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

Kevin Dede - Rodman & Renshaw

Good day and welcome to the Crexendo First Quarter 2017 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. I am Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo first quarter 2017 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 then provide some granularity to 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 conference call, other than statements of historical fact, are forward-looking statements. Forward-looking statements include, but are not limited to, words such 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 fiscal year ended December 31, 2016 and the Form 10-Q for 2017 as 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 the first quarter were good. Our Cloud Telecommunications segment revenue for the first quarter of 2017 increased 16% to $2.1 million compared to $1.8 million for the first quarter of 2016, that increase is encouraging. Also encouraging is that we have our cost and processes under control. Non-GAAP net loss was a $188,000 for the first quarter of 2017 or $0.01 loss per diluted common share compare to a net GAAP to a non-GAAP net loss of $556,000 or $0.04 loss per diluted common share for the first quarter of 2016. That is about a 67% improvement from last year. This shows me that we are on track to reach cash flow breakeven and GAAP income this year. Our GAAP numbers also improved and would have been even better except for a onetime options charge which effected GAAP results. While these numbers are good, I know there will be even better in the future quarters. As I discuss before, I have spent considerable time working with Doug Gaylor to see where we can improve our sales process. We became convinced that we could and should have better results in our direct sales team enterprise sales and an attracting dealer partners, that are better qualified and that have better qualified leads. We made and have completed changes in our sales management structure, which I fully expect to improve those metrics. We have added a new VP of sales and a new Director of sales, to help our dealer partners and direct sales groups. Doug and I are working closely with the new sales team and I am convinced they will drive sales improvement which will be realized over the next several quarters. In addition to the management changes as I have increased - we have increased our partner channel by over 20% and increased our direct sales group by over 30%. Our backlog during Q1 which is I believe is also encouraging. Backlog is a metric that allows us to internally forecast future sales growth. I'm watching backlog carefully and fully expect that the changes discuss will start to show improvements to backlog and subscription revenue over the next few quarters in coming years. I am very proud of the Crexendo team, as I have discussed many times we are very careful with spending and everyone understands that we will not waste a penny of shareholders' money. However more important is that the Crexendo team realizes that our products and services must be second to none and that has also taken to heart every day by our team members. I have said this before, if people give Crexendo's right the cloud services and products to try they will be convinced there is no better solution on the market and in most cases they will save substantial amount of money. Customers tell me that Crexendo's award winning solutions are perfect for our company, they wants to increase productivity and save money. But those not want to scrimp on quality, service or value our telephones and mobile apps are amongst the best in the industry, at highly competitive prices we have all the pieces in place to really accelerate growth and reach profitability. I know our sales will continue to increase we will continue to reduce our cost and we will run the business with the high degree of efficiency. I continue to be a convinced we will reach cash flow breakeven and GAAP income in 2017. I continue to believe that our company and we will continue to grow the business through our sales force and our partner channel. We are always reviewing appropriate accretive opportunities and believe that the right opportunity comes along, there will be a way to further accelerate growth. I continue to be a strong believer in the future of Crexendo. With that I will turn the call over to Ron. Ron?

Thanks, Steve. Consolidated revenue for the first quarter of 2017 increased 8% to $2.3 million compared to $2.2 million for the first quarter of the prior year, approximately 88% of the revenue for the quarter was contributed by our cloud telecommunications segment which contributed $2.1 million for the quarter an increase of 16% compared to $1.8 million contributed in the first quarter the prior year. Our web services segment revenue for the quarter decreased by 29% and $283,000 compared to $396,000 for the first quarter of the prior year. Our consolidated operating expenses for the first quarter decreased 6% to $2.9 million compared to $3 million reported for the first quarter of the prior year. The Company had a net loss of $543,000 for the quarter or $0.04 loss per diluted common share as compared to a net loss of $868,000 or a $0.07 loss per diluted common share, reported for the first quarter of the prior year. As Steve mentioned, on a non-GAAP basis, we had a net loss of $188,000 for the quarter that's a loss of $0.01 per diluted common share, so we're getting that number closer to zero. EBITDA for the quarter was a loss of $482,000 compared to a loss of $830,000 for the first quarter of the prior year and our adjusted EBITDA for the quarter was a loss of $184,000 and that's compared to a loss of $580,000 reported for the first quarter of the prior year. Our cash and cash equivalents, excluding our restricted cash, at March 31 was $968,000 and that's compared to $619,000 we reported at December 31, 2016. We used $52,000 of cash property in activities for the three months ended March 31, compared to $261,000 we used during the same period of the prior year. Our cash provided by investing activities for the quarter was $252,000 compared to $12,000 for the same period of the prior year. During the quarter we sold a $252,000 Certificate of deposit, and those proceeds were moved to our cash and cash equivalents. Cash provided by finance in activities for the three months ended March 31 was a $149,000 that's compared to financing activities used for that $97,000 for the same period of the prior year. During this first quarter we received proceeds from stock option exercises doing of $166,000 which resulted in that the provided cash of $149,000. With that I will turn it over to Doug Gaylor, our President and COO for additional comments.

Thanks Ron. Although we had a flat quarter from a revenue perspective, there were positive metrics as well as a lot of excitement at Crexendo during Q1. As Steve discussed, we did a complete review of the sales team and process and we hired a new sales management staff consisting of a new VP of sales and a new Director of sales. We also have hired five new industry experience sales reps and at a very strong first quarter of sales booking that will lay the ground work for strong future growth. In addition, we continue to manage our cost and improve our bottom line as we at closer to cash flow breakeven and GAAP profitability. Since we manufacture our owned phones, system software and platform, we are able to effectively manage our expenses as we continue to grow our telecom revenues. This combined with our diligent focus on costs has helped us increase our gross margins from 59% in Q4 to 63% in Q1. Our improved margins and reduced cost helped us to reduce our cash burn by 80% compared to Q1 last year and by 87% compared to Q4 2016 and has us getting very close to cash flow breakeven. We expect these nice trends to continue going forward. We had great excitement in our partner channel program during the quarter, adding 16 new partners for the quarter and that momentum has continued in the Q2 with very strong partner additions including some very significant partners on boarded that have large sales forces on the street. Our focus on larger and more establish partners paid off for the nice increase in partner sales during Q1 and some larger multi-location sales opportunities including a 350 phone a 150 phone and multiple 75 phone plus opportunities were sold through the dealer partner channel during the quarter. Our engineering team continues to deliver great new enhancements and capabilities to our platform, richer enhancements such as collaboration, chat, customer screen pops and HD call back in queue had helped us further distance our affordable offerings compared to our competition. We are excited to be releasing additional new features this quarter that include SMS, text messaging and proactive dialing capabilities that will be greatly received by our customers and prospects. Our new partners combined with our new sales management team and new industry experience sales representatives help to increase sales bookings significantly over the previous quarter. We expect this trend to continue as we have a lot of momentum and backlog heading into Q2. The increased sales help to increase our backlog by 6% quarter-over-quarter, positioning us well to meet our goal of cash flow breakeven and GAAP profitability. We are encouraged with the continued quarter -over-quarter improvements that we have seen, we are confident that the revenue growth will start to accelerate. Our products and our solutions are the strongest in the industry and we are focused on getting the message out to end users, we are direct and our partner sales channels. With the changes in additions to our sales channels in 2017, I am very excited and confident that we are in great position to take the organization to new levels of success. As we continue to successfully execute our plans to increase revenues and decrease our cost, we are well positioned to cash flow breakeven and profitability. I know we are in the right track and I am very excited to continue and to execute on our growth plans now and into the future. And I will now turn it back over to Steve for any additional comments.

Thanks Doug. At this time, I'd like to open it up to questions. Kevin.

Thank you. [Operator Instructions] And we will take our first question from Kevin Dede with Rodman [ph]. Please go ahead.

Hi, Kevin.

Yeah, hi, how you are doing.

Doing well.

Great, great. Congratulations to you and the team, 16% growth on the telecom side. I was just wondering if you could talk a little bit to the backlog at the end of the quarter versus the end of the year. Understand some of the things that you discussed regarding new sales talent in place, but I just want to get feeling, if there your confidence in acceleration in sales, I guess for the balance of the year versus the cost in hiring and team growth?

Yeah okay. You have several questions in there, but if we look at quarter-to-quarter bookings, we had a very nice increase between the bookings in Q4 and the bookings in Q1. So much so that we can project quite accurately what our revenue will be in Q2 as appose to Q1. The bookings actually increased little over 30% from Q1 to I mean from Q4 to Q1. And I think I've covered just about all your questions here.

Right, okay. Right, I guess something that we track because when we signed an agreement, if we signed an agreement for a 36 month term, we only take a portion of that revenue on a monthly basis. And so backlog is contracted obligated revenue that is not recognized yet. So when we talk about increasing our backlog by a substantial amount quarter-over-quarter that's a very positive sign, because that backlog is unrecognized revenue that is contractually obligated at this point.

Will you guys. Yeah, so Steve, Doug will you get to a point do you think that you feel comfortable discussing that backlog and the booking numbers?

Yeah I think we will obviously of something we have to talk to our auditors about. But we may be in a position to do it next quarter or in the third quarter. At the size we are right now Kevin, it's going to fluctuate quite a bit, because the folks that make the decisions to go with our service sometimes they're slow in making the decisions others of them are fast in making the decisions. So sometimes stuff gets pushed from one quarter to the other. As we get bigger, it's going to be less evident, but I believe we can talk about that for sure in the third quarter and possibly next quarter.

Have you realized any seasonality in sales?

Yeah it's a little bit might it's actually a little slower than our previous company. It slower in the first quarter and starts picking up in the first quarter, the second quarter, the third quarter and then because of the holidays that are so prevalent in fourth quarter it's levels off just a little. But we still don't have any seasonal data that backup any of what I've said, it's just my gut feeling. But I think if bigger, we'll be able to predict that a lot. A lot easier.

Okay. So to your point, so Steve have you seen some acceleration in April and May versus say January, February, March?

Well we actually saw good acceleration in January, February and March as compared to October, November and December. And answer to your question, some of the sales people we just put on had actually produced some deals which is very, very unusual for bookings. But most of them do have experience and they bring good leads with them. So we're encouraged by that.

Okay, Doug you've talked to some of the new features that you're adding to your phones, can you just review the new phone introduction cycle. I mean is that something that sort of happens on an annual basis, or could you just speak that a little bit?

Yeah great question. So we're very different from our competition in that we're kind an agile software release program which means that we're coming out with new software enhancements to our platform about every six to eight weeks, that means we are continually enhancing our offering every six to eight weeks for all of our existing and future customers. Our phones themselves basically do what the platform tells it to do, so we don't necessarily release new phones, we released new capabilities for the phones. So, our phone models that we have today have been out now for roughly about a year and are extremely well received out in the field. But those phones only do with the applications and software of the platform tell it to do and we continue to enhance those capabilities by adding new features and new capabilities. As I mentioned on some of the feature releases that we've got coming out within the current quarter and the previous quarter, features like text messaging to the desktop, those are the features that we don't have today, but will be released within this quarter [ph]. So, any of our existing customers that are with us today will have the capability to easily add those capabilities to their platform.

Okay. Can you - Doug, can you just speak a little bit to the business model associated with that? Are these features that you'll require additional charges for or something that just we bundled in a service package that your customers already have?

Good question, Kevin. The high majority the features that we come out with, when we come out with our software enhancements and releases are made available at no additional cost to our end user customers. There are on occasion certain features that we release that do have a cost associated with them. For example last quarter we released a HD call back in queue, you may run into this when you call into a call center and they say, hey we're really busy right now, you are the fifth caller inline, if you like we can call you back when your place comes up and you won't lose your place inline. That's a great feature, it's a very expensive feature with our competitor platforms out there. They have it all, many of our competitor platforms don't even offer that capability. We engineered and designed that capability into our solution and we offer that as a very minor cost upgrade to a customer that has an existing call center. Other features like the standard enhancements are made available at no cost. But I would say the high majority or no cost additions and every now and then we come out with features that are very specific and used and do have a cost associated with them. But the costs are always very minimal.

Steve, just a couple more quick questions, if you'll let me.

Alright.

So, could you talk the web services side I think it's a little bit, how are you managing that I know it's not getting much from your management emphasis, but I'm just kind of wondering what your philosophy is and how you think we should look at that going forward this year and next?

We looked at actually selling the business and we concluded that we can get more for it by just knocking the caller if you will. It's going to be to the point where we will be totally irrelevant as far as materiality as concern here another few quarters. But right now it runs about 275 a quarter 283, yes and it's pretty well leveling off. That was decreasing as you can see, the first quarter versus first quarter of last year declined by 29%. But going forward it will probably decline by 10% or 15% and that's going to be immaterial. One other thing I would like to add about what Doug said, is most of our improvements and features and functions and benefits that sort of thing are done to our system our platform. So the phones are practically never obsolete. We do have features that are added from time-to-time in the phone, but it's all done with firmware [ph]. So, that's a huge advantage that we have versus some of our competition. And when I say I'm proud of our people, I really I am proud of the way they architected this system in the way they are able to push out improvements every six day weeks. So, we're pretty excited about that and some of the things that Doug talked about are things that actually help us when deals, our competition is pretty static when it comes to doing these sorts things for the prospects and customers. If we tell a customer we can have it done and 6, 8, 10 weeks we get it done in 6, 8, 10 weeks and we get the deal. So we're seeing more [indiscernible] as we go forward.

Okay. Last one is really for Ron. Could you speak little bit to the $252,000 sale of long term investments, that you showed in the cash flow statement?

Sure, we had a requirement from our merchant services with Wells Fargo to have a CD as security for the merchant account, that was due from the legacy business, stores online, that resulted in right-off higher than the thresholds they like. It's been 8 to 10 years since we had the higher right-off, so we approach the bank to release those restrictions and we were grant that release. So we were able to sell that CD.

Right, right and that helpful for the cash position. What are you plans on maintaining your cash balance as the telecom business continues to burn it a little bit?

We continue to focus on the cash balance on a daily basis, as in the past quarters that was always going down, so we put a lot of emphasis on managing that cash balance on a daily basis, that's where as we start to see it grow. This quarter and future quarters that we plan has the same diligence in managing every dollar we spent, to ensure that we are spending the right money at the right money, to ensure that we have a very positive balance sheet.

Fair enough. Thanks Ron. Thanks Steve for a luxury of your attention and addressing the questions, I appreciated very much.

Kevin just emphasized that, every one of the management team and all of the employees are very, very focused. Just a few additional comments, by moving that $252,000 from long term assets up to current assets it improved our current ratio substantially, even though we are small we have everything has been done to really position us for rapid growth in the future and I am just really excited about where we are going and I am excited about our people and I want to thank all of our long-term investors for hanging in there with us. Thank you.

[Operator Instructions]. A - Steve Mihaylo: Well Kevin it looks like there are no more questions. Thank you Kevin D, for asking some pretty good questions and has allowed us to give more of our story. With that I am going to conclude our first quarter 2017 earnings call and we look forward to reporting the second quarter in about three months from now. Thank you everyone.