Crexendo, Inc. Q2 FY2025 earnings call

• Crexendo reported an 13% increase in total revenue to $16.6 million, with GAAP net income of $1.2 million and adjusted EBITDA of $2.8 million. It's the eighth consecutive quarter of GAAP profitability and 27th consecutive quarter of GAAP net income.
• Software Solutions segment saw 31% organic growth, with the platform surpassing 6 million users and moving towards 7 million. The licensee and partner ecosystem is gaining traction post-disruption from legacy vendors like Metaswitch and BroadSoft.
• Telecom Service segment grew 4%, with a focus on profitable growth and avoiding low-margin opportunities. Actively migrating to Oracle Cloud Infrastructure (OCI), with international data centers migrated and U.S. data center migrations ongoing to drive cost savings.
• Investing in AI capabilities, planning to roll out AI call bots, operator functions, and messaging. Actively reviewing inorganic opportunities, seeking accretive acquisitions that can be profitable in no more than 3 quarters.
• Recognized in the Russell 2000 Index, showcasing the company's growth and market position.

Consolidated revenue for the quarter increased 13% to $16.6 million. Software Solutions revenue grew 31% year-over-year to $7 million. Telecom Service revenue increased 4% to $8.4 million. Product revenue decreased 7% to $1.2 million. Remaining performance obligations (RPO) were $83.5 million at the end of Q2, up 17% year-on-year. Software Solutions segment had a gross margin of 74% in Q2, while Telecom Services segment had a gross margin of 56%.

• Expect continued organic growth, with a focus on double-digit growth in both Software Solutions and Telecom Services.
• Anticipate margin improvements as the U.S. data center shutdowns are expected to yield significant cost savings, with major savings likely next year.
• Remain committed to growing the business profitably, leveraging the scalability of the business model.

• Forward-looking statements are subject to risks and uncertainties outlined in the company's SEC filings, which could cause actual results to differ materially.
• Intense competition in the UCaaS landscape may impact margins if competitors engage in irrational pricing.
• Uncertainties in the timing and success of inorganic acquisition efforts, as acquisitions must meet criteria of being accretive and achieving savings within 3 quarters.

Q: Pipeline for the second half, licensee count, growth from existing vs new.

A: Expect continued growth in new licensees and upgrades. The licensee count is around 240, with both new licensee additions and upgrades on a strong trajectory.

Q: UScellular acquired by T-Mobile, impact.

A: Anticipate expanded opportunities with T-Mobile, leveraging the strong partnership with UScellular and looking to expand the successful relationship with T-Mobile's team.

Q: Margin improvement from data center shutdowns.

A: International data center shutdown had minimal immediate impact on margins, but major savings are expected when the U.S. data centers are shut down next year.

Q: Master agent growth drivers.

A: Strong relationships with telecom service distributors, focus on fostering partnerships, and G2 customer satisfaction results are driving master agent growth.

Q: Valuation expectations for acquisitions.

A: Look for acquisitions that can be accretive and achieve savings in no more than 3 quarters, with a focus on finding opportunities that can be integrated and profitable quickly.

Q: RPO/backlog mix.

A: RPO is $83.5 million, up 17% year-on-year, heavily weighted to the first 3 years of 5-year contracts, with a mix of telecom services and software solutions contracts.

Q: Movement from Metaswitch, BroadSoft licensees.

A: There is strong interest from potential customers, though the sales process is long. Recent wins include larger opportunities from these legacy vendor customers.

Q: AI innovations pricing, upsell.

A: Existing customers can benefit from upsells on new AI capabilities, and new customers are attracted by the technology advantages of AI features, creating opportunities for upsell and new business.

Q: Competitors' irrational pricing, product margins.

A: Competitors still engage in irrational pricing, but Crexendo is winning due to the value of its product, services, and customer service.

Q: Mitel bankruptcy impact.

A: Continued opportunity with Mitel partners, as they look for transitions to Crexendo, providing potential new licensees and partners in the retail business.

Q: International expansion.

A: International markets are expanding, with OCI allowing location-agnostic expansion. The company has strong presence in Europe and Australia, and is willing to expand into other geographies.