Crexendo, Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Mar 2021

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Crexendo Fourth Quarter and Year End 2020 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, Steven G. Mihaylo. Sir, the floor is yours.

[Steve Mihaylo:]

Mihaylo, that's close enough. Good afternoon, everyone. I'm Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to Crexendo's fourth quarter and year end 2020 conference call.

[Jeffrey Korn:]

Thank you, Steve.

[Steve Mihaylo:]

I keep saying agreement - statement.

[Jeffrey Korn:]

We're not going to make everybody sign it. So I'll just read it. I want to take this opportunity to remind listeners that this call will contain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. All statements made in this conference call, other than statements of historical fact, are forward-looking statements. Forward-looking statements include, but are not limited to words like believe, expect, anticipate, estimate, will and other similar statements of expectation identifying forward-looking statements. Investors should be aware that any forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the Securities and Exchange Commission, including the Form 10-K for the fiscal year ended December 31, 2020, the SEC Form 8-K relating to the NetSapiens merger and the upcoming proxy filed by Crexendo relating to the NetSapiens merger and 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, future events or otherwise. I'd now like to turn the call back to Steve. Steve?

[Steve Mihaylo:]

Thank you, Jeff. This has been a very, very big week for us. Yesterday, we announced a major merger agreement and today we announced what I believe are exceptional results. I too have to be limited in what I can say about the merger agreement with NetSapiens. As you understand, the merger agreement is subject to approval by both Crexendo and NetSapiens shareholders. As part of that process, we plan to file a proxy statement on Schedule 14A with information which should include audited results of NetSapiens. We will promptly, after that, mail the definitive proxy statement to each shareholder entitled to vote at the shareholder meeting relating to the transaction and solicit votes of the merger. Since that has not yet been filed nor has it been approved by the SEC, I'm limited in what I can say, which could be construed as soliciting votes without proxy material.

[Ron Vincent:]

Thank you, Steve. Financial highlights for the fourth quarter, we're pleased to - with our consolidated revenue for the fourth quarter of $4.3 million, an increase of 16% compared to $3.7 million for the fourth quarter of the prior year. Service revenue for the fourth quarter of 2020 increased 14% to $3.8 million, as compared to $3.3 million reported for the fourth quarter of the prior year. Cloud Telecommunications Segment service revenue for the quarter increased 16% or $499,000 to $3.7 million compared to $3.2 million reported for the fourth quarter of the prior year. Our Web Services Segment service revenue for the quarter decreased 21% or $33,000 to $121,000. Product revenue for the fourth quarter of 2020 increased 32% to $526,000 as compared to $397,000 for the fourth quarter of the prior year. Consolidated operating expenses for the fourth quarter increased 20% to $4.2 million compared to $3.5 million for the fourth quarter of the prior year. Net income for the fourth quarter of $7.2 million or $0.40 per basic common share and $0.37 per diluted common share, as compared to $228,000 or $0.02 per basic common share and $0.01 per diluted common share for the fourth quarter of the prior year. The significant increase in net income during the quarter resulted from recording an income tax benefit of $6 million related to the release of our valuation allowance on deferred tax assets and $1 million other income related to the extinguishment of debt. Non-GAAP net income for the fourth quarter of $7.4 million, or $0.42 per basic common share, and $0.39 per diluted common share compared to $347,000 or $0.02 per basic and diluted common share for the same period of the prior year. EBITDA for the fourth quarter was $185,000, as compared to $243,000 for the same period of the prior year. Adjusted EBITDA for the fourth quarter was $431,000 compared to $349,000 for the same period of the prior year. Consolidated revenue for the year of $16.4 million, an increase of 14% compared to $14.4 million reported for the prior year. We continue to see tremendous growth in our Telecommunications segment. Cloud Telecommunications Segment generated revenue of $15.8 million for the year, an increase of 15% compared to $13.8 million reported for the prior year. Service revenue for the year increased 14% to $14.5 million compared to $12.7 million for the prior year.

[Doug Gaylor:]

Thanks, Ron. We continued our profitable revenue growth for Q4 to finish the year with solid growth in earnings numbers despite the headwinds and uncertainty brought about by the pandemic. Aside from the 16% year-over-year revenue growth to $16.4 million, we had a very busy year with our organic up-list from the OTC to the Nasdaq in July, followed by our successful equity offering in September allowed us to be in a position to negotiate the definitive agreement with NetSapiens that I'll discuss in more detail shortly.

[Steve Mihaylo:]

Thank you, Doug. I have no additional comments except to say that we're very pleased with joining with NetSapiens. And I want to welcome all of the NetSapiens people to the team. Having said that, I'll turn it over to John to questions.

[Operator:]

Thank you. Ladies and gentlemen, the floor is open for questions. And we do have a question from Josh Nichols from B. Riley. Josh, your line is live.

[Aman Gulani:]

Hey, guys. This is Aman jumping in for Josh, but congratulations on the acquisition. I did want to ask, can you comment on the growth, profitability trajectory and margin profile of NetSapiens? How does it stack up to Crexendo's business?

[Steve Mihaylo:]

Well, what was your name again?

[Aman Gulani:]

Oh. It's Aman.

[Steve Mihaylo:]

Oh, Aman. First of all, we're just about in the process of releasing a proxy statement, which will have a lot of the details you're asking about, in the proxy statement in the 14A. You have to understand that I cannot answer this question until there's been a vote and until NetSapiens is part of the company. And that will be in approximately 40 to 50 days. So you're just going to have to wait. And in the meantime, I'm going to turn this over to Jeff Korn, our Chief Legal Officer and let him talk to you.

[Jeffrey Korn:]

Just to be a little more clear, NetSapiens has not completed their audit yet. So the numbers Steve gave were unaudited numbers and our best estimate. Much of the detail you're looking for will be in the NetSapiens audit, which will be included in the proxy when we file it. But we are hamstrung, as Steve said, from commenting outside of the information we've already given until such time as the proxy is out, because we can't solicit any votes without that information having been approved by the SEC and being publicly available.

[Aman Gulani:]

Got it. Okay.

[Steve Mihaylo:]

And I hope you understand, Aman.

[Aman Gulani:]

Yeah. I totally understand. Are you able to maybe talk about, maybe like integration, like the timeline on that, how long that might take and potential cost synergies that you could realize?

[Steve Mihaylo:]

Well, first of all, we're going to rationalize our data centers, which should bring the cost down substantially, we're going to rationalize accounting, which again, will bring the cost down. Beyond that, our people are going to be busy transitioning on to the NetSapiens platform, which we think offers a few more features than we do. And it's using software that was developed in house for them, and doesn't require the cost of a session border controller. And it doesn't require the cost of a database, which were using Oracle right now. So, both of those things are going to bring the cost down. I'm going to let Doug talk about additional synergies.

[Doug Gaylor:]

Yeah, obviously, as Steve said, it's an accretive acquisition. And so, we're extremely excited about that. So, when we look at the efficiencies, both organizations run very efficiently today. And so, combined, we'll have lots of opportunity to be able to grow consistently with combining teams. So I couldn't be more excited about the engineering talent on both sides of the equation. It will help us get product out faster. As I mentioned, there's already 240-plus integration, API integrations on the NetSapiens platform. We'll continue to expand and develop on that. So from an integration perspective, we anticipate hitting the streets running. We've already got management meetings queued up and are working together to make sure that we can maximize the benefits on both sides of the equation.

[Aman Gulani:]

Thank you that's helpful. And then, can you maybe walk through like the pricing model and the economics for Crexendo, given that they do not charge per seat?

[Doug Gaylor:]

Yeah, it's a different model. I mean, if you think about how we are set up today, we sell primarily to end-users on a per seat model. NetSapiens is a different model, because they're selling platform applications to end-user resellers that are selling that as their UCaaS platform to end-users. So it is a different model, but it's truly an amazing model. The fact that they've got 1.7 million users on their platform today is a testament to the technology that they've built in the applications that they've got out there. And so, we are extremely excited about taking that number and growing it even further. As I said, 60% of the market is still untapped out there. So when we think about the opportunity to grow both sides of the equation, tremendous opportunity out there. And with 1.7 million end-users on the NetSapiens' side and a much, much smaller number at, less than 60,000 on the Crexendo side, there is still tremendous opportunity for growth there.

[Aman Gulani:]

Got it. Got it.

[Steve Mihaylo:]

And, Aman, I would like to add a couple of things here. NetSapiens is selling their product on a license, subscription basis. We sell ours on an end-user basis, as Doug pointed out. NetSapiens just announced that they're going to be selling a white-label product. And furthermore, they have a product that competes very well with Zoom. So there are 4 different revenue streams here versus one currently. We think there is tremendous opportunity involved.

[Aman Gulani:]

Okay. And can you maybe talk about like the composition of the 1.7 million users? What type of customers is the user base made up of? Are they large enterprise customers? Any color on that would be helpful?

[Doug Gaylor:]

Yeah, I think the user base is very similar in demographics to Crexendo users out there, small, mid-size and small enterprise businesses, so they run the gamut. But, again, they're selling primarily through their community of partners, which is a tremendous asset to the organization. And so, that community of partners, in different markets might have different demographics that they're going after, but got tremendous success in all of the markets that they're in right now.

[Steve Mihaylo:]

And there is one other thing I'd like to offer here. They have currently about 5 or 6 international partners. Obviously, we intend to expand as time goes by on that platform as well and that customer base.

[Aman Gulani:]

Okay. Thank you. I'll jump back in the queue.

[Steve Mihaylo:]

You bet.

[Operator:]

Your next question is coming from Andrew King from Colliers Securities. Andrew, your line is live.

[Andrew King:]

Great. Thanks for taking my question, guys. Congrats on the good quarter. So, first question, just, Ron, across 2020, we've seen a slight decline in your gross margins. Can you talk about what factors are impacting that and how you see that trending across 2021?

[Ron Vincent:]

Yes. So, yeah, 2020 was a rough year. And so, as we went through the year and the stay-at-home orders, we had some challenges with sales like everyone else. And so we look to help out our customer base. So as we've not got new customers, and we're helping people migrate to the cloud, we offered very, very good promos, up to - sometimes up to 6 months free, and so as we allocate those discounts across the service period, it results in a lower per seat revenue on a go forward basis when you amortize over those 3 months. And so that was the impact you saw on our gross margin during the year. Now, that was - those discounts were because of the situation we were in 2020. And so I don't think those are going to continue into 2021.

[Andrew King:]

Great. And then just, Jon, in your first few months there, I'd love to get an idea of what you've seen in your position coming as a newcomer to Crexendo, and where your focus is and what initiatives you're really spending your time on?

[Jon Brinton:]

Great. Thanks for the question. And it is great to be here with the Steve, Doug, Ron, Jeff and the team and kind of helped to grow, and what I've observed is, it's a great foundation of people that are extremely committed to serving customers and serving our channel, and delivering solutions that help our customers meet their needs as they deal with things like the pandemic and other challenges in their business. What I've taken as initiatives is just helping the organization to build a much more, I would say, brand forward sales and marketing campaign so that we can drive to expand our channel, expand our sales to businesses. I'm excited about the opportunities that the acquisition of NetSapiens also brings from the sales and marketing perspective. And we're just looking to get a solid platform to grow revenue here at Crexendo.

[Andrew King:]

Great. Thanks for taking my question, guys.

[Doug Gaylor:]

Thanks, Andrew.

[Operator:]

Okay. The next question is coming from Arham Khan from Eden Capital. Your line is live.

[Arham Khan:]

Hello, everyone on here. Excellent results again. Thanks for your work and your continued work over the years. Everything that you've ever said, you've come to fruition, especially on the acquisition, which you've guided. I wanted just ask one question about that acquisition. More generally speaking, you wanted to more than one I believe? Does this net savings acquisition constitute the correct kind of size for you? Or is this significantly the large landing spot in acquisition and then the rest will be smaller bolt-on? Or is this the bolt-on that, that you want to continue to follow-up you with?

[Steve Mihaylo:]

Just so you understand, this took a lot of time. We've been working on this deal with the NetSapiens' folks. And when I say, we, it's really, Ron, Jeff and Doug. Doug was heading up the team. Just the acquisition agreement alone is 158 pages. We had lawyers, accountants working on this. This will be probably the thing we were looking at, it's great to get the revenue, but it's also great to get the talent. And they provided both, and they provided technology. As I mentioned earlier, our technology is very, very good. But it requires session border controllers' that requires Oracle's database software. This does not. This will be accretive to Crexendo. Secondly, you asked if this is about the right size acquisition, I can tell you that we're going to be getting larger and larger and larger acquisitions, this will wind up being a small acquisition when the time comes that we're down the road another year or 2. So that's all I have to say. And Doug, do you want to add something to that?

[Doug Gaylor:]

Yeah, obviously, Arham, we've talked a lot, and as you know, we continue to have lots of discussions out there, it takes a lot of discussions to get the - I use the old analogy, you got to kiss a lot of frogs to find your prince or princess. And, we definitely found a tremendous opportunity here with NetSapiens. And once we get this integrated, then it's off to the next one. And so will the next one be as large or smaller, or it just depends on what we encounter out there. I can tell you that the excitement that we've seen with this announcement has been tremendous, not only from our partners and from the NetSapiens community, but from our employees and from the NetSapiens employees. And just from the general industry as a whole, I think, we're getting just tremendous, tremendous kudos for it. And I think it's going to resonate in the industry. And as you well know, once you get on the scoreboard a few times, then we don't have to try as hard to find opportunities, opportunities will find us.

[Arham Khan:]

Got it. Awesome. Thanks so much. It's great to see and see you guys again. Thank you.

[Doug Gaylor:]

Okay. Thanks, Arham.

[Operator:]

Okay. We've got one remaining question from . William, your line is live.

[Unidentified Analyst:]

Yes. Thank you. Congratulations on the acquisition, and it's kind of interesting to note, although you can't share the profitability. But the $11 million represents about 40% of your projected revenue, if you took this year and $11 million would be 40%, you do about $28 million. Am I right?

[Ron Vincent:]

We'll let you do the math, Bill.

[Unidentified Analyst:]

Okay. Well, it seems like that, which is good. Okay. Well, I'm not as dumb as I look. But anyway, the - could somebody explain, the accountant could explain the income tax benefit provision of the $6,041,000. I know part of that may be the forgiveness of the PPP loan, if you got it. But what's the other tax benefit? Could you explain how that generated another $6 million of revenue - of net income?

[Ron Vincent:]

Sure. So as you know, we've turned profitable in 2019 and again in 2020. So as a result of our 3 year look back on our taxable income. We look - we assess our valuation needs on our deferred tax assets. And so we've had about $20.5 million in NOLs that have accumulated over the last 9 years as a result of growing this business, and so as we would turn profitable, we have to reassess that in the reporting periods to determine if there's a need for that valuation allowance on a go forward basis. And so, in the fourth quarter, we made the determination that based on our look back and profitable, cumulative look back period, as well as other additional positive evidence of future income, taxable income forecast, and the timing differences on the turn of temporary differences. We determined that valuation allowance was no longer required for $6 million worth of our deferred tax assets.

[Unidentified Analyst:]

Okay. So explain to me, so on your return, are using your - how much have you carried back of the $20 million are you using for your 12/31 state taxability? You're not using the whole $20 million carry back, right?

[Ron Vincent:]

So what we're doing the tax effect on the $20 million-plus any temporary differences. And so at the federal rate of 21% times the $20 million is how you get $4 million of it for your NOLs. And then you have the temporary differences that equate for the remaining differences.

[Unidentified Analyst:]

Okay. That makes sense. Okay, thank you for the explanation. I appreciate it. Well, good luck, and we'll be interested in reading that proxy and see how the margins are and what it brings to the bottom line when we put it together? Do you expect much problem in converting some of your customers to their system, actually moving some of them over, Steve, to use the new company's platform? Is that going to be a problem?

[Doug Gaylor:]

Yeah. We're going to have both platforms running concurrently. So it's not going to be something that you're going to see an immediate jump on.

[Steve Mihaylo:]

All I was going to add is, why wouldn't a customer want to get a few more features a little bit more bulletproof platform, and one that has 1.7 million customers?

[Unidentified Analyst:]

Okay. But they don't have to do anything, I mean, it automatically uses provider. I mean, there's not - it's seamless to them? It's seamless to them?

[Steve Mihaylo:]

Yes.

[Unidentified Analyst:]

Okay. They don't have to convert or do anything, they just get it. Okay. Thanks for taking my question.

[Operator:]

Okay. Next question is coming from Michael Kaufman from MK Investments. Michael, your line is live.

[Steve Mihaylo:]

Good afternoon, Michael.

[Michael Kaufman:]

Hi, Steve and Doug. It sounds like a very strategic fit. I'm excited for you. And I'm also excited that you pulled off a great quarter in trying times. From an integration standpoint, I'm just wondering how many employees do they have versus you have? And where are you physically located? Is this going to be something that is complicating? Or does it seem like it's pretty straightforward?

[Doug Gaylor:]

Yeah, pretty straightforward, and that's one of the beauties of the synergies between the 2 organizations. They're very similar in size with employees, roughly about 60 employees, based out of La Jolla, California, right outside of San Diego. And they've got remote workers as well. So they've got remote workers across the country as Crexendo does. And so, again, with the technology that we have nowadays, you don't have to have all of your people in one spot. So although the majority of their employees are in the La Jolla area, they've got employees across the U.S., some in Canada and some international.

[Michael Kaufman:]

Well, it sounds like it's a perfect fit, at least, from the cosmic review that you gave…

[Steve Mihaylo:]

We think it's a good fit. Yes.

[Doug Gaylor:]

And the exciting part is, is that again, from 1.7 million user perspective, the majority of that is here in the States. There are some international, but that's a huge growth area for them. And it's an area that we've been asked on numerous years in a row on our conference calls, and we don't have any international presence today. And so it's really a growing area for us and when you think about the penetration of 60% still left in the States to move to the cloud. That percentage of adoption to the cloud is much, much lower in many international countries. And so there's tremendous opportunity there. And they've already got a great head start in that international arena.

[Michael Kaufman:]

It sounds like you've moved into the bigger leagues, and we're going to follow you and wish you the best of success and luck. And I look forward to hearing from you on the next call.

[Doug Gaylor:]

Great. I know, you've been following us since we were in the AA, and now we're officially well into the majors with our up-list and looking forward to winning the World Series here.

[Michael Kaufman:]

I keep buying more stocks.

[Steve Mihaylo:]

And, Michael, let me remind everyone, that we've done exactly what we said we would do.

[Michael Kaufman:]

Absolutely.

[Steve Mihaylo:]

We went from the pink sheets on to the NASDAQ organically. We did a public offering last year. We've done a very, very difficult acquisition that all that's left is shareholder approval. We're well underway as far as talking to everyone at NetSapiens. And this is just the beginning. Put on your safety belt and buckle up, and…

[Michael Kaufman:]

Well, the other thing is you stayed profitable and cash flow positive. On a lot of the…

[Steve Mihaylo:]

Well, I appreciate that as well. There is one thing that you have to understand is we do more and more acquisitions, there's going to be more amortization of the intangibles, and so on.

[Michael Kaufman:]

Oh, I understand that.

[Steve Mihaylo:]

So it may affect our GAAP income, but our EBITDA and our non-GAAP income will still be there.

[Michael Kaufman:]

All right. Well, I know you guys can make it happen. So I'm rooting for you.

[Steve Mihaylo:]

Thank you.

[Doug Gaylor:]

Thanks, Mike.

[Operator:]

Okay. Your next question is coming from Ken Kamen from Mercadien. Ken, your line is live.

[Kenneth Kamen:]

Great news, guys. Congratulations. I'll just echo what was just said, that these conference calls through the years have been very realistic assessments of your view of the future. And they've been very pressing, so I appreciate them. The question I had is around the product, you had said that, why wouldn't someone want to stay - migrate for more features? So I'm curious, what would some of these features be for someone as a layman as I am as it relates to the telephone industry? And a 2-part question. One is, are you filling holes that your customers were asking you for or prospects were asking you for and you couldn't fill, because you didn't have them? And are the things that you bring to NetSapiens that they didn't have that you'd be able to fill there to make the offering, obviously, more robust? But I'm trying to understand, what are those handful of things that you would think of a high-level exciting, we didn't have this, but now we do?

[Steve Mihaylo:]

Yeah, let me - I'm going to turn this over to Doug to comment on it. But they bring a very robust product, which includes a Zoom-like product. It's as good - almost as good and it will be as good as Zoom as time goes by. That's one thing. The other thing is, in this room there must be over 200 years of experience in running a telecom company. Doug and I, for instance, have been together for 32 years. We know what we're doing. And I'm going to turn it over to Doug to elaborate on all of that.

[Doug Gaylor:]

Yeah. Great question, Ken. And, obviously, when you look at technologies today and we've highlighted this in the past, is that we make all of our technology with the exception of a few applications, one of them being our collaboration tool. Our collaboration tool is what we use to share screens and do video conferencing and do some of the applications that we need in today's environment. And that white-label offering that we have is a good offering. When we look at the NetSapiens SNAP.HD, it's a tremendous offering. And so, that's definitely an upgrade that we will add into the portfolio. I mentioned the 240-plus integrations that they've got with their API library that they've got. And that's a tremendous opportunity for us. When we look at meeting integrations with things like Microsoft Teams and other applications out there, those applications are robust and already ready to go. So for the right opportunities, we're going to be able to pick and choose what's the best fit and where that positioning is. So, it really gives us the best of both worlds to be able to go out there, analyze the customer's needs and make the right presentation for them.

[Kenneth Kamen:]

Great, thank you much. Keep up the good work. My retirement is counting on it.

[Steve Mihaylo:]

Thank you. I hope your kids are already licking their chops about their advanced degrees that they're going to get.

[Kenneth Kamen:]

All right, guys. Congratulations.

[Steve Mihaylo:]

Thank you.

[Doug Gaylor:]

Appreciate it.

[Operator:]

We have no remaining questions in queue.

[Steve Mihaylo:]

All right. Well, I want to thank everyone for joining us on this conference call. We've got a lot of good things we'll be able to report when we report first quarter. And by then, hopefully, we'll have the NetSapiens thing completely finished. And we look forward to being with you next time around. Good afternoon, everyone.

[Doug Gaylor:]

Okay. Thanks, everybody.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.