Crexendo, Inc. December 2019 Virtual Presentation, Featuring President & COO Doug Gaylor

Doug Gaylor

Hi everybody.  This is Doug Gaylor and I am president and Chief Operating Officer (COO) of Crexendo.

Crexendo is one of the leading suppliers of unified communications or UCaaS which is also commonly known as cloud communication services here in the United States.  We are a fast-growing provider of cloud communications and when we think about the industry the industry’s got a lot of growth.  It is a very rapidly fast-growing industry and we have been able to post 25% increases in revenue through the first nine months of the year, year over year compared to 2018. And we are a little different in the fact that we are doing that profitably which is really an anomaly in the industry right now.  Many of our competitors are very challenged to get to that net profit area and we have been consistently showing that income for the last three quarters.  So, we have got a nice trend going and anticipate that to continue.  We are currently on a revenue run rate a little bit over $14 million and have a lot of great opportunity for growth since we have a very stable cost structure and since we managed the business very well and very profitably.

As we look at where we go today, we have got a lot of growth opportunity in the industry and a lot of growth potential for Crexendo and we are extremely excited to present Crexendo to the Little GrapeVine community. So with that we will get started with our presentation.  Thanks for joining us.

Presentation

CXDO Presentation Dec 2019 Slide 1

Again, thanks everybody for joining us for the Crexendo investor presentation.  I’ll just go ahead and dive right in obviously starting with our little safe harbor statement which you have probably seen many times before.

CXDO Presentation Dec 2019 Slide 2

Best Kept Secret in UCaaS

CXDO Presentation Dec 2019 Slide 3

I’ll like to talk about Crexendo as the best kept secret in UCaaS.  UCaaS stands for unified communications as a service. So if we think about Crexendo today, we are a fast-growing leader in the UCaaS space, have a tremendous amount of experience within our management team with over 150 years combined in the telecom industry.  Today we are we are not only a provider of UCaaS services, but we actually design our own platform.  We’ve built our own platform; we design our own telephones and we have really built a world-class award-winning platform.  We appeal to businesses from anywhere from 5 – 5,000 telephones and as I mentioned an award-winning platform that continues to win awards twice this year and a few last year as well.  You are going to hear a biased opinion that how great we are from me, but the industry continues to support us with great accolades as well.

Communications Today

CXDO Presentation Dec 2019 Slide 3

When we think about what communications and unified communications is, the industry for telecommunications has really changed over the last few years and today if we think about communications it’s really any device anytime, any form.  10 years ago, if I were doing this presentation it was a black phone on your desk and it didn’t have a whole lot of other capabilities other than making calls and receiving calls and getting voicemail.  But today that’s not how Communications works. If we think about today’s format for businesses it’s not just the phone on your desk, but it’s the contact center which is your call center applications and your customer service interactions and analytics with your service information on what’s going on in your business, its collaboration during screen sharing and doing video conferencing and doing webinars and it’s messaging.   73% of Millennials today would rather be text messaged from an individual as opposed to talking to an end of his own.  When we see that massive change in how people are communicating that really kind of sheds light on how the industry is changing from an unified perspective that it’s not just the phone on the desk anymore, it’s all of the pieces of the puzzle that you see on the screen here working in tandem.

So that kind of brings us to where the industry is.

The Telecom Industry 2019

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If we think about where the telecom industry is in the year 2019 and going forward this is kind of a tongue-in-cheek presentation of what I think the industry looks like.  It’s kind of the Wild West because the industry statistics show that 70% of businesses out there still haven’t migrated to the cloud for their communication services.  And what does that mean for the industry?  Well that means that everybody’s out there trying to get that 70% that hasn’t migrated over to the cloud yet to migrate over to their services.  Whether that’s the bigger guys like the $RNG (RingCentral) and the $EGHT (8×8) and $VG (Vonage) or the little guys like Crexendo, we are all going out there trying to get those customers that are still using legacy premise-based telephone equipment and migrating them over to the cloud.  It’s really truly a land grab out there because the opportunity is so tremendous.

UCaaS Market is HotCXDO Presentation Dec 2019 Slide 6

In fact, if you look at Gartner reports from 2017, they estimate that the rate of organizations deploying cloud telephony is going to double between 2017 and 2021.  We are halfway through that migration strategy and as you can see from this slide here the premise based businesses are really hemorrhaging and you see that with companies like $AVYA  (Avaya) and others have major challenges out there and then you see how the cloud-based and UCaaS service companies are seeing a tremendous growth on the range of 20% to 30% compounded annual growth rate.

CXDO Presentation Dec 2019 Slide 7

When we think about you know that Gartner also highlights that small and mid-sized businesses are adopting cloud at a much higher rate than the enterprise customers and that’s because obviously the enterprise customer is moving a much bigger ship.  It’s harder to turn a big ship as opposed to a smaller boat so the smaller and midsize businesses are obviously adopting that cloud adoption much quicker than the larger enterprise clients are.

Other statistics show that the industry again, it’s just got a tremendous amount of opportunity.  Research and Market shows that the industry is going to grow at a 25% clip and IDC shows that the industry is going to have a total market cap of about $54 billion by 2022.  Just a tremendous amount of opportunity in the space itself.

How does Crexendo differentiate itself?

Crexendo DifferentiationCXDO Presentation Dec 2019 Slide 8

When it comes to business services, my philosophy is that every business out there has got a telephone system and most of them need our services, so when it comes to how does Crexendo differentiate ourselves from all those other logos that you saw on the Wild West slide a moment ago, it’s really through a number of different areas.  First of all, the Crexendo white phones and platform are completely designed and engineered and supported by Crexendo.  We don’t use third-party applications.  Many of our competitors are using a $BSFT (BroadSoft) platform and $PLCM (Polycom) phones.  Well if you are using a BroadSoft platform and Polycom phones you really don’t have any of your own intellectual property in there.   Crexendo designed its own platform.  We have built our own telephones and we engineer and support everything in-house that leads to a lot higher margins for us, overall.  Crexendo is a CLEC which is a Competitive Local Exchange Carrier, basically that just means that we are the dial tone provider for businesses, so we are replacing the traditional local exchange carrier whether that’s a CenturyLink or an $T (AT&T) or $VZ (Verizon).  We are replacing them because we are the local exchange carrier at the point that we put in our services.

We are also pretty unique in that we offer hardware maintenance and software upgrade to the life of the customer.  Since we make our own telephones it’s easy for us to put our stamp of approval and our support behind our product and our software.  We offer free hardware maintenance and free software upgrades for the life of the customer, again a pretty unique proposition from Crexendo.

We are also pretty unique in the fact that most of our high-end features are included as a standard offering where many of our competitors are selling all of these extra services as optional features.  That gives us a pretty nice cost advantage over our competition.  Think about applications like call center and collaboration and mobility, we include those as a standard offering in our platform where again many of our competitors charge extra for those functionalities.  We are in-house, we are US based service and support for 24 hours a day seven days a week 365 days a year.  When somebody has a Crexendo system and they call in to get support or service they are always talking to a Crexendo employee that’s going to help them out.  And we also are pretty unique in the fact that we do custom engineering for custom applications.  If a customer has a need that we don’t currently support within our platform we bring our engineering team in and we in many cases can work with them and custom design applications.  We work on an agile software release program which means that every six to eight weeks we are coming out with new software enhancements on our platform and that gives us a pretty great advantage over the competition and the fact that we can make additions and changes to our system in a pretty quick fashion, where many of our competitors have to wait for a long period of time. BroadSoft comes out with one software release a year, where we come out with six software releases every year.

The fact that we make everything in-house doesn’t mean that we don’t adhere to industry standards. Our platform is very open and very support based so we can handle the biggest phones that are out there in the industry today from an IP perspective.  We can handle Polycom phones, {inaudible} phones and Cisco phones.  Many customers that already have the investment in these type sets can easily migrate them over to the Crexendo cloud.

So, when you think about, while you are attending this presentation, why would I want to invest in Crexendo now?   Well, a couple of reasons.

Why Invest in Crexendo?CXDO Presentation Dec 2019 Slide 9

First of all, a 25% increase in our telecom revenues for the first nine months this year compared to the first nine months of last year, a 21% increase from 2017-2018.  We have got tremendous growth going on in our organization.  We have hit some really nice inflection points that I will talk about here in a moment with our net income, but one of the most important parts of our business today is that nearly a 100% of our customers are on long term contracts, typically 36-60 month contracts and that means that we have got a really high relationship, long term relationships with our clients, a very low churn rate and it gives us a very profitable model going forward.

Financials & BacklogCXDO Presentation Dec 2019 Slide 10

Those inflection points that I talked about.  We have hit net income of $911,00 or 6 cents per diluted  share for the nine months ended September 30th and that positive net income has also produced free cash flow in the organization.  We have increased our cash flow from operating activities by $1.2 million for nine months ended September 30th.   All of these things really add up to a really strong equation.  If you think about the high growth plus that recurring revenue stream and the strong cash flow it really means higher multiples in the end run.  And we have got a very stable cost structure.  Think about our growth from here on out. Our cost structure is very stable.  We are debt free and have a very stable cost structure and on top of that, a very experienced and cost-conscious management team really allows for us to have very positive operating margins and an extremely strong future going forward.

To give you a little snapshot of our financial profile.

If you think about where we have come from and where we are today: you know 2016 , a marketcap of less than $20 million, an increase to $30 million at the end of 201,  to $44 million at the end of q3 of this year with about 14.6 million shares outstanding.  You know, nice increases there.  One of the things I want to highlight on this slide here is that our backlog is currently at $25.3 million at the end of q3 and that backlog is a pretty critical number for us because that’s $25 million worth of contracted obligations that are under contract for us that we haven’t recognized revenue on yet and I have got a slide that will show how that breaks down over the next couple of years, but that’s a pretty important number for us as we look at going forward because, as I mentioned a moment ago, all of our customers are on long term contracts.  Those 36 or 48 or 60-month contracts all go into our backlog until we recognize that revenue on those accounts on a monthly basis.  You can see from the last couple of years, pretty big drastic change in our net income. So significant losses in 16 and 17, trimmed that down to almost a break-even point in 2018 and then a very profitable model going forward in 2019. When we look at what that change is, it’s again getting that recurring revenue model up to that inflection point that we hit last year and now we have got a very profitable model going forward.

So just to kind of give you a little bit of a revenue and backlog and a margin snapshot.CXDO Presentation Dec 2019 Slide 11

You can see the revenue growth on the side here 2019 through three-quarters almost equivalent to what we did in 2018.  Again, that’s a nice 20% plus growth there.  The slide here you’ll see the blue and the gray – the blue is our monthly recurring revenue compared to the gray which is our non-recurring revenue.  That 85% of our revenue comes from our services and that’s our recurring revenue.  About 15% comes from the one-time sales of the hardware and the equipment to deploy the Crexendo solution.  About an 85% -15% percent split there.

We talked about that backlog number of north of $25 million, so you can see that growth has been tremendous growth over the last four years here and how does that backlog break down.

If we look at that $25 million worth of backlog, it breaks down over the following five years in the slide that you can see here.CXDO Presentation Dec 2019 Slide 12

So, we still have you know a little bit over $2.5 million worth of backlog that will be taken for revenue in Q4.  The nice part is that we are starting out 2020 with almost $9 million worth of revenue already baked in.  We have already got $9 million worth of contracted revenue ready to go that’ll be recognized in 2020 and you can see that scales down a little bit over 21, 22 and 23, but that’s a really nice backbone to have as we look at the next few years and that number will continue to grow and this side will allow us to keep shifting that backlog year over year.

So, you know at the end of 2020 when we do this presentation you’ll see a very similar type side with it stretching into 2025.

One of the slides that we’re probably most proud of is the turnaround in our bottom-line improvement.CXDO Presentation Dec 2019 Slide 14

So, if you look at 2016 again fairly significant losses there, 2017 cut those losses in half, 2018 again trimmed tremendously almost to a break-even perspective and then if you look at 2019 it’s a very positive year forward.  I really see the reverse of this slide or the inverse of this slide going forward, if you think about losses and trimming the losses and trimming the losses and then a very profitable model in 2019.  We anticipate having that same type trajectory going forward.  A very profitable model going forward.

How do we drive our sales, where do we get our sales from? Our sales sources come from a bifurcated sales channel.
CXDO Presentation Dec 2019 Slide 15
We have got about two-thirds of our sales that come from our partner channel, about a third of our sales that come from our direct channel, direct is just a smaller group that handles larger and major accounts and then our partner channel out there are selling Crexendo services along with whatever other products they sell in your typical portfolio.

To give you a little bit more color on the partner sales, we currently have more than 240 partners out there selling the Crexendo platform with our growth plans to add about 5% new partners every quarter.

Growth Strategy

CXDO Presentation Dec 2019 Slide 16

We have got our channel managers out there taking care of our existing partners, but their responsibilities are to go out and find new partners that they bring on board. Those partners, what do they typically look like?  We really break our partners down into four different key areas.  We have got our traditional telecom VARs, those are telecom companies that have been selling phone services for years and years and years and Crexendo is with these telecom VARs one of maybe two or three different products that they handle from a telecom perspective and we have got our data and our business-to-business VARs.  Those would be data VARs that are not telecom oriented, but have added Crexendo to their portfolio to pick up that piece of the equation from a data perspective.  If they are out there, outsourcing the data department for a company, they’ll add Crexendo to their portfolio so they can not only handle the customers data services, but bring in Crexendo as the telecom offering as well.

And then from a b2b VAR perspective, that would be copier companies, cellular companies, any kind of business-to-business type application where telephones fit nicely into that portfolio and we have got quite a few, as I mentioned, copier companies out there.  It’s a great vertical market for us, for partners where they can add the Crexendo telecom platform into their portfolio of offerings.  A lot of copier companies have looked for new revenue sources and when they think about their business it’s been declining over the years because print services aren’t what they used to be, they need new services.  A lot of copier companies have moved into the managed network service group which means that they are going after the customer’s network and our phone system just rides on top of that network.  It’s a logical addition to their portfolio and it’s been one of the probably our fastest growing areas from our partner perspective is the business of business VARs.

Managed service providers – we have got a lot of managed service providers, those are companies that are doing managed services and going in there just doing consulting for businesses and giving them different ideas and applications and they are going in there presenting Crexendo as a solution as well.  And then we have got master agents out there, probably one of the smaller areas that we concentrate on because it’s a very saturated market, but we do work for some master agents out there.  Those are really the four main areas for our partners.  But as I said, our biggest area of growth is our business to business partners out there.  One of the largest partners we have got is U.S Cellular.  You may be familiar with U.S Cellular, the fourth largest Cellular provider in the country today behind AT&T, Verizon and the combination of T-Mobile and Sprint. U.S Cellular is one of our largest partners, in fact in 2019 will be our largest partner.  They went out and did a fairly exhaustive search for a hosted telecom partner that they could add to their portfolio about two years ago.  And after a lot of research and looking at just about every player in the industry they chose Crexendo to be their exclusive partner and that relationship has been just a dynamite partnership both for them and for us and that continues to grow and prosper as we continue that relationship.

A great amount of success is our partner sales and that’s an area that is going to continue to grow as I said it’s about 2/3 of our sales in 2018 and I anticipate it’ll be that or higher in 2019.  As I mentioned, our direct sales handles really our larger accounts and major accounts and we have got a small experienced direct sales team that handles those types of accounts.  As we look at our growth strategy not only our organic growth which is a hundred percent of what you have seen in the number so far, but going forward we’d like to increase those numbers with hopefully a lucrative acquisition in the next 12 months.  Lots of opportunities, lots of targets out there and we’ll talk about that a little bit later, but there’s a lot of opportunity in the market for acquisitions and we are always looking for the right accretive acquisition that we can add to the organization.

As I mentioned at the beginning of the call, I’m the President/COO, I run the company on a day to day business, I have worked with Steve Mihaylo who’s our CEO for the last 32 years now believe it or not.

Leadership Team

CXDO Presentation Dec 2019 Slide 17

Our former company was a company called Inter-Tel.   Steve’s founded Inter-Tel in 1969 and grew it to $500 million in revenue before selling it off to $MITL (Mitel) back in 2008.  That transaction was about a $750 million sale of the company.  And after about a year or two Steve called me up and said he was putting the band back together again and he brought myself on and our VP of engineering Nishith Chudasama and since then for the last nine or ten years we have been building Crexendo to the successful formula that we have today.  On top of that we have got a great team with Ron Vincent as our CFO and Darren Johnson running our sales department and Brian Spitler running our operations department.  It is a great core team of people leading the charge for Crexendo.

So, to kind of sum it all up, you have sat through the last 15 minutes on what’s Crexendo all about and why should I seriously consider investing in a company like Crexendo? Yeah first and foremost we have got great technology.  We own it, we designed it, we continue to improve it.  It’s a rock-solid platform and has just tremendous success out there in the industry and as I said continues to win industry awards. It’s not just me telling we have great it is, but we continue to get recognized within the industry from very respected sources on how great our platform is.  Great software that we developed in-house and continue to develop for our customers and continue to customize for our customers as well.  I have got a great team with great success in the industry.  For myself, it’s going on thirty-two years with two different companies basically and have had tremendous success with both and look forward to continuing that success here at Crexendo.

Wrap Up

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The industry itself, tremendous opportunity for growth as I mentioned.   70% of the businesses haven’t migrated to the cloud yet.  If I think about that and relate to the cell phone industry everybody out there today probably has a Smartphone. 99.9% of the country today has a cell phone that’s a Smartphone.  But if we think about just 11 years ago everybody had a $MOT (Motorola) flip phone and nobody had a Smartphone.  Once that change in technology happened it was a pretty mass migration, now that’s more on a consumer side, but on the business side we are seeing that same revolutionary change in the industry.   We are seeing a very fast migration from the traditional legacy premise-based equipment to the cloud.  There’s still a tremendous amount of opportunity with 70% of the businesses out there still haven’t migrated to the cloud and tremendous opportunity for growth.

Recurring revenue model, that’s the way the future.  With that recurring revenue model, as you can see from the backlog slide that I showed, just a tremendous amount of opportunity for us to continue to grow there and starting off 2020 with $9 million worth of revenue already baked into the company gives us a pretty good head start.  We don’t have to go out there and recreate the wheel every single week and day a month.  We have a pretty good head start already for the next five years running.  Our team is phenomenal at great cost management and you can see that from the profitability that we have.  It’s amazing when I think about the fact that the top seven or eight players in our market today haven’t shown profitability.  And for Crexendo to have reached profitability consistently to me is a great feather in our cap compared to many of our competitors that are still challenged for trying to get to profitability.

All that leads for a great future for Crexendo and we are excited to take that journey and hopefully you’ll take that journey with us and ride the cloud with Crexendo.  With that I think we will pause and open it up for some questions and answers.

Question & Answer

Okay well thanks.  I will dive into the question and answer portion.  A lot of interest here from the Little GrapeVine community.  I appreciate all the questions.

On Long Run Gross EBITDA Margins

Little Grapevine NetworkFirst one is “can you discuss what type of gross and EBITDA margins you are targeting in the long run?”

Doug Gaylor:  Great question.  We’ve consistently seen gross margins for telecom running between 68% and 70% and we are confident that we can maintain these levels going forward.  We have reached some really nice inflection points that we talked about within the company that have allowed us to considerably put 8%-9% of net income to the bottom line and we feel our structure is such that these results are very sustainable.

On Customer Renewal Rate

Little Grapevine NetworkOkay next question is “Your customers are on long-term contracts.  What has been your renewal rate at contract expiration?”

Doug Gaylor:  Our renewal rate is extremely strong.  We have got very low churn within our organization.  The high majority of our customers are on either 36- or 60-month agreements and we are very proactive with them at the end of their term to get them to renew.  That really leads us to having a low churn rate in 2018.  We had less than a 6% annual churn rate for the year, so mainly because we have got a very proactive approach with our customers.

Follow-up to that is “How many contracts are in the last year of their term when it comes to your long term contracts?”

That’s a good question and when we think about our average customer out there, our average customer is under contract for a period of about 45 months and as we Illustrated back in our slide deck, the backlog of over $25 million flows out over the next five years or so with almost $8 Million queued up for 2020 already. And nearly 100% percent of our customers are locked in to long-term agreements.  That really gives us a high percentage of our clients on those long-term agreements and allows us to have that low churn what we talked about.

How The Cloud Helps Solve Problems

Little Grapevine NetworkThe next question says please explain the types of problems that businesses experience with their communications platforms and how the cloud helps solve them.

Doug Gaylor:  Again, good question and when we think about my statement earlier, every business has a phone system out there and most will benefit greatly by migrating to the cloud.  Older systems are less flexible, they are less efficient, they tend to have higher costs than cloud communications today, so when communications is more than just a phone on the desk and you start thinking about mobility and messaging and video and call center applications, that’s really changed the way we communicate and most of the older premise-based systems cannot offer those types of communications on them.  Moving to the cloud really allows businesses to communicate more effectively and productively at a cost basis that typically can save them 25% to 50% over their current telecom spend and our solutions are giving them a much better solution for less and less it’s an easy decision for businesses to migrate to the cloud.

International Focus

Little Grapevine NetworkOkay the next question is “Are you solely focused on North America?  Have you quantified the international opportunity and what does international competition look like?”

Doug Gaylor:   With approximately 70% of the US markets still running on legacy premise-based equipment there’s still plenty of opportunity here in the US and Canada and that’s really our primary focus, although our phones can function anywhere in the world or where there’s internet connectivity and can be deployed anywhere.  All of our sales efforts are focused primarily in the US and Canada because there’s  again so much opportunity here.  International opportunity is out there, but there’s so much opportunity here in the U.S.  That’s really where our focus is and we don’t want to get defocused.

Addressing Backlog Questions

Little Grapevine NetworkOkay next question is pertaining to our backlog.  “What percentage of the backlog is deliverable in time periods of less than one year?”

Doug Gaylor:   As we illustrated in our presentation earlier our backlog continues to grow and it currently stretches out to 2024.  In terms of percentages about 12% of our backlog will still be applied in the remaining part of 2019 in q4, about 35% of our backlog will be recognized in 2020, 26% is currently slated for 2021, 17% in 2022, 9% in 2023 and then 2% in 2024.

Little Grapevine NetworkA follow-up to that would be the reason for our backlog and it’s just contractual.

Doug Gaylor:  And again, so our backlog is all unrecognized contractual future revenue and it continues to grow steadily.  To tell you how we calculate that backlog, if a customer signs a $1000 per month agreement for Crexendo services for 60 months, we recognize revenue for that account and a $1,000 per month with the remaining amount staying in backlog.  For a 60-month contract that may be a $60,000 total contract value, but we only recognize revenue on that a thousand dollars a month at a time.  $59,000 dollars would go into backlog in month one that would be reduced to $58,000 in month two and so on.

Little Grapevine NetworkAnd then as another follow-up to our backlog “what is the break out of hardware or service revenue in your backlog?”  And again, another good question.

Doug Gaylor:  If we think about from a revenue perspective, hardware comprises about 15% of our revenue and services comprises about 85%.  That’s historic when it comes to our revenue.  But in regards to our backlog, almost a hundred percent of our backlog is service oriented.  The only hardware component in our backlog is pending installations which typically happen within the first 30 60 90 days after a contract is signed.  The hardware component in our backlog is a very minute percentage and almost 100% of our backlog is pure service-related.

Targeting Smaller Markets?

Little Grapevine Network Okay another question here, switching modes to a little bit more on the competitive landscape “Are you targeting smaller markets that the bigger guys ignore?”

Doug Gaylor:   Again, a good question if you think about where our concentration is, Crexendo concentration is definitely on the SMB market, the small and mid-sized business market.  Our average size account today is approximately 21 stations with our largest multi-location site pushing 4,000 stations and our largest single-site at about 1800 stations.  The bigger players in the industry all seem to be very focused on just the enterprise right now.  That leaves a lot of opportunities in the SMB space on the table for us and we are glad to take advantage of that.

How Competition Consolidation Affects Crexendo

Little Grapevine NetworkAnother follow-up competitive question “RingCentral recently partnered with Avaya, allowing RingCentral to offer a Avaya’s customers UCaaS solution.  How does this impact the industry and more specifically your growth opportunities?” 

Doug Gaylor:  We are really interesting here.  I think this partnership creates a tremendous amount of opportunity in the industry as it signals that Avaya, who is the largest telecom provider in the country, and this partnership to me has basically shown that Avaya is acknowledging that everything is moving to the cloud and they don’t have a competitive offering in the cloud to survive.  They had to partner with someone else to avoid missing out on the cloud revenue all together.  They partnered with RingCentral.

This allows everyone to go put a target on Avaya ‘s customers and try and beat RingCentral to the punch.  RingCentral has got basically a hunting license to go out after Avaya ‘s customers and try and get them to convert over to RingCentral ‘s platform, but by Avaya signaling that with the partnership with RingCentral it’s really telling all the Avaya ‘s customers out there that they don’t have a go-forward plan with a Avaya platform, so they really have to look for other alternatives.  RingCentral has won, but Crexendo is just as viable of a solution for them as RingCentral is.  It really allows us an opportunity to go after Avaya partners from a partnership perspective.  They are not very thrilled with this new partnership and it really allows us to go after those customers because those customers are looking for growth opportunity and it may not be with RingCentral; it may be with someone just like Crexendo.  This type of disruption in the industry is good for us and I think it really creates a lot of opportunity for us to continue to pursue.

On Hardware Revenue & Use

Little Grapevine Network The next question is related to your service offering. So, if investors out there are questioning the sustainability of the hardware component in our business model as the shift to mobile and wireless happens, is there concern that Crexendo has a portion of revenue that’s associated with hardware as opposed to just being the software as a service type of organization?

Doug Gaylor:  And again, I would answer that with the fact that hardware is just a small part of our revenue.  It’s only about 15% of our revenue today, but we still feel that the desktop phone is a critical component to our offering. So, as we look at the industry today, you know the death of the black phone has been talked about for 25 years now and it still hasn’t gone away.  The black phone on the desk is still a critical part of our offering because most businesses still require people to have a phone on their desk,  but we are seeing more and more of an increase in soft phones and we also are seeing an increase in mobile applications which we offer both and the hardware component still plays an important role, but as we think about the influence of soft phones and mobility that’s also going to play a big role in our growth.  But as far as hardware being a risk factor for us, we make great margins on the hardware since we make our own phones and it’s going to continue to be you know a nice portion of our business force.

Little Grapevine Network: Okay, the next question also related to hardware.  “Your cloud solutions are used with leading VoIP PBX phones?  How often do you see new customers that have other hardware starting to switch to yours and can customers use your phones on a competitor’s system?”

Doug Gaylor:  The high majority of sales today are still legacy premise-based customers that are moving to the cloud.  Thus, they need new phones.  If I take – an old Avaya customer or an old my previous company Inter-Tel customer or Mitel customer or a Comdial customer – if I take one of those customers and I migrate them to the cloud I have got to change out their phones because their phones are not IP phones they are not SIP compatible they are not cloud compatible.  But we do support the industry leaders of Polycom, Yealink, Cisco, Grandstream and others and we are beginning to see a higher percentage of those still probably in the single digits, but we are seeing a higher percentage of sales of customers bringing their own device.  If I go out there and I take a RingCentral customer to the Crexendo platform they are probably bringing their Polycom phones with them and that’s perfectly fine.  If I take an 8×8 customer or a Vonage customer, they are bringing their Polycom or they are getting their Yealink phones with them and that’s perfectly fine.  We make great margins on those and it’s a win-win for the customer.  They get to keep their phones and they get better and more affordable service with Crexendo.  On the flip side, our Crexendo phones are standards-based so they in turn can be used on other platforms as well.  Our Crexendo phones can be used on a Broadsoft platform or meta switch platform or any of the standard platforms out there.

On Partner Relationships

Little Grapevine Network:  :   Ok the next question comes in and relates to your partner relationships.  “You currently have about 240 partner relationships. Do you have an idea of the total potential number of partners that exist in the targeted pool?”

Doug Gaylor:  Great question here and I don’t have an answer to that with an exact number, but there’s tens of thousands of potential partners out there in our target pool.  When we think about those four categories that we talked about with data VARs and b2b businesses and traditional telecom vendors and managed service providers and master agents just a tremendous amount of opportunity out there.  The numbers would be in the tens if not hundreds of thousands of potential partners out there.   No Limit and shortages of partner opportunities out there.  It’s a matter of finding the right ones that are good fit for Crexendo and a good fit for the partner organization as well to add our product in their portfolio.

Little Grapevine NetworkOk the next question highlights our relationship with one of your largest actually our largest partner, U.S. Cellular.  Please explain how U.S Cellular relationship works and what that opportunity looks like.

Doug Gaylor:  The U.S. Cellular relationship is strong and it’s growing nicely.  U.S. Cellular, as I mentioned, sells Crexendo as their exclusive hosted cloud communication solution to their existing clients and prospects.  They are the fourth largest cellular provider in the country so they have a tremendous amount of end-users out there, many of them, business to consumer, but they have a whole direct sales force that concentrates on their business accounts and that’s where we have started our relationship with.   We started the relationship with their direct sales team and that’s been a great partnership where their direct sales team introduces us to their direct business accounts.  We have had tremendous success in that arena.  More importantly as we continue to grow, they have just recently expanded our partnership to their dealer agent program.  Their dealer agent program has over 400 resellers reselling U.S. Cellular’s products out there, so that relationship just recently started within the last quarter and we are already seeing great traction with their agent and resellers of the U.S Cellular program out there.  That’s been a nice partnership.  The whole US Cellular partnership relationship started in beginning of 2018 and it’s been a great success for both partners in the relationship, for U.S. Cellular and for Crexendo and very happy with the growth opportunity going forward.

Customer Conversion to the Cloud

Little Grapevine NetworkThe next question is, “What is your marketing and sales strategy to convert customers to the cloud and how does a prospective customer find out about Crexendo?”

Doug Gaylor:   I have said it a couple of times today that our philosophies that every business has a phone system and most of them need our service so the fact is that 70% of these businesses still use legacy equipment.  Our marketing strategy is to get to the customer first and educate them on why the cloud will make them more efficient and more productive for less money and hopefully get their commitment without any competitive influence.  We accomplish this a lot easier through our partners that have pre-existing relationships already with their customers so that they can walk in and introduce Crexendo and our offerings to their existing customers and prospects.  And again, if they walk into an existing customer, so if I take a copier company and they walk into one of their existing copier customers and they can show them a better telecom solution for less money that’s going to make them more productive and more efficient.  It’s a winning solution for everybody.  We tend to win a lot of those opportunities without much competition because we are getting there first.   Our strategy to convert customers to the cloud is really leveraging on our partners and our partners relationships with their customers to migrate their customers to the cloud as quickly as possible.

Return on Investment of Sales Hires

Little Grapevine NetworkA follow-up to that is the question of how long does it take for a new sales hire to start delivering an ROI?

Doug Gaylor: And for us historically that new sales rep hired typically takes about 3 to 4 months for a new rep to get trained and build a pipeline and start delivering an ROI. 3 to 4 months would be a good turnaround time for new sales trip to start producing an ROI.

On Acquisition Landscape

Little Grapevine NetworkOk switching loads here a little bit the question is, “Can you talk about potential target acquisition landscape?”

Doug Gaylor:  This market is ripe for opportunity.  The telecom space has always had a lot of M&A going on but right now there’s a lot of potential acquisition targets in the industry.  Everything about the fact that BroadSoft that I have mentioned a couple times on the call, they just recently got acquired by $CSCO (Cisco) almost two years ago now.  BroadSoft has over 700 platform resellers out there, so if you take away the biggest ones that would be the household names of the Coxes and the Comcast and the Verizon’s there’s a lot of smaller BroadSoft resellers out there.  There are other popular platform options that have large reseller basis as well.  There’s definitely a lot of targets.  All of these resellers out there that are selling BroadSoft or Metaswitch or Asterix platform are definitely prime opportunities for acquisitions out there.  As you can tell by the fact that most of our competitors have yet to get to GAAP income status,  it’s a challenge for many of these resellers to achieve profitability. Acquisitions becomes a strong exit strategy for them.  Our industry unfortunately has created some extremely high valuations with the likes of RingCentral and 8×8.  Some of these smaller resellers get delusions of grandeur thinking that they are worth eight to ten times revenues which makes for a very short discussion, but the target acquisition landscape is very rich, so we have just got to g

Little Grapevine NetworkAs a follow-up question to that “describe your strategy for potential acquisitions and what characteristics are you looking for”.  So, yeah, another great question.  For Crexendo we are looking for lucrative acquisitions that are revenue and customer centric.  For us, it’s really not about the technology, but it’s more focused on revenue and people that will help grow with the combined organization going forward.  That’s what we look for in a potential acquisition.  Is it going to be a lucrative, can we get good people out of it and obviously from a synergy perspective you know when we look at those acquisitions how quickly can we migrate their customer base from whatever platform they are on to the Crexendo platform?  As I mentioned earlier with BroadSoft or Metaswitch, I can take a Broadsoft customer, migrate there Polycom phones from the BroadSoft platform to the Crexendo platform very easily.  The right acquisition has some immediate synergies from eliminating duplicity and cost structure and the hosting structure by moving those clients straight over to the Crexendo platform.

Little Grapevine NetworkAnd a follow-up question to that, “Are you seeing any value opportunities in the market right now?” 

Doug Gaylor: I like to say that we are kissing a lot of frogs out there trying to find the right one that fits.  At any given time we may have two or three such discussions going on but it’s got to be the right acquisition, it’s got to be the ideal fit for us to pull the trigger so again lots of discussions going on, but when we find the right opportunity we’ll pull the trigger on it.  I would hope that within the next 12 months we’ll be able to see a nice lucrative acquisition layered into the organization.

Uplisting Goals

Little Grapevine NetworkOkay next question relates to our last quarter’s conference call.  “As per your Q3 conference call you mentioned that you might be able to qualify to up lists in Q1 of 2020.  What are the missing requirements to up list?”

Doug Gaylor:   Another good question. So at the end of our q3 our shareholder equity was $3.6 million and we need to be at $4 Million to up list.  We are pretty darn close.  We are right where we need to be, so we anticipate with a good q4 or potentially a q1 if we don’t quite get to that number, we should be able at the $4 Million shareholder equity number in very short order.  We will likely start the application process in q1 and are confident that we’ll be ready to up list by the end of q1.  A good opportunity for us to take advantage of that.

On Industry Consolidation

Little Grapevine NetworkOkay, a few more questions here the next one talking about consolidation in the industry.  “Do you think there is going to be some consolidation in the industry?  What are some of the challenges and what are some of the opportunities?”

Doug Gaylor:  I would see that the industry definitely has a lot of consolidation opportunity in the near future and I think we are positioned well to grow through that consolidation.  As I mentioned, if I look at 8 or 9 of our largest competitors in the space, they are all consistently losing money and that’s just not sustainable.  We have been very focused on growing our business and reaching profitability and I think we will be well positioned to take advantage of the industry if a downturn in the economy hits.  And a lot of our competitors that have consistently been losing money they may have to run for shelter and a lot of times you know mergers between two losing lending opportunities, that’s sometimes the kiss of death.  I think with the merger and opportunities and the industry I think consolidations got to happen.  When consolidation happens it’s a good thing for us.  With only 30% of the market converted to the cloud tremendous opportunity lies in mining that gold for the remaining 70% which is going to migrate to the cloud over the next few years.  It’s not a matter of if these businesses move to the cloud, it’s when and when they are ready to move to the cloud we will be there for them.  The challenge will be the overly competitive market where companies are willing to absorb huge losses to gain market share, again it’s just not sustainable for years and years and years to keep losing money.  That’s going to be the challenge for many others, but not for us, because we are well positioned to take advantage of the opportunities and really maneuver around those challenges.

On Crexendo’s Company Culture

Little Grapevine NetworkAbout Crexendo itself, so what is the attitude like inside the company right now?

Doug Gaylor:   It’s great.  It’s never been better, so we have a great attitude in the company right now.  We have got a very tenured and dedicated staff that have been focused on growing the business and reaching profitability.  For the great amount of tenure that we have got in the organization they have seen the challenging times of losing money for the last few years and now that we have reached that inflection point, you know it’s really turned the attitudes around within the organization, not that they were ever bad, but they are much stronger now that we have reached profitability.   Profitability allows for the business to run a little bit more smoothly and allows people to relish in the fact that the company is doing extremely well.  Now that we have reached these inflection points in the business, I think the attitude and morale in the organization is great.

Can You Increase Operating Leverage?

Little Grapevine NetworkOkay last question.  Looks like you have almost doubled your cash position in less than a year which now stands at $3.4 million.  Do you think you will be able to continue to increase operating leverage and will expenses continue to remain flat?

Doug Gaylor:   As I mentioned we have got a very stable cost structure and we are virtually debt free, which allows us to have a very profitable model going forward that will generate a tremendous amount of cash flow.  Right now, we are focused on reinvesting some of those profits back into our sales marketing programs to continue to drive the top line.  And with our model, if we can continue to drive the top line, that will invariably help generate more profits and cash flow to the bottom line. I couldn’t be more optimistic about the future and the great opportunity that we have got ahead of us.

Concluding Remarks

With that, that looks like that was the last question.   I’d like to really thank the Little GrapeVine community for spending the time to learn and hear a little bit more about Crexendo and we look forward to having your continued following of Crexendo in the future and if there’s ever any questions feel free to reach out to me.  Again, I’m Doug Gaylor, President and Chief Operating Officer here at Crexendo and look forward to a long and successful communication and discussions with the Little GrapeVine community

Thanks

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