarter. So there really wasn't PP&E purchases that we had that are below, replacement of computers and laptops that are below the capitalizable threshold that were expensed during the quarter. And then the majority of those increases, we did add a new accounting staff. It was a new FTE or replacement to someone that we lost in 2019. And so that added additional costs for the year-to-date period and for the quarter. And so that was the main drivers, therefore the increase in G&A.

And just so you're aware of it, this company, even though you may only look at three or four different matrixes, we looked at about 15 or 20. And my background is financial. One of the things we looked at is a lot of additional metrics out there and productivity and all kinds of different metrics. You have to remember though, as a growing company, we're going to grow SG&A, we have to in order to keep up with the growth. But the trick will be to grow in a little bit slower in the future. And then we grow revenue. I think, Ron, would you have one other comment you wanted to make or not now?

No. Doug mentioned R&D, but we talked about that first. We added two or three FTEs during the quarter.

Okay. Does that answer your question?

Yes, that’s very good. Thank you.

You bet.

[Operator Instructions] We’ll go next to Michael Kaufman at MK Investments.

Hi, Michael. How is it going?

How are you doing, Steve? I want to thank you and Doug and the whole team for really threading the needle and producing profitable growth in light of the pandemic and uplisting and doing a public offering. I think it was certainly a very impressive performance. I'm sure under your joint leadership, it will continue to evolve.

Well, just remember that Doug and Jeff and Ron, and the entire team, including Joe Seeler and all the rest of the team, Nishith, you name it, everybody is very, very focused on our growth and our profitability in the future.

Understand that. And I really compliment everybody for doing a great job of balancing all these various forces.

Thank you.

I'm just wondering, what is the current headcount? I didn't see it from any of the material. And what do you think you would be at the end of the year? What's kind of your cosmic projection?

Yes. Current headcount, Michael, is 60 at the end of the quarter. So I anticipate potentially adding maybe two or three more bodies before the end of the year. So again, it's all about the productivity. So we are constantly looking for the right fits, but we also realized that the productivity per employee is also another key metric that we measure. So obviously, as we continue to grow, we're looking for the right folks that are going to help us in that growth. And obviously, if there's any acquisitions in play there as well, that we'll look at that and how that helps augment any weaknesses or any voids that we've got in our organization.

I think more importantly, Michael, is where our headcount is at the end of 2021. And I would expect that if you look at where our headcount is going to be at the end of 2021, the productivity will have increased. I don't know by exactly how much, but it's going to increase over the coming year.

I guess, the other thing, if you are picking up other teams potentially, you got to make sure that you have the right bandwidth and you'll have to do some massaging of everybody. So the last thing you want to do is over hire to the point where you get confusion as you're trying to build a company faster and bigger. So…

We're well aware of that. But any redundancies, of course, they're going to have to be considered, when it comes to additional people where they're going to be necessary. As a larger organization, you're going to have to have more people to run it. So we take all of that into consideration.

And I will say, Michael, that we are extremely well-versed at multitasking, as you can tell, just from the quarter. So from the quarter, we did an uplist, we did an S-1. We did a lot of things, and at the same time still maintained our sales growth and our profitability. So, we are extremely focused on what we need to do, but we also are extremely well-versed at being multi-task organization that we wear a lot of hats and we know that, hey, we got to continue to grow this thing, and we've got to continue to add where we need to add and we've got to continue to make sure that we're delivering.

I think it’s a remarkable balancing act having been involved in starting a few hundred companies, myself and I just wish you guys the best of luck.

Thank you.

And with no other questions holding, I will now turn the conference back to management for any additional or closing comments.

Okay. Thank you, Jess. With that having been said, just keep in mind that our focus will be on growth and profitability. We do expect, as we add the growth, the organic growth is going to take the number of people that we currently have, but the acquisition growth is going to take more people. And it's also going to allow for some goodwill and intangibles. And on the intangible side, we will be writing that off over the course of two, three, four, five years, which will impact GAAP earnings, but it won't impact EBITDA earnings. And that's going to become a more meaningful metric here as we go forward. But our goal is going to be to at least have some GAAP in income, every single quarter going forward. So accretive acquisitions, as Doug pointed out is going to be the name of the game. With that, I want to thank everyone for being on this call and we look forward to talking to you in the New Year and wish you a happy holidays for everyone. Good day and goodbye.

Thank you, everybody.

Thank you, Mr. Mihaylo. Ladies and gentlemen, that will conclude today's call. We appreciate your participation. You may disconnect at this time and have a great day.