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

Good day and welcome to the Crexendo Fourth 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.

Thank you, Vicky [ph]. Good afternoon everyone. I'm Steve Mihaylo, CEO and Chairman of Crexendo. I want to welcome all of you to the Crexendo 2015 yearend conference call. With me here today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; and Jeff Korn, our Chief Legal Officer. I'm going to ask Jeff to read our Safe Harbor Statement. After that I will give some brief general overview comments to the quarter. Ron will provide some granularity on the numbers. Doug will provide a business and sales update. And then we will open the call up to questions. Jeff, would you please 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 press conference call other than statements of historical fact are forward-looking statements. Forward-looking statements include but are not limited to words as like, believe, expect, anticipate, estimate, will, and other similar statements of expectation identifying forward-looking statements. Investors should be aware that any forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the Company's filings with the Securities and Exchange Commission, including the Form 10-K for the fiscal year ended December 31, 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. I'm very pleased with the results both for the year and for the fourth quarter. We experienced a 39% increase in revenue from hosted telecom services for the year ended December 31, 2015, which is a very solid increase and it's in line with our expectations and growth plans. I am particularly pleased with the 42% increase in our hosted telecom services backlog in 2015. As I've said before, I believe that in this stage of our growth, backlog is the best way to gauge our future growth. The substantial year-over-year increase is a very good trend. I expect us to continue to grow revenue and backlog quarter over quarter and year over year. In addition to the year-over-year increase, we introduced both sales and backlog Q4 -- we increased, rather, both sales and backlog Q4 2015 over Q3. I believe the results show that we are on the right track. We continue to have success with large-sized customers. Our team is particularly adept at finding solutions for enterprise customers. I believe this is differentiated for us and lets us compete with anyone in the industry. We have a very strong integrated sales process for sales and engineering, our partners in providing specific solutions when needed. This gives us a competitive advantage with customers who need advanced and customized solutions. We continue to work hard on our cost structure and we continue to do an excellent job on reducing costs. Our 11% reduction in consolidated operating expenses for the year ended December 31, 2015 shows we remain on the right track. This decrease in 2015 is after [ph] reducing costs in 2014. I'm also encouraged that we have substantially improved our tracking of expenses. Our expenses in 2015 were fully in line with our expectations and our plans. Even with our success, we continue to watch every expense. The increase in sales, together with the continued reduction in costs, is a trend that should allow us to reach cash flow breakeven and profitability in the near future. Sales from our partner channel continue to have a very positive impact on our business. Last week we concluded our very successful business partners conference in Scottsdale. Our sales and management team used the working conference as an opportunity for our partners to get in-depth training on the Crexendo suite of services. We got to show how our solutions can save end-users and customers substantial amounts of money while increasing their productivity with our industry-leading products and services. However, we are not content with our results and we continue to work on adding additional highly qualified partners and inside sales personnel to ensure our success. We are always working on our award-winning products and our world-class services. Our customers are very pleased with our services and we continue to have an extremely high retention rate. We are always working to grow the business. I believe we're on the right track for that. We will also continue to review potential accretive acquisitions which could be beneficial to our business. I believe that we're in the right space, that we have the right products, services and people to allow us to reach our goals. With that, I will turn the call over to Ron. Ron, would you please give us an update with more granularity on the numbers?

Thanks, Steve. I sure will. Consolidated revenue for the fourth quarter increased 7% to $2.1 million, compared to $2 million for the fourth quarter the prior year. Our Hosted Telecommunications segment contributed $1.7 million for the fourth quarter, up 27%, compared to $1.3 million contributed in the fourth quarter of the prior year. Our Web Services segment contributed $407,000 for the fourth quarter, down 37%, from $645,000 contributed in the fourth quarter the prior year. Consolidated operating expenses for the fourth quarter decreased 10% to $3.4 million, compared to $3.8 million for the fourth quarter of the prior year. On a GAAP basis, the Company reported a net loss of $1.3 million or a loss of $0.10 per diluted common share for the fourth quarter, compared to a net loss of $1.7 million or a loss of $0.15 per diluted common share for the fourth quarter of the prior year. Non-GAAP net loss was $600,000 for the quarter or $0.05 loss per diluted common share, compared to a non-GAAP net loss of $1.2 million or $0.10 loss per diluted common share for the same period of the prior year. EBITDA for the fourth quarter was a net loss of $1.3 million, compared to a net loss of $1.7 million for the same period of the prior year. Adjusted EBITDA for the fourth quarter was a net loss of $700,000, compared to a net loss of $1.2 million for the same period of the prior year. For the full year, consolidated revenue for the year of $7.8 million, compared to $7.6 million reported in the prior year, an increase of 30%. We continue to see tremendous growth in our telecommunications segment. Our Hosted Telecommunications segment contributed $6 million to the full year, an increase of 39%, as Steve mentioned, compared to $4.3 million reported in the prior year. Our Web Services segment contributed $1.8 million for the full year, a decrease of 44% or $3.3 million contributed in the prior year. As expected, our EPTA cash collections decreased by approximately $476,000 as we near the end of contractual payment terms on these agreements. Our web management services decreased approximately $543,000 due to a shift in customer base to enterprise-sized customers. And our web hosting revenue declined approximately $444,000 from customer churns. Our telecommunications segment backlog, which is anticipated to be recognized within the next 36 to 60 months, increased 42% to $13.9 million at December 31, 2015, compared to $9.8 million at the end of the prior year. Consolidated operating expenses for the full year decreased 11% to $12.7 million, compared to $14.2 million reported in the prior year. On a GAAP basis, the Company reported a $4.5 million net loss for the full year, or $0.35 loss per diluted common share, compared to a net loss of $6.4 million or $0.57 loss per diluted common share in the prior year. Non-GAAP net loss was $2.7 million for the full year, or $0.23 loss per diluted common share, compared to a non-GAAP net loss of $4.8 million or $0.43 loss per diluted common share for the prior year. EBITDA for the full year was a loss of $4.6 million, compared to a loss of $5.9 million for the prior year. Adjusted EBITDA for the full year was a loss of $2.9 million, compared to a net -- a loss of $4.6 million for the prior year. Total cash and cash equivalents at yearend was $1.5 million, compared to $2.9 million at the end of the prior year. The decrease is a result of cash used for operations for the full year of $3 million, compared to $4.5 million for the prior year. We used cash for investing activities for the full year of $4,000, compared to cash provided by investing activities of $2.1 million in the prior year. And financing activities provided $1.6 million for the full year, compared to $2.1 million provided in the prior year. With that, I'll turn it over to Doug Gaylor, our President and COO, for additional comments.

Thanks, Ron. We had a strong fourth quarter and continue to see the trends moving in the right direction for both our sales and revenue numbers. The 11% increases we recognized quarter over quarter in both telecom revenue as well as in our telecom backlog, combined with a very strong sales bookings quarter in Q4, have accelerated our progress towards profitability. Our partner channel continues to grow and had their largest sales contribution to date during Q4. And we continue to have success with our direct sales focused on larger national and multi-location accounts. The increases on our sales and revenue numbers have been complemented with reductions in our expenses, which helped reduce our non-GAAP losses by over 16% quarter over quarter. Our telecom revenues and telecom backlog had nice increases for the third consecutive quarter, buoyed by strong sales from both our partner channel and our direct channel. Our partner channel had a strong quarter by landing some very sizable opportunities, including a 1,200-phone plus opportunity, as well as a 400-phone, a 250-phone, and multiple 100-phone opportunities during the fourth quarter. The amount of larger opportunities in our partner community as engaging in with Crexendo highlights what we have been positioning for quite some time, and that is that our product is the perfect fit for the midsized and small enterprise level clients. Our operations and implementations processes on these larger accounts is very structured and geared towards larger installations. These cut-overs go extremely smooth for us and our partners now have full confidence that they can introduce Crexendo's cloud communications with their larger accounts, where before they only felt comfortable in the smaller-size ranges. We highlighted many of these successes and case studies at our recently completed business partner conference called CrexWorx that Steve alluded to earlier. Our CrexWorx 2016 conference was well-attended and highlighted our most recently released product offerings, including our new telephone instruments, our newest version of Crexendo Mobile Application, new ACD, Automatic Call Distribution, enhancements, and many others. Our partners were very excited about all of our new releases and the feedback and enthusiasm from them continue to raise the bar to new heights was clearly evident. We also announced at CrexWorx our availability to BYOD, which stands for bring-your-own-device capability, for existing Polycom and Yealink phone users. Polycom and Yealink are the number one and number two providers of SIP telephones in the United States. And the capability for us to allow those end-users or those SIP phones to migrate to -- migrate off their current solution to Crexendo will lead us to hopefully a lot of existing customers from our competitors moving over to the Crexendo platform. We often get asked by many of our competitors' customers that are not satisfied with their current solutions if they can lessen their transition expense by bringing their existing tone sets with them, and now we can provide that solution to them. This was one of the most welcomed announcements from our partners at the CrexWorx conference. We continue to manage our expenses and were successful during Q4 in renegotiating with some of our largest carriers for additional discounts on their services due to the increased amount of traffic that our network is now supporting. These additional discounts will be recognized going forward in the year ahead and will help contribute to greater margins on our sales. We also received the first shipments of our newest telephone sets that are now released for production and should see positive effects on our gross margins from these new phones as they are more robust for our customers and have better margins for Crexendo. I'm encouraged with the quarter-over-quarter and year-over-year revenue increases and backlog increases that we have seen as we start the new year. And I'm confident that the trend will continue. Crexendo has positioned itself well to take advantage of the rapid migration of businesses to the cloud as evidenced by our annual growth in both our direct and partner channels. As we continue to increase revenues and decrease our costs, we are positioned well to execute on our plans for growth and profitability. I'm confident we are on the right track and I'm excited to continue to execute on our growth plans in the future. I will now turn it back to Steve Mihaylo for any further additional comments.

Thank you, Doug, and thank you, Ron. Vicky [ph], if you could open it up to questioning. We'll take questions. Thank you.

And we have no one signaling for a question at this time.

Okay. Well, I'm just going to make a few additional comments. I think it's important to note quarter-over-quarter growth. We pretty well worked through the legacy business and we're still seeing some attrition in the legacy hosting, and we probably will somewhere in the neighborhood of 10% or even 15% a year. That should become an immaterial part of our business in the next year or two. As I've mentioned many times before, backlog is going to be a very important metric, but you also need to look at our balance sheet. And I would point out to you that our current ratio is nearly two-to-one. And this year, providing there are no unforeseen circumstances, we should have nearly $2 in sales for every $1 of balance sheet. This is very important. And finally, we should see some kind of cash flow breakeven this year. We're not exactly sure when it will happen, but I think the probability is pretty high. With that, I'm going to remind you all to look at our 10-K and our press release for further clarification on any of these events. And I will wish you all a good day and a good evening. And see you next quarter. Thank you very much.

That does conclude today's conference. We thank you for your participation.