Steve Mihaylo - CEO Doug Gaylor - COO Ron Vincent - CFO Satish Bhagavatula - CTO/CIO Jeff Korn - Chief Legal Officer

Chip Saye - AWH Capital

Good day and welcome to the Crexendo Fourth Quarter 2014 Earnings Call. Today’s call is being recorded. I would now like to turn the conference over to Chief Executive Officer, Mr. Steve Mihaylo. Please go ahead, sir.

Thank you, Justin. Good afternoon, everyone. I am Steve Mihaylo, CEO and Chairman of Crexendo. I want to welcome you to the Crexendo 2014 fourth quarter conference call. With me today are Doug Gaylor, our President and COO; Ron Vincent, our Chief Financial Officer; Satish Bhagavatula, our CTO and CIO and Jeff Korn, our Chief Legal Officer. I am going to ask Jeff to read the Safe Harbor statement after that I will give some brief overview on the quarter. Ron will provide granularity to the numbers, Doug will provide a business and sales update, Satish will give an update on technology, and then we will open the call up to your questions. Jeff, would you please provide the Safe Harbor statement?

Thank you, Steve. I want to take this opportunity to remind listeners that this call will contain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. All statements made in this conference call other than statements of historical fact are forward-looking statements. Forward-looking statements include, but are not limited to words like, belief, 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, 2014 when filed and the form 10-K for the period ending December 31, 2013 and the 10-Q as filed March 31st, June 30th and September 30, 2014. 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. And now like to turn the call back to Steve. Steve?

Thank you, Jeff. I’m going to give some real brief comments and I’ll let Ron give the granularity here, but the fourth quarter of last year was final quarter where we were collecting and recording sales on the collection of our long-term extended agreements on the stores online business. We still have a little bit of that but it’s going to be so small that it will probably amount to less than a 100,000 per quarter for the next couple of quarters and then it will go to zero. As you can see we have sales of approximately $2 million, that was a decrease of 7% -- I read the wrong line here -- the revenue actually increased in our Telecom division by 68% to 1.3 million compared to 798,000 for the fourth quarter of 2013, consolidated revenue was 2 million compared to 2.1 million for the fourth quarter of 2013 and Ron will be pointing out that this included quite a bit of the collections from the long-term extended payments on stores online. Crexendo web services revenue for the fourth quarter of 2014 decreased 52% to 645,000 compared to the 1.3 million for the fourth quarter of 2013. That’s getting very close to our lowest level you’ll see except for any attrition we might have in our web hosting business. Consolidating and consolidated operating expenses for the quarter -- in the fourth quarter of 2014 decreased 7% to $3.8 million compared to 4.1 million for the fourth quarter of 2013. I might add that we had quite a bit of non-cash items in here a law suit that was settle on the legacy business and also some non-cash for the stock options. We also had quite a bit of expense associated with the final reduction and ForEx associated with our stores online business. Altogether it was close to $400,000 or $500,000 which will not be in the first quarter of this year. With that I am going to turn it over to Ron Vincent, our Chief Financial Officer and then I’ll give some additional comments.

Thank you, Steve. As Steve mentioned, we had consolidated revenue for the fourth quarter of 2 million compared to 2.1 million for the fourth quarter of the prior year, our hold to telecommunication segment contributed 1.3 million for the fourth quarter up 68% compared to 798,000 contributed in the fourth quarter of the prior year. Our Web Services segment contributed 645,000 for the quarter, down 52% from 1.3 million contributed in the fourth quarter of the prior year. Our consolidated operating expenses for the fourth quarter did decreased 7% to 3.8 million compared to 4.1 million in the fourth quarter of the prior year. On a GAAP basis, the Company reported a net loss of 1.7 million or $0.15 loss per diluted common share for the fourth quarter compared to a net loss of 1.8 million or $0.17 loss per diluted common share for the fourth quarter of the prior year. Non-GAAP net loss was 1.2 million for the fourth quarter or a loss of $0.10 per diluted common share compared to non-GAAP net loss of 1.6 million or $0.15 loss per common share for the fourth quarter of the prior year. EBITDA for the fourth quarter was 1.7 million compared to 1.7 million for the fourth quarter of the prior year. Adjusted EBITDA for the fourth quarter was 1.2 million compared to 1.5 million for the fourth quarter of the prior year. Some highlights for the full year, we had consolidated revenue for the year of 7.6 million compared to 10.3 million reported in the prior year a decreased to 26%. We continue to see tremendous growth in our hosted telecommunications segment which contributed 4.3 million for the year an increase of 81% compared to 2.4 million reported in the prior year. Our Web Services segment contributed 3.3 million for the year a decrease of 59% from 8 million attributed in the prior year. The decline in Web Services segment resulted from our strategic decision in 2013 to limit the provisioning in our Web services to our enterprise size customers, coupled with declining cash collections on our extended payment term arrangements, EPTAs of approximately 2.5 million from our outstanding EPTAs from the prior year. At year end the remaining EPTA receivable net of allowance is approximately 186,000 so we’ve pretty much extinguished that reserve. Hosted telecommunications services backlog which is anticipated to be recognized over the next 36 to 60 months has increased to 9.8 million at year end compared to 7 million at the end of the prior year. Consolidated operating expenses for the year ended December 31st decreased 12% to 14.2 million compared to 16.1 million reported for the prior year. On a GAAP basis the company reported a 6.4 million net loss for the year or a loss of $0.57 per diluted common share compared to a net loss of 5 million or a loss of $0.46 per diluted common share for the prior year. Non-GAAP net loss was 4.8 million for the year or $0.43 loss per diluted common share compared to a non-GAAP loss of 4 million or $0.38 loss per diluted common share for the prior year. EBITDA for the year was 5.9 million compared to 4.6 million for the year ended December 31, 2013 adjusted EBITDA for the year was 4.6 million compared to 3.8 million in the prior year. Our total cash and cash equivalents including restricted cash at the end of 2014 was 3 million compared to 3.6 million at the end of the prior year. Cash used for operations for the year was 4.3 million compared to 5.4 million for the prior year. Cash provided by investment activities for the year was 2.2 million compared to cash provided by investment activities of 860,000 for the prior year. Cash provided by financing activities for the year was 2 million compared to cash provided of 158,000 for the prior year. The 2 million related to financing activities resulted from the sale of 2 million worth of common stock to our CEO, Steve Mihaylo. And the investment activities resulted from the sale leaseback of our corporate facility to a business owned by Steve Mihaylo. And with that I’ll turn this over to Doug Gaylor, our President and COO for comments.

Thanks Ron. During Q4 we delivered strong sales bookings from both direct sales channel as well as our partner channel and that help to increase our telecom revenues by 30% from Q3 to Q4 while increasing our telecom backlog by 11% over Q3. We also introduced the new series of Crexendo endpoint telephone sets with very positive reviews and we continue to cut expenses and consolidate services all while installing a record number of new accounts. On the direct sales front we had our strongest quarter of the year with a significant increase in sales bookings over Q3. We had tremendous success in multi-location sales as well as ongoing success in specific vertical markets that continue to be a very good fit for the Crexendo solution. Our focus on larger opportunities and multi-location accounts allowed us to increase the average size sales for the quarter by nearly 50% over Q2 and Q3 average transaction size. We were able to secure multiple larger opportunity sales due to our ability to custom create software applications and functions that our engineering team developed to meet specific customer needs and system requirements. The nimbleness that Crexendo continues to demonstrate in designing solutions for our end users is a unique differentiator for us and the hosted cloud telecom industry. Our dealer partner channel continues to grow and expand adding 21 new dealer partners in Q4 and having our best sales quarter ever with a significant increase in partner bookings over the previous high water mark that was achieved in Q3. This is our fourth consecutive quarter with increased partner bookings. Also during the quarter our partner channel sold a renewal one of our largest accounts highlighting the long-term stickiness that we have with our current client base. The partner channel also sold multiple larger multi-location accounts, as the partners are more and more comfortable selling Crexendo’s cloud solution to larger customers, where previously they would have led with traditional legacy solutions. Our focus on providing the tools, training, marketing materials and sales support for our partners has been received this great appreciation from the partner channel and that helped us achieve record attendance at our second annual business partner conference that was held in mid-January here in Phoenix that had nearly three times as many attendees as we had at our inaugural conference last year. We’re also extremely excited to introduce three new Crexendo telephone end points to our product portfolio during the quarter. The new endpoints all have interactive color displays and support up to 1 Gig throughput speeds, our development of these new endpoints as well as additional new models currently being designed will allow us to have a suite of some of the most feature rich affordable telephone instruments in the industry. Since we are designing and developing our new series of telephones internally, we will be able to increase our margins on the sale of the endpoints and those higher margins should start having a positive effect on our bottom-line in the latter part of 2015. As Steve and Ron had previously mentioned, we continue to cut our expenses and consolidate services as we grow. Our migration of all of our One Stop Voice customers over the Crexendo platform was completed on time and with great customer satisfaction. This migration will allow us to eliminate all redundant cost that was required to support the dual platforms. These cost savings will be realized going forward. With the successful migration completed, I can say that we are very pleased with the final outcome of the asset purchase of One Stop Voice and the integration into the Crexendo platform. We continue to work on reducing any unnecessary expenses and reducing our cost in all areas of the business. Our operations group installed a record number of new accounts during Q4 and our detail process of on boarding a new customer results an extremely high customer satisfaction scores post installation. We have built a very scalable model to help customer implementations and this allows us to easily support the larger and more complex installations that we are selling more and more of. Our operations teams working with the support of our engineering team provide design and functionality on our cloud platform that few others can match. All of these efforts resulted in having our strongest quarter for telecom revenue and backlog finishing the year with nearly 10 million in contracted backlog. As we begin 2015, I am very excited about the direction of the organization that we are headed in. The feedback that we received from our partner conference was that, we are the right partner, with the right solutions, at the right time as they embrace the cloud as part of their offerings. As we continue to build on our partner channel and continue the success of our direct sales team and our focus on larger multi-location accounts we are putting together a winning formula. All of the current indicators are positive for continued growth within the organization and I am committed to delivering and executing on our plans to get us the profitability. I’ll now turn over to Satish Bhagavatula for engineering and technology update.

Thank you, Doug. Greetings, everyone. I am glad to report that we’ve made significant improvements to our telecom services, products and technology during Q4 to meet the demands of larger, multi-location enterprise opportunities. We continue to see such opportunities in both the direct and partner channel. As Steve and Doug mentioned, before it was streamlined our product development priorities, development cost and resources to align with the growth we see in telecom, while temporarily suspending the initiative to build a new web platform. We continue to support our existing web hosting customer base on stores platform. I am hopeful this realignment of engineering resources on telecom product development will yield greater agility in meeting the demands of our ever growing new customer base while helping us maintain granular opportunities. As the telecom customers continue to increase, we have seen a remarkable growth in the traffic and stress on our infrastructure. Successful migration of endpoints, service and carriers from One Stop Voice acquisition to Crexendo native infrastructure demonstrates that our infrastructure is scalable and that it can withstand the continued growth of the Crexendo base. In notable accomplishment that I would like to report is the great overall performance and uptime of our cloud infrastructure that has been achieved over the last two years. Q4 marks the two-year analyst for technical operations out of our Arizona data center and we are very pleased with the results we have seen and hope to continue the great trend going forward. The current deployment architecture and service cost model serves as a template for us in realizing our [geo-ridden] and cloud architecture strategy over the next three years. This continuous analysis, monitoring and evaluation process enables us to be the best in the class cloud service provider. On our product development front we continue to roll out new updates every four weeks with an exception to the standard deployment freeze we observed during the Q4 holidays. This relieve management process offers added stability and establishes a mature software development lifecycle which is an essential and most vital component for all cloud service providers especially in telecommunications. During Q4 of 2014 much of the emphasis on the telecom development was spent on enhancing our Crexendo platform to address general requirements of potential enterprise and larger call center prospects. Our ability to offer live trials to a prospect with white-glove service during the trial and the agility in developing features quickly to meet the needs of these prospects have always proved to be very fruitful. During Q4 we were able to displace both the cloud center solution and an on-premise phone system at the same time with Crexendo’s single unified cloud solution. Our launch of Crexendo consoles and Attendant Console solutions in Q3 prove to be instrumental in winning some notable larger opportunities in Q4. As Doug previously mentioned a considerable effort was made in development, test and launch of our new cost reduced all color gigabit POE endpoint CX240 and CX340. We have started rolling out these phones and are seeing great acceptance. Our teams also spend considerable time incubating and launching our Crexendo Communicator. This application allows our customers to be able to remote control call delivery through a Web browser on a desktop, phone of phablet. With this feature an end user is able to answer, reject, deflect sent to voicemail and transfer calls to another user without having to touch their desktop endpoint. Such features are essential building blocks and are very important to be able to penetrate small and medium size enterprise opportunities. This feature also allows our customers to do screen pops at any standard Web CRM solution in the industry. We believe this functionality will be the foundation for Crexendo’s desktop and tablet presence while we leverage technology such as single sign on, Web sockets and HTML slides. We are confident that our value-add continues to increase as we continue to enhance and build our telecom product portfolio and the infrastructure that supports it. We continue to look into synergistic technology partnership opportunities to augment our internal product development and does meet the need to innovation rapidly and provide quicker time to market. We continue to adapt more cloud technologies to allow for greater automation of our business which in turn improves our margins and enables us to be better -- to better serve our customers. With that, now I will turn it back to Mr. Steve Mihaylo.

Thank you, Satish. As I indicated in the press release, this has been a quarter of transition for us. As discussed Crexendo is essentially a startup business with startup problems with the legacy business attached. I realized that things we expected haven’t happened as quickly as we would have liked, but that’s the nature of a startup business and I might add it’s also the nature of a startup business that has a legacy business with quite a few issues attached to it. However, I firmly believe in our business and I have continued to put my money where my mouth is it is not mere belief that makes me confident it is due to an industry with nearly unlimited potential it’s some folks think that worldwide this is an industry that could have as big as trillion dollar industry and in the United States it’s certainly on the hundreds of millions or billions. Here are some of the reasons why I believe in our business. We have worked for some time to right size the business I think we are there. I believe our legacy revenue has hit a point where they are essentially flat. We have been able to reduce staff associated with the legacy business while keeping sufficient staff to meet the needs of our legacy customers. The legacy customers have actually been the beneficiaries of improvements of our Web site builder. I believe the Web site builder will be a benefit to Crexendo in the future but as part of our cost cutting measures we have deferred the rollout of the builder until we are profitable in our core telecom business. In our telecom business, I am very pleased with the trend we have seen. We had a record quarter for sales in Q4 both from our direct sales and from our dealer partner sales. We are down the core producers in our direct sales staff we are now in the process of adding additional staff which I am hopeful will start to show results later this year. And I might add that the folks that we have in our direct sales staff provide us with a valuable proof of concept of everything that we’re doing because we’re selling much larger customers and also every one of them was productive this past quarter. So we just need a few more of those and we need some more support people and it should translate into sales later this year. Our dealer channel continues to grow with additional sales and additional dealers. As mentioned, we have seen customer renewals from our dealer partners which I finding an exciting trend because I believe it shows our sales will be sticky and reaffirms my believe that our solution that is second to none, I am encourage that we will continue to see quarter-over-quarter sales results. Our backlog is again at a record high then I am convinced is an excellent sign point to continued growth, I am very excited about the raw add of our new telephone endpoints. We have worked closely with our engineering team as well as our outside suppliers to supply the phone -- to produce the phones in record time. I am convinced that the new phone is superior phone at a higher margin then previous phones and at lower cost. The collaborative effort in which the phones were developed reduces the associated expense and increased efficiency. To give you an idea of how quickly we’re able to get these phones out using the approach that we’ve developed, we had first proof of concept out of the molds of the phone plastic parts and actually assembled phones within three or four months, it used to take us close to a year to develop the same thing at Inter-Tel and we should be selling those by the first part of May. So, as Doug indicated that’s going to bring our margins up even more in our cost down even more. I have discussed a cost reduction before that is the mantra with us; we continue to do a great job of reducing cost across the board. We have been scouring all of our cost that we continue to reduce inefficiencies and redundancies. We have looked at all licensing fees related to the business we have acquired. We have been able to reduce certain licensing fees; we are also looking at all professional season cutting those expenses where possible. In a complete review of our procurement process, we believe that we have reduced the cost associated with acquiring phone numbers and we are managing telephone taxes more efficiently. The cost reduction we have been incorporated allows us to more efficiently manage our business, decrease our cash burn and should allow us to profitability sooner. I continue to be very encouraged and confident in our future and I am satisfied with the ability of our services and products that we provide our customers and the quality and the enthusiasm of our very talented people. I know we are in the right space, I know we are having the best services and the best products. With that, I’ll turn the call back over to Justin who can turn it over to our listeners for questions.

(Operator Instructions) Our first question comes from Chip Saye with AWH Capital.

I have a question that, I see the host of revenues were up 68% in Q4 to 1.3 million, so good result there, just looking at last quarter’s report and trying to page together what the operating income was for host to Telco, I figure the operating profit was a negative 1.6 million which was really close to what the operating profit or operating loss was last year of roughly 1.6 million. And I was just -- I was little surprise by that so can you help us understand the changing margin?

Yes, there were two things, last year we have extended term payments that were recorded as revenue. This year we had less, but we still have a little debt. Additionally, once we collected most of the extended term payments and we’ve gotten our legacy business to the point where we could reduce staff, we reduce staff in the fourth quarter. The combination of that with our lawsuit that we settled, we had almost-- and also expenses by stock option expenses and other non-cash expenses. We had close 0.5 million of expenses in the fourth quarter that will not be in the first quarter and if you were to compare last quarter 2013, the fourth quarter to this quarter 2013, there would have been significant decrease in the loss. So, you're going to see that all coming in the first quarter of this year and as the quarter’s roll in second, third and fourth you’ll see that even decreased a little bit more, but at the same time our revenues will be increasing. I am pretty confident and I can tell you that I think we’re going to be very close to cash burn rate, breakeven by the end of this year. It might occur in the first quarter but it’s going to occur sometime in the fourth quarter or the first quarter and I know that’s a forward-looking statement and my Chief Legal Officer is rolling his eyes, but that’s just how confident I am. So you’re going to see some tremendous results this year and next year as well. Does that answer your question?

It does, I just wanted -- second part of that, there was no change in the revenue mix, was there?

Well, yes, there was because if you followed this company long enough you know that we had to record over $3 million in collections on our long term contracts from the legacy business’ revenue. So we had telecom revenue go up significantly, we made a decision couple of years ago to throttle back our services in the Web space as well as stop the seminar business completely. So that 3 million in legacy revenue will not be a part of the mix going forward and it was part of the mix this year. But next year you will be able to make a comparison with the first quarter of this year a pretty clean comparison because 90% of more of it will be telecom revenue. And most of that will be recurring.

(Operator Instructions) No further questions at this time sir.

We appreciate all of you that joined us on the call conference today. I am very excited about what we’re doing more so than ever before because we’re starting to see real traction in our telecom business. And I encourage all of you to be here for our first quarter 2015 conference call which will be probably the very end of April or in the first part of May. Thank you very much and good evening everyone.

Thank you. That does conclude today’s conference call. We do thank you for your participation today.