Steve Mihaylo – Chairman and Chief Executive Officer Jeff Korn – Chief Legal Officer Ron Vincent – Chief Financial Officer

Kevin Dede – Rodman & Renshaw

Good day, and welcome to the Crexendo Second Quarter 2016 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, Kevin. Good afternoon, everyone. I'm Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo second quarter 2016 conference call. Joining me today are Ron Vincent, our CFO; and Jeff Korn, our Chief Legal Officer. Doug Gaylor, our COO had a family issue, and I have asked Jeff to read Doug's prepared remarks. I'm also 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 on the numbers. Jeff will read Doug's prepared remarks, and then we will open the call up to questions. Jeff, would you please provide the Safe Harbor Statement?

Yes, sir. 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, and the Forms 10-Qs for 2016. Crexendo does not undertake any obligation to publicly update, revise or change 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. We continue to make good progress in real [ph] Crexendo year-over-year. Our second quarter 2016 hosted historic communications services revenue compared to second quarter 2015; grew 35%. That's very solid growth. I think it's equally important that with -- that substantial year-over-year increase, our costs in second quarter 2016 over a second quarter 2015 were flat. This trend of controlling costs while increasing revenue is very important for the future of the business. We continue to increase our backlog, which is also a good trend. I have discussed what I believe is our secret formula that our entire sales process [technical difficulty] with engineering. This means we are particularly in depth at providing solutions that our enterprise customers need and want. Enterprise customers with multi-location installations do have a different sales and revenue cycle than smaller customers. There is a longer process and negotiating determining solutions closing the sales and installing enterprise customers than other customers, in addition there is a longer leg time with sales to recognizing revenue. These delays could cause some variance in the results from quarter to quarter depending on the size and complexity of the installation. We are working to aggressively add smaller customers which have a similarly shorter sales and installation cycle, in that regard we are tirelessly working on a campaign to add qualified dealer partners, our dealer partner channel does an outstanding job of selling smaller deal, we are also adding inside sales associates whose job is to work the phones and have call up head leads for a direct sales team. We are working with an outside agency to improve our marketing and outreach. I expect these actions to start to show results by the fourth quarter of this year. I believe we are still positioned to reach cash flow break-even with GAAP profitability next year, we continue to invest in our engineering and services, we regularly get high marks from our customers, which has resulted in a low customer churn rate. Our phone gets great reviews and our commitment to service excellence is second to none. I talked to our customer regularly and make certain that our team is on the right track, the more people I talk to, the more I am convinced that Crexendo -- I am tongue tied today Crexendo right the cloud solution are in the right position to support customers who are moving there expensive legacy phone service to the cloud. We will continue to grow the business organically and I am always looking for accretive appropriate acquisitions, I remain very confident on our future. With that, I will turn the call over to Ron Vincent, Ron.

Thanks, Steve. Consolidated revenue for the second quarter increased 20% to 2.3 million compared to 1.9 million for the second quarter of the prior year, approximately 83% of that revenue was generated from our host to telecommunication segment, which contributed 1.9 million for the second quarter, that's up 35% as Steve mentioned from 1.4 million contributed in the second quarter of the prior year. Year-to-date consolidated revenue increased 19% to 4.4 million compared to 3.7 million for the same period of the prior year. The telecommunications segment contributed approximately 84% or 3.7 million to the consolidated revenue. While we are pleased with the 20% growth in revenue we are equally as pleased with the operating expenses for the second quarter, now which only increase approximately 20,000 or 2% when compared to the second quarter of the prior year, year-to-date consolidated operating expenses decreased 2% to 6.1 million compared to 6.2 million for the same period of prior year. On a GAAP basis, we reported 778,000 net loss for the second quarter or $0.06 loss for diluted common share compared to a net loss of 1.1 million or $0.08 per diluted common share for the second quarter of the prior year. Year-to-date we reported a net loss of 1.6 million [indiscernible] six months ended June 30 or a loss of $0.12 per share, compared to a net loss of 2.2 million or a loss of $0.18 per diluted common share for the same period of the prior year. Non-GAAP net loss was 523,000 the second quarter or $0.04 per diluted common share compared to a non-GAAP net loss of 734,000 or $0.06 loss per diluted common share for the second quarter of the prior year. Year-to-date the company reported non-GAAP net loss of 1.1 million or a loss of $0.08 per diluted common share compared to a net loss of 1.4 million or a loss of $0.11 per diluted common share for the same period of the prior year. EBIDTA for the second quarter was 740,000 loss compared to a loss of 1 million for the second quarter the prior year. Adjusted EBIDTA the second quarter was 524,000 compared to a loss of 744,000 for the second quarter of the prior year. EBIDTA for the six months ended June 30, was a net loss of 1.6 million compared to a net loss of 2.3 million for the same period of the prior year, adjusted EBIDTA for the six months, ended June 30 was a net loss of 1.1 million compared to a net loss of 1.6 million for the same period in the prior year. Total cash and cash equivalents excluding restricted cash at June 30, was 923,000 compared to 1.5 million at December 31, 2015. During the six months ended June 30, we used 710,000 for operating activities, compared to 1.7 million used for operating activities for the same period in the prior year, cash provided by investing activities for the six months was 11,000 compared to cash used for investing activities of 20,000 for the same period of the prior year, cash provided by financing activities for the six months ended June 30 was 125,000 compared to 629,000 for the same period of prior year. With that, I will turn it over to Jeff Korn for some prepared remarks from our President and COO.

Thanks, Ron. We continue to see growth in our telecom revenue, telecom backlog and overall revenue while we continue to decrease expenses and lower our costs, Q2 delivered 4% overall revenue increase quarter-over-quarter and 8% increase in telecom revenue quarter-over-quarter. Our backlog increased to 4% from Q1 and 35% from year-over-year is a good signal that we are building a strong foundation for the future. Our sales bookings were slightly higher than Q1 and are helping accelerate our progress for cash flow breakeven and GAAP profitability. We were able to negotiate some cost savings with our providers that will begin to show results in Q3 and as well we are implementing a cost recovery to offset administrative and taxing fees that should help also improve our margins beginning in Q3 or Q4. We continue to sell larger and multi-location and more complex solution opportunity and saw some nice contributions in those areas from our partner channel, direct sales team during the quarter. We have 14 new partners for the program in Q2 and are excited about the potential contributions from these partners based on their size and market concentration. As we've discussed previously, we are targeting larger and more established partners in our recruiting efforts. These quoting [ph] processes and on-boarding processes may take a little longer with the type of partnership of our size, the end result will be much greater as these large partners will bring as many more opportunities and we have already seen sales production from some of these new partners in the first 60 days. Our news telephone sets that were introduced in Q1 has had a great impact on our sales presentations as the new look and additional feature offering have been greatly received. We now have five Crexendo designed feature-rich affordable options to provide the right solutions for any business. The fact that we have custom designed our phones allows us to see better margins which was evident in Q2 as we increased to 55% gross margin during the quarter and this trend will help accelerate our path to profitability. In addition, we had additional success in Q2 with bring your own device ability that we began at the end of Q1. That allows new customer to migrate their Polycom and Yealink telephone device over to Crexendo platform. This Polycom and Yealink are the number one and number two providers of phones in the U.S. this migration strategy will have significant benefit going forward as it allows us to migrate customers from our competitors that would not otherwise migrate if they were forced to buy new telephone. BOYD approach allows us to recruit new partners who might be selling a competitive hosted platform and will find our platform more stable and also it's more robust in our pay structure [indiscernible]. We saw a 7% decrease in our Q&A expenses year-over-year while showing a 20% total increase in our revenue numbers over the same period of time as we continue to add more economies of scale at of our business. With our growth in subscriber usage and services, it allows us to negotiate better rates from our providers and will help us increase margins quarter-over-quarter. These efforts are all certainly helping our cash flow as we reduced our cash burn by 58% in the first six months of 2016 compared to the first six months of 2015, a trend that will continue as we work diligently to get our cash flow -- to get cash flow breakeven. I am encouraged with the continued quarter-over-quarter and year-over-year increases and backlog increases that we have seen, Crexendo has invested heavily to design and deliver a very robust and effective solution that services our small, mid-size enterprise level customers extremely well. And these investments are starting to show very positive trends. As we successfully continue to execute on our plans, we are well-positioned to increase our returns, and confident we're on the right track and excited to continue to execute our growth plans in the future. With this, I will turn the call back to Steve for any further comments or questions.

Thank you, Jeff. I have no further comments. So, at this time, Kevin, we will open the call up to questions.

Thank you. [Operator Instructions] We will take our first question from Kevin Dede with Rodman. Go ahead, please.

Hi, Steve.

Good afternoon, Kevin.

Hi, Steve. Thank you. I am great. I am great. And it sounds that you are doing well too. First, I just wanted to thank you very much for hosting the call, and thanks for taking my questions.

You bet.

I was hoping you could talk a little bit to headcount, and how that's compared to the cost side of the equation?

Well, there is a lot of different things that go into the cost side of the equation. Obviously, headcount is one of the biggest. Year-over-year, we have probably reduced our headcount from about 60 or 61 people, down to 55 to 56.

Fifty four-fifty five.

Fifty four-fifty five, so, about a 10%, and that was just normal attrition and we just didn't add in those people. Obviously, if we have a key position that requires us to have somebody, we will replace them, but we won't add any people. We expect to hold that number below 60 the rest of this year and probably most of next year.

Could you talk a little bit about the installation number in the quarter versus last, and maybe even versus March?

Well, that's I can tell you what it was. The trouble is that it's sort of a meaningless number, because sometimes we have bigger installations which makes the number go down and sometimes we have higher installation rate, which -- of smaller deals which makes the number go up, but the more important number is the number of desktops that were installed or the backlog is probably the most reliable. And Ron, what was that backlog number?

The backlog was 15 million or something…

Well, [indiscernible] it's approximately 15.5 million, but how much that increased quarter-over-quarter? We are going through that. It's in the press release.

Okay. So that's the -- but that backlog refers specifically to the hardware side of the business, correct?

No, it does not. It refers to everything; hardware and services. Most of it's made up of services…

Okay.

Because hardware is paid for upfront.

Okay, okay. Right, fair enough. Can you talk to the number of customers, maybe in the hosted business specifically?

Again, it's probably better to talk about desktops.

Okay.

We have about 25 -- actually we have 24,215 desktops, and we also have probably about 10,000 hosted Web sites and another 5,000 or 6,000 mobile devices that are software apps. So altogether, close to 30,000 hosted telephone devices, and about 10,000 hosted Web sites, 8,000 to 10,000.

So, I am just kind of trying to figure out how to look at different metrics, to even try to get to something, I guess like an ARPU number, just to try to monitor your progress in terms of the [indiscernible] have with each customer?

We are still seeing a decrease in our web services, which was planned. We discontinued [indiscernible] in July of 2011. The bulk of the decrease has occurred and it will become smaller and smaller as a percentage of sales as we go forward. We looked at selling that business, but quite frankly, we determine that we would get more by just continuing to receive the revenue as it going down. At some point in time, probably a $1 million a year is where those stabilize, about 200 or 250 per quarter, 100,000 in revenue per quarter, and then it will stabilize, then you should see all of our growth, and the most important thing is going to be cloud hosted telecommunications. So, I would say that the backlog number is going to be your most reliable indicator of how we are doing.

Okay, fair enough. And then, I guess I was sort of looking that a way to characterize the customer base, specifically, and I was wondering if you think you might be able to get…

And desktops, Kevin, would be the way to look at it, but there is also additional revenue we get to bursting unified communicator. There are several features we charge additionally for it, but the best way to…

Right. That's why I thought like an ARPU number might be helpful at some point.

I'm not sure what you are saying? What kind of number?

Oh, the service providers use an average revenue per customer…

Oh, an average per customer, average per desktop…

Right.

Yes, I think it's probably close to $20 or $22 per month. Maybe you could call Ron Vincent offline and we will get the exact number for you.

Yes. The key is the trend, and with the growing you know, telecom cloud business, you would expect that number to increase?

That's correct. No, we not only expect it to increase, it is an increasing.

Okay. And then just lastly for me, help me characterize the cash flow expectations for the balance of the year, what you think your revenue number would be -- would need to be to get you to breakeven and maybe you could talk a little bit on the trajectory to get there.

Well, we are on the right trajectory. Historically for the last two years we have increased the Q3 and the Q4 sales over Q1 sequentially. So we expect a little bit of a hockey stick going into the second half of the year. That plus the fees that Jeff Korn talked about in Doug's presentation, these are 911 type fees and other fees that -- we had to change some of our software in our billing platform in order to recover those, we should start recovering those in September or October, which should be in the range of $8,000 or $10,000 a month. So that's almost like a month of additional sales. That was the trajectory of our sales in Q3 and Q2, should get us to breakeven some time next year, and I am [indiscernible] you know, breakeven is one thing that you are talking about on a cash basis, and GAAP earnings is another thing, but the breakeven will probably occur maybe in the middle of third quarter and the GAAP revenue or profitability should occur by the end of next year or the first quarter of '18.

Okay. So, you -- in reference to cash, you are talking about September '16?

Pardon me. Yes. No, we are talking of September, you know, July to September of '17.

Oh I see, I see. Okay.

I've committed to put about a million three or four into the company between now and next year, which every projection we've done it shows that should be enough to get us to cash flow breakeven.

Perfect, thank you for adding that details, Steve. And thanks again for taking my questions, I appreciate it greatly.

Oh, absolutely, Kevin, and give Ron a call offline, and he will get you the exact number. I could be off on that. In fact it's probably a bit higher than I said.

Okay, thank you again.

You bet.

[Operator Instructions]

Oh, Kevin, it looks like there is no additional question, so I am going to wrap this up today. I want to thank everyone for participating in our second quarter 2016 conference call, and we look forward to speaking with you all again after complete the third quarter of 2016. Good evening and good afternoon depending on what part of the country you are in.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation.