Steve Mihaylo - CEO Doug Gaylor - President and COO Ron Vincent - CFO Jeff Korn - General Counsel

Charles Ronson - Alexander Capital

Good day and welcome to the Crexendo Fourth 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. I am Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo fourth quarter and year-end 2016 conference call. With me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; and Jeff Korn, our General Counsel. I am going to ask Jeff to read our Safe Harbor statement. After that, I will give some brief general comments relative to the quarter and year-end. Ron will provide some granularity on the numbers, Doug will provide a business, sales update, and then we will open the call up to questions. Jeff, would you please provide the Safe Harbor statement?

Yes, 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 in fact 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. The Risk factors are explained in detail in Company’s filings with the Securities and Exchange Commission including the Form 10-K for fiscal year ended December 31, 2016 and Form 10-Qs for 2016, which have been filed. Crexendo does not undertake any obligation to publically 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. Our sales for 2016 were very strong and continuing to move in the right direction. Our Cloud Telecommunications Service segment for the year ended December 31, 2016 increased 30% to $7.8 million compared to $6.0 million for the year ended December 31, 2015, a very solid increase. And if a few more sales have been closed in the fourth quarter of the year, would have ended even stronger. I am highly confident that we will continue to have strong sales growth and I am particularly pleased with sales growth so far in 2017, which is fueling my enthusiasm. I fully expect that sales growth will steadily increase, and I expect our sales to grow at an even higher rate in 2018 than in 2017. We continue to work to make the direct sales and partnered channels stronger and more efficient. I have been working closely with Doug on those initiatives and I am expecting great results on a go-forward basis. We will continue to have good organic growth. Our cost cutting initiatives have been highly effective. Consolidated operations for the year ended December 31, 2016 decreased 6% to $11.9 million compared to $12.7 million for the year ended December 31, 2015. And we expect that trend to continue in 2017. That in and itself would be impressive, but when that is looked at together with the substantial increase in revenue, it is a very impressive metric. While we watch every penny equally important, we never scrimp on quality or what is in the best interest of our customers. We won several highly respected awards in 2016 for both our service and our products. The award for our call center solution is particularly interesting. As I have discussed before our secrete sauce is that we have a highly integrated sales process, sales services and engineering work hand-in-hand to provide enterprise customer solutions that are highly competitive and best of breed. Our call center solution came from a partnership with one of our end-user customers. We developed a solution for this customer that solved their problem. The work with one customer enabled us to further develop our call center solution that works with most call centers, provide them with better service, saves them money and increases their productivity. This award is a testament to our processes and our solutions. Our continual investment in our processes will continue to work to benefit of our shareholders and our customers. Interest in our award-winning solutions remain high. These are good trends. Watching the enthusiasm from our end-user customers who have installed our products and services and the enthusiasm of our partners makes me highly confident in our future growth and in our future. Our endpoints/ telephones are also best of breed. We have developed a responsive, dynamic and good looking endpoint that is company cost competitive and I believe the best in the industry. We have turned the corner. Our sales continue to increase. We will continue to reduce our costs. And we run the business with the high degree of efficiency. I am convinced that we will reach GAAP cash flow breakeven by Q3 2017 and GAAP income in Q4 2017. I know our future is very bright and I remain highly confident in our business and products and services and our all people. I continue to believe in the Company and we will continue to grow the business through our sales force and our partnered channel, while looking for appropriate, accretive opportunities. With that, I will turn the call over to Ron. Ron?

Thanks, Steve. Some fourth quarter highlights. Our consolidated revenue for the fourth quarter of 2016 increased 11% to $2.3 million compared to $2.1 million for the fourth quarter of the prior year. Our Telecommunications segment, revenue for the fourth quarter increased 20% to $2 million compared to $1.7 million for the fourth quarter of the prior year and our Web Services segment contributed $299,000 for the fourth quarter, down 27%, around $407,000 contributed in the fourth quarter of the prior year. Consolidated operating expenses for the fourth quarter decreased 17% to $2.9 million compared to $3.4 million for the fourth quarter of the prior year. On a GAAP basis, the Company reported a net loss of $525,000 or a loss of $0.04 per diluted common share for the quarter compared to a net loss of $1.3 million or a loss of $0.10 per diluted common share for the fourth quarter of the prior year. On a non-GAAP basis, net loss for the quarter was $256,000 or a $0.02 per diluted common share compared to a non-GAAP net loss of $645,000 or a loss of $0.05 per diluted common share for the same period of the prior year. EBITDA for the fourth quarter was a net loss of $473,000 compared to a net loss of $1.3 million for the same period of the prior year. Adjusted EBITDA for the quarter was a net loss of $266,000 compared to a net loss of $694,000 for the same period of the prior year. And let’s take a look at some full-year highlights. While we are pleased with our consolidated revenue for the year of $9.1 million compared to $7.8 million reported in the prior year an increase of 17%, we continue to see tremendous growth in our Telecommunications segment. Our Cloud Telecommunications segment contributed $7.8 million for the year that’s an increase of 30% compared to $6 million reported over the prior year. Our Web Services segment contributed $1.4 million for the year, a decrease of 26% from $1.8 million reported in the prior year. Our Telecommunications segment backlog which is anticipated to be recognized within the next 36 to 60 months increased 15% to $15.9 million at December 31, 2016 compared to $13.9 million at the end of the prior year. Our entire management team is laser-focused on scrutinizing every expenditure. And we were able to reduce our consolidated operating expenses for the year by 6% to $11.9 million compared to $12.7 million reported in the prior year. On a GAAP basis, the Company reported a net loss of $2.8 million for the year or a loss of $0.21 per diluted common share that’s compared to a net loss of $4.6 million or $0.35 loss per diluted common share in the prior year. Non-GAAP net loss was $1.7 million for the year or $0.13 loss per diluted common share compared to a non-GAAP net loss of $2.8 million or $0.22 loss per diluted common share reported in the prior year. EBITDA for the year was a loss of $2.6 million compared to a loss of $4.6 million for the prior year. Adjusted EBITDA for the year was a loss of $1.7 million compared to a loss of $3 million for the prior year. Our total cash and cash equivalents, excluding restricted cash, at December 31, 2016 was $619,000 compared to $1.5 million at the end of the prior year. During the year, we utilized $1.1 million of our cash for operations compared to $3 million used in the prior year. And our investing activities during 2016 generated $11,000 and our financing activities generated $237,000 for the year. With that, I will turn it over to Doug Gaylor, our President and COO for additional comments on our operations.

Thanks, Ron. We continue to see growth in our telecom revenue and our overall revenue where we continue to decrease our expenses and lower our costs. Q4 delivered a 1% overall revenue increase quarter-over-quarter and 2% increase in telecom revenue quarter-over-quarter. Our focus on managing expenses while expanding our partner and direct sales efforts has helped us to get much closer toward cash flow breakeven and GAAP profitability. I believe we are at a point now where we can expand our hiring of additional talent that can help take both our direct and our partnered channels to new levels. We added 14 new programs to our program in Q4 and we are excited about the potential contributions from these partners. As we have discussed previously, we are targeting larger well-established partners in our recruiting efforts. In addition, we also added three new general managers since November and we are very excited about the pipeline of opportunities they are currently introducing Crexendo to. We have also already seen early successes from these new partnerships in the form of new bookings and new opportunities. Our focus on larger multi-location accounts allowed us to secure some nice opportunities during Q4 as well as in our current quarter that have multiple locations and should continue to provide ongoing sales. We have added many new features and capabilities to our platform to help us with these larger national and multi-location accounts and they have been nicely received. We added a web collaboration application called Crex Connex [ph] in Q4 that will allow our customers replace services like go-to-meeting and WebEx for a fraction of the cost. This collaboration tool allows users to do screen sharing, file sharing, video conferencing, chat, whiteboarding and other features that make businesses more productive and efficient. We also added a cluster of advanced call center features and reports in Q4 that further enhances our already robust call center offering. As Steve mentioned a moment ago, our call center enhancements rewarded us with a tremendous honor in Q4 and that we recently received a 2016 TMC Labs Innovation award presented by TMC’s customer magazine for a fantastic Crexendo call center solution. This industry leading publication recognized our call center solution as a truly innovative product and highlighted our call center solution as one of the most -- best solutions brought to market in the past 12 months that facilitates customer centric functionality. Our engineering team continues to design and enhance our product offering, and that allows us to have a tenuously advanced solution at a fraction of the cost of our competition. The fact that we custom and design our solutions allows us to see better margins, which was evident in Q4 as we increased our gross margin to 59%, up from 57% in Q3 and up from 48% in Q4 of 2015. And this trend will help accelerate our path to profitability. We continue to focus on cost containment and saw decrease in SG&A expenses of 3% quarter-over-quarter and 11% year-over-year on a 1% and 17% increase in revenues respectively. These efforts have greatly reduced our cash burn as we saw a 63% reduction in cash used in 2016 compared to 2015. We anticipate this trend of lower cost and increased revenues will continue and we’re diligently working to get to cash flow breakeven. Although our growth is not happening as quickly as we would like, we are encouraged with the continued quarter-over-quarter and year-over-year revenue increases and backlog increases that we have seen and we’re confident that this trend will continue. Our products and solution is the strongest in the industry and we are focused on getting the message at end users we are direct in our partner channels. As we continue to successfully execute on our plans and increase revenues and decrease costs, we are well-positioned to get to cash flow breakeven and profitability. I know that we are on the right track and I am excited to continue to execute on our growth plans in the future. I’ll now turn it over to Steve for any additional comments.

Thanks, Doug. I have no other comments at this time. Kevin, I’d like to open it up to discussion and questions from our audience.

Thank you. [Operator Instructions] And we’ll take our first question from Charles Ronson with Alexander Capital. Please go ahead.

Hey guys, just saw your results, and congratulations. It’s always interesting to see a company keep its promises sequentially because I can see everything you said about cutting expenses, not instantly but cutting expenses sequentially in operation. So, I mean that’s obviously going the right way. I just wanted to clarify one point. I think it was you, Steve mentioned it, on a sequential cloud telecom service revenues, they weren’t really up by much. And you -- I think what you said, I don’t want to put words in your mouth is that -- now that you are going after somewhat larger deals there it takes somewhat longer for them to close when you have somewhat less control over the timing of the close?

Well, that’s true. However, in the quarter we didn’t have any large sales other than maybe $70,000 or $80,000 type sales. But in previous quarters, we’ve had as much as $1 million sale. So that’s actually very positive that our sales are probably in the range of an average of $30,000 or $40,000 compared to previously they were much bigger. We’re still getting big sales. We had a large sale but nothing like the ones we’ve had in the past. We closed a big religious organization and their charitable arm for around, what was it, 300,000? Yes, about 300,000 in January. But in the past we’ve had bigger sales than that. The beauty of this is we are not dependent on one big sale. We’re doing it with a lot of smaller sales. And that’s positive and that means our partners and our sales team is starting to get more quantity in here instead of bigger deals making the increase kind of outside it.

Okay. I think that answers most of what I needed…

There is one other thing I would like to add Chuck. You mentioned expenses. We had a fairly significant expense reduction in the fourth quarter that will filter into 2017, plus we have some additional expenses we’re cutting in 2017. And I actually believe, our expense reduction will be slightly larger in 2017 than it was in 2016. So, that -- a combination of that with our increased sales and bookings and revenue along with the fact that we’ll get a margin increase again, it was about 2% quarter-over-quarter, not year-over-year but sequentially third quarter to fourth quarter and we should get a significant increase of about 2% or 3% in the first quarter, which will put us at about 61% or 62%. And we expect that to increase at about a 1% or 2% increase throughout the year. So by the end of the year, we should be in the high 60s and could possibly even hit 70% gross margin.

That would be great. I can see the increase in your gross margin, I mean with 63% and that’s up from 60% in Q3. And you are making nice moves also in the sales and marketing area with the expenses going down. So, looks good. Things are moving the right way. Thanks for taking my question.

[Operator Instructions]

Kevin, it looks like we have no additional questions. That being the case, I want to thank everyone for being on the call this quarter and we look forward to being with you next quarter. And I wish all of you a good afternoon. Thank you.

Thank you, ladies and gentlemen. This does conclude today’s conference. Thank you for your participation.