Steven Mihaylo - Chairman and CEO Doug Gaylor - President and COO Ron Vincent - CFO Jeffrey Korn - Chief Legal Officer

William Meyers - Miller Asset Management

Good day and welcome to the Crexendo Second Quarter 2015 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chief Executive Officer, Steve Mihaylo. Please go ahead, sir.

Thank you, Beth. Good afternoon, everyone. I am Steve Mihaylo, CEO and Chairman of Crexendo. I want to welcome all of you to the Crexendo 2015 second quarter conference call. With me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; and Jeff Korn, our Chief Legal Officer. I am going to ask Jeff to read our Safe Harbor statement, after that I will give some brief general overview comments relative to the quarter. Ron will provide some granularity to the numbers. Doug will provide a business and sales update. Jeff, would you go ahead and read 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, and the Form 10-Q for the period ending March 30, 2015 and June 30, 2015. 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?

Thank you, Jeff. This quarter has been a good quarter. Let me point out some of the highlights. We have an expansion between the first quarter and the second quarter a 4 percentage points in our gross profit margin. We also had a significant decrease in the first quarter and again although not quite as big a decrease and the expenses in the second quarter. What I believe is the most important metric to engage a cloud telephone company as our backlog and again this is grown and continues to grow quarter-over-quarter. This goes very well for our future growth and revenue from telephony services also grew quarter-over-quarter and I fully expect this trend to continue. As you know our business last year included quite a bit of legacy sales which were really just the collection of receivables on extended term contracts. This year they are essentially gone. So sequentially from quarter-to-quarter you are going to see what this company has capable of. Our partner channels are knowing very well. Sales from dealers continue to meet our expectations. We continue to work a highly qualified dealer and partners and I have high expectations from this channel. We are also adding to our inside sales for as I'm impressed with what I have seen in our recent hires. I'm also impressed as I walk our hallways. I constantly hear sales activity and excitement which I know will lead to increase sales. In addition, as I mentioned before our partnered channels should have more bookings in the third quarter than our dealer channel because the three large deals that our sales people have may close, it could be or maybe for to finish this quarter. I have discussed this before, I think our secret sauces are people. Our integrated sales and engineering and all our support associates they work very closely together which enables us to build specific solutions for our enterprise clients. In fact I believe nobody in our industry has more large installations than Crexendo does and I'm including even the bigger companies in our industry. We have several dozen installations over a 100 desktops, at least a dozen over 500 desktop and half a dozen over a 1000 desktops. In fact we are currently installing an installation when completed will be over 3000 desktop. He adds that to our award-winning products, our world class service and I know we have an unbeatable combination. For our customers whose contracts have expired continue to renew at an extremely high rates. In fact, we have less than 1.5% attrition rate and that's on an annual basis. This is very good for our business, equally is important, qualifies better customers are getting the industries best product service and support. We are as always keeping a very close watch on expenses. Cutting any unnecessary cost, cash burn is a very important metric to our team. We watch that very carefully. We are willing to invest. But the investment has to make sense and the something that improves our products, services and lead us to profitability and greater sales. We are finishing test and roll out of our new end points. In other words telephone sets. We continue to have high expectation for their success. I'm very excited and confident about our future. We will continue to grow organically where being on the lookout for accretive acquisitions. With that I'll turn the call over to Ron and he will give us some granularity and then all from the subject questions. Ron?

Thank you, Steve. We reported consolidated revenue for the second quarter 5% increase quarter-over-quarter to $1.9 million compared to $1.8 million for the second quarter of the prior year. Our Hosted Telecommunication segment contributed $1.4 million for the second quarter, up 48% compared to $963,000 contributed in the second quarter of the prior year. Our Web Services segment contributed $469,000 for the second quarter, down 44% from 865 contributed in the second quarter of the prior year. Consolidated revenue for the six months ended June 30, decreased 4% to $3.8 million and compared to $3.9 million for the six months ended June 30, 2014. And that 43% or 800,000 increase in our Telecommunication services segment was offset by 49% over 900,000, that a decrease in our revenue from the web services segment for the same period. Consolidate operating expenses for the second quarter decreased 14% quarter-over-quarter to $3.2 million compared to $3.7 million for the second quarter of the prior year. Year-to-date consolidated operation expenses decreased 13% to $6.2 million compared to $7.1 million for the same period of the prior year. On a GAAP basis, the company reported a net loss of 1.1 million for the second quarter or a loss of $0.08 per diluted common share compared to a net loss of $1.5 million or a loss of $0.13 per diluted common share for the second quarter of the prior year. We reported a net loss of $2.2 million for the six months ended June 30, for the loss of $0.18 per diluted common share compared to a net loss of $3.1 million or loss to $0.28 per diluted common share for the same period in the prior year. Non-GAAP net loss was $734,000 for the second quarter or a loss of $0.06 loss per diluted common share compared to a non-GAAP net loss of $1.1 million or $0.10 loss per diluted common share for the second quarter of the prior year. Year-to-date the company reported a non-GAAP net loss of $2.2 million or $0.18 per diluted common share compared to a non-GAAP net loss of $3.1 million or loss of $0.28 per diluted common share for the same period in the prior year. EBITDA for the second quarter was a loss of $1 million compared to a loss of $1.4 million for the second quarter of the prior year. Adjusted EBITDA for the second quarter was a loss of $742,000 compared to $1.1 million for the second quarter of the prior year. EBITDA for the six months ended June 30, 2015 was a loss of $2.3 million compared to a loss of $2.8 million for the same period of the prior year. Adjusted EBITDA for six months ended June 30, 2015 was a loss of $1.6 million compared to a loss of $2.3 million in the same period of the prior year. Total cash and cash equivalents, including restricted cash at June 30 totaled $1.9 million compared to $3 million reported at December 30, 2014. We use cash for operations during the quarter from $977,000 compared to $934,000 for the same period of the prior year. Year-to-date we have user's cash and for operations at $1.7 million compared to $2.2 million used for the same period in the prior year. We used cash for investing activities for the quarter of 16,000 compared to cash used for investing activities of $200,000 for the same period in the prior year. Year-to-date we have used cash flow of operations of 20,000 compared to 1.8 million provided by investing activities for the same period of the prior year. 519 activities provided 690,000 for the quarter compared to 18,000 used for financing activities for the same period in the prior year. Primarily from the exercise of one associated with stock purchase from Steve Mihaylo, our CEO. Year-to-date financing activities have provided 629,000 compared to 5,000 provided for the same period in the prior year. With that I will turn it back over to Doug Gaylor, our President and COO, for additional comments on operations and sales.

Thanks Ron. Our Telecom revenues and our Telecom backlog had quarter-over-quarter growth of 7% and 3% respectively. Sales from our partnered channel were extremely strong and we are confident that our partner channel will continue to grow and expand. Our continued focus on cost control help increase our margin to the quarter and less in our cash burn as we closed our GAAP on reaching profitability. We continue to pursue and secure a larger-size transactions in major account and have had success in these areas to both our direct and partner channels. And we continue our testing on the new Crexendo designed end-points which we expect to release soon. In addition we are adding additional feature enhancements in the months ahead that will further strengthen our offering. On the sales front we are starting to see nice traction from our partnered channel as we have a significant increase quarter-over-quarter and partner bookings and expect that trend to continue. During Q2, we on boarded the most partners in the programs since we started the channel. We have two additional channel managers who have made an immediate contribution in terms of new partners and new sales during the quarter and we are very optimistic in regards to the growth of our partnered channel. Our client solutions still avoid and many of our partner’s product portfolios and our partners are excited and committed to growing their sales with Crexendo's platform. Through hands on support and very focused and supportive trending processes we've doubled the sales contribution from the channel in just nine short months. We last a new partner portal this year and have had great feedback from our partners on the relative tools that we provide for them within the portal to help them position themselves our solutions. We have additional enhancements plan for the remainder of the year that will further improve our support of our partners and insist them in selling more of our solutions. Our direct sales team continues to focus on larger multi-location accounts and we saw additional sales contribution in those areas from our direct team during the quarter. Our engineering ability to customize solutions for small, medium and enterprise level clients is a tremendous differentiator for Crexendo and has allowed us to win nice size accounts during the quarter. In addition our direct sales concentration on specific verticals, where we have had strong success continues to add new customers in these verticals, and establishes Crexendo as a recommended solution from many of these industries. Our new series of telephone endpoints released at the end of 2014 that have lowered our cost and improved our margins or providing our clients with advanced technology and capabilities. We anticipate releasing two new additional end-points in the months ahead to add to our portfolio telephones and additionally we will be rolling out video capabilities to our mobile application that will be a fast track even more reason to select Crexendo as their vendor of choice. Our constant focus on cost structure and expenses help decrease our operating expenses by over $260,000 for Q2 compared to Q1 and by $1.1 million for the first six months of this year compared to the first six months of 2014. We continue to review and consolidate expenses were possible and anticipate that we will continue to see additional cost saving throughout the remainder of the year in these efforts. Our on-boarding process for new Crexendo clients has been diligently or frustrated to make sure that every new customer’s experience of Crexendo was a positive one. We handhold our customer through their implementation in our extremely high customer satisfaction scores continues to confirm that we are doing a great job in this area. We have begun the transition of our CTO, CIO, previously held by Satish Bhagavatula over to our in house team of engineering and IT. The VP's in-charge of engineering and product development and sport were instrumental in the initial and ongoing architecture of our platform and are exciting about assuming additional responsibility and support to this transition. We anticipate having the support and consulting of our former CTO for at least the next 6 months as we make this transition. I'm encouraged with the quarter-over-quarter and year-over-year revenues increase and backlog increase that we've seen. We advertise for cloud communication services remains extremely high and we are only in the infancy stages of this math’s of migration to the cloud. Crexendo has positioned itself very well from a sales support and implementation perspective to take full advantage of the opportunity ahead in this industry. As we continue to increase our revenues and decrease our cost, we are positioned well to execute on our plans for growth and profitability. I'm confident we are on the right track and are excited to continue and execute our growth plans for the future. I'll now turn it over to Steve for any additional comments.

Thank you. Let me make just a couple of comments and then we'll open it up to questions. Our 5% revenue growth sequentially actually works after about 22% growth annually. This is about standard for our industry. However, I won't be satisfied unless we can get our growth rate up to at least a sequential increase of 10% which is close 44% or 45% and I think with accretive acquisitions and a little quicker growth rate in our channel partners. We should be able to get the rate up even more in the math. The other thing I'd like to point out is our cash burn has come down significantly. When you look at adjusted EBITDA that's just the cash that we're burning in the company. Things like stock options and other things are going GAAP accounting aren't accounted in EBITDA and in that area we brought our cash flow down from 1.1 to approximately 735,000 in the quarter and that's huge. So with that I'll open this up to questions and feel free to ask anything. - are you there?

Thank you. [Operator Instructions] And we do have some questions in the queue. This time we will go to William Meyers with Miller Asset Management.

Good afternoon, William.

Hi, Steve. Thank you for taking our questions. I would like to begin with if you could give me some idea how profitable these telecom contracts are once they are in place, once they are just sitting there you are not doing sales, you just got to do whatever cloud support you have to do. What percentage of the revenue coming in then might actually turned the profit?

Well, so let me answer that by telling you that our gross product profit is did increasing month-over-month quarter-over-quarter. This last quarter we expanded our gross merging from 44% to 48%. And the beautiful part of that is our infrastructure is now in place we still actually have some savings that we expect in our infrastructure. And our new VPs of Engineering progression these are the primary people that designed the platform that we're on have made a decision which are even increase our gross profits more. And that's by backing up everything we do to Amazon. And that's kind of bringing on our gross profit up even higher. So we have declining cost we have stable infrastructure cost and we have increasing sales. And the other thing I might point out is we do not discount we haven't have the discount at all. So all of our sales are at the same profit margin and we made some adjustments in our costs are selling price. That actually slightly increases the price of our product and it increases the yield. So if you put all of those things together, we should see sequentially month-after-month quarter-after-quarter improvements in our cash burn and in our potential and eventual profitability.

Okay. Then you don't think I spotted was it look like your R&D budget was pretty low in this last quarter and I'm wondering if that's a new run over rate or if that's just a little for the quarter.

That's a good catch and I'll tell you what's important about we have about 6 or 7 full time engineers on our staff here at Crexendo and that's about 15% of our employment. However, we're leveraging all of R&D with employees they're not employees they're sub-contractors in India and China and we have the equivalent of an additional 20 engineers that we're paying fraction so they don't so. So a lot of work our VPs there is a managed projects with the Indian and Chinese engineers. So we've been able to bring our cost grown in R&D while our increasing our capability and that's always a good thing and although where it's we're gaining huge increases in productivity.

Okay. And then can you give us a total number of users again into the quarter you've releasing that kind of information at this point.

We don't release it but I will tell you this is it's increased every single quarter. And we're now up to we're approaching 20,000 desktops which is almost twice what our web hosting - and the twice the number of customers I should say we're already we've equipped web hosting about 3 to 1 margin. And that's in our financial statements if you want to go through and look at it.

Okay great. And the last and the usual question. How does that look as far as getting to cash flow breakeven? Are you going to be able to do that without having to raise cash?

Look I'm going to support this company as long as it takes and I don't care if that's 10 years from at that's what we're telling to do that but I think probably our cash breakeven certainly next year. I don't know exactly when I think it will be sooner in the year than later but I would make the ability to say that the in the sometime next year.

Okay. Well congratulations on the quarter and all of the good sales and see you next quarter I guess.

Thank you William.

We have another question in queue this will from Craig Samuels [ph] with Samuels Capital Management.

Good afternoon Steve. Can you talk a little bit about your M&A pipeline expectations?

M&As are a very tricky thing. We look at a lot of candidates and frankly most of them have so much so many issues that it's presents the problem for us and the rest of them have got prices that are way beyond that the market is dictating for these things. But that something now we will do in the future. I have no one is predicting when and they're on acquisition but I can tell you that it's something I spend the lot of my personal time. So it's something that will become part of the regimen at this company.

As far as deals you've talked about I think you said three large deals. Can you comment on size or--.

I'm going to want jump on the Gmail what they are but they're all I think at least two of them are over 1000 stations is that correct Doug.

Yeah we're - working on larger accounts this is been our focus for quite some time now Craig and so when you look at some of the bigger opportunities we've got out there is some major accounts that are well into 1000 ton range or we have the global equipment’s that hopefully we will get some opportunities to that up period and where in the future.

And 1000 plus phones was there is like in terms of revenue for annualized for backlog

At 1000 phone opportunity we run around $20,000 per month typically for monthly recurring and then have obviously fairly significant upcharge or upfront cost for the equipment.

Got it. As far as sales force and productivity, how many dealers are presumably working with you and can you quantify in some type of dollar metric their performance over the past 12 months are you seeing improvements in the ones that are actually producing?

Yeah absolutely yeah we've got approximately 120 dealers in our state now and so when we look at where we are today in our growth pattern so our dealer settles have increased tremendously and we have 43% increase quarter-over-quarter. And as I mentioned in my comments a little bit about we build of our dealer sales productivity in the last 9 months. So when we look at the attraction that we're making with our dealers and as we've mentioned on previous calls. When you bring new dealers on new - to on board then we've trained them we've got to their mind there on the product. And so that takes time especially they've been selling other competitive products or other legacy based products. So it takes time and it takes a lot of hard work to get them to see if that why if that everything is moving to the cloud. Once you see that migration start you start seeing a lot more traction at the dealers so I would love to say that every one of our dealers is out there producing sales on a quarterly basis, but we're working on giving more traction from more of our dealers and that's a daily focus for all of us on the - side.

One way to gauge increases. We I think we increased our channel inventories by as much as 40% in the last couple of quarters. Just like.

Right as I mentioned we added that two new additional channel managers that came onboard the previous gentlemen been experienced and of brought on quite a few dealers just in the last quarter from their prior arrangements. And so that's making some significant headway because those partners still bringing on already have pipelines with cloud opportunities and we've actually been able to convert them almost immediately when we look at the typical ramp up time for a new dealer a new dealer with no pipelines takes a lot longer than a dealer with pipeline. And so the vast set of the new gentlemen that we brought on as they were able to secure some cloud partners and already had cloud opportunities in the pipeline encloses opportunities within the first 30 days with being partners which is really - when you think about the partner channel for us as it getting a partner on boarded. We've got partners on in the last quarter quite a few partners on in the last quarter it is sold opportunities within the first 30 days.

And in fact the other thing that we're doing that's significant. I know Doug touched on this. So we're giving the partners with tools they need. We're currently in the final stages of testing a design center which will deploy in multiple cities so that parties can bring their prospects in their design center and work with somebody on our staff here in Phoenix regardless of what sit at there and like would be New York of Los Angeles or Chicago. So they'll have the ability to demo our products, design their system and close it right on the spot. And we think this will be of our partners in additional took to work with. We also have our portal and other things that we done which makes it easier and easier. And as Doug said basically that they have a 100 phones we have monthly those is going to be about 2000 in a month recurring revenue with they have a 1000 or mid-20,000 and so on. They just multiple the number of phones by monthly amount per desktop and that's very simple to do and we have four different endpoints where we - excuse me. And we're developing more. One of things that Doug forgot to mention about out mobile application. He said we're adding video, but we're also texting and we expect this to be done by the end of the year. Currently voice is just about completed and the video and texting will be in the next release and we expect that either October, November and December. So there is a lot going on behind the curtain and behind the numbers which allow us to accelerate our growth.

Got it. And then last question what about in-house sales have you started hiring more - or are you just sticking with the dealers for now.

No we've hired two insides sales people one of which is already providing sales. They're smaller but it's a way for them to be trained. And we're going to explain that extra here in the next couple of months.

Good to hear. Thank you.

You're welcome.

[Operator Instructions].

Well, it looks like there no more questions Matt. I want to thank everyone for being here and I look forward to talking to you next quarter. Next quarter should be even more Doug tends to talk about and we're been work very hard and after this point. So thank everyone and good afternoon and good evening.

And again this does conclude today's conference call. Thank you all for your participation.