Crexendo - Earnings Call - Q2 2021
August 10, 2021
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Crescendo Second Quarter twenty twenty one Earnings Conference Call. All lines have been placed on a listen only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, Mr. Steve Mihaylo, Crexendo's Chairman and CEO. Sir, the floor is yours.
Speaker 1
Thank you, Jess. Good afternoon, everyone. I'm Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo second quarter twenty twenty one conference call. On the call with me today are Doug Gaylor, our President and COO Ron Vincent, our CFO and Jeff Korn, our General Counsel.
Also here today joining us for the first time is Arnold Busch, our Chief Strategy Officer. I am going to ask Jeff to read our Safe Harbor statement. After that, I will give some brief comments. Ron will provide extra detail 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 read the Safe Harbor statement?
Speaker 2
Yes. Thank you, Steve.
Speaker 1
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 the 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 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 more detail in the Company's filings with the Securities and Exchange Commission, including the Form 10 ks for fiscal year ended 12/31/2020, and the Forms 10 Qs as filed. 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 any circumstance. I'd now like to turn the call back to Steve. Steve? Thank you, Jeff.
I'm very excited to be joining you today from our San Diego office where Doug, Ron, Jeff and I have been continuing the ongoing meetings with the newly acquired NetSapiens team. I believe our meetings have been going extremely well. We are working together to make sure that the teams are integrated and to make sure we maximize the operational benefits we have from the acquisition of NetSapiens. We have made clear our mission is to excuse me, I've got a frog in my throat, to maximize shareholder value while providing the best products and service to the Crexendo customers and NetSapiens community. We are beginning to see substantial dividends from our joining NetSapiens.
We have been able to introduce the best telecom offering in the business, the Crexendo VIP cloud performance platform. This is built using the best of Crescendo ride the cloud technology combining with NetSapiens platform which supports over 1,700,000 end users globally. This offering is so good we provide an uptime guarantee. And I might add, we think it's the first in the business. It's not just us who is impressed with the new platform.
We were recently awarded the TMC twenty twenty one Communications Solution product of the year. Our being able to roll out VIP is just the first of many benefits to our putting these two companies NetSapiens and Crexendo together. We are beginning to see other benefits from the acquisition. The Crexendo engineers who live telecom have been working closely with the NetSapiens team to continue to make NetSapiens the best communications platform in the business. We want to make sure that the institutional knowledge of both companies becomes a benefit for all of our shareholders, customers and employees.
The synergies and the integration do not end with VIP and our engineers working together, we will start to see cost savings that will be realized by leaving the Crexendo customers to the NetSapient platform. Investing in one platform will be a substantial benefit to our shareholders, customers and employees. We are integrating other processes too. We have merged the legal and accounting teams as we will be having HR merge soon. And I might add to that, we're doing an upgrade to our accounting to get everyone on the same billing platform.
We are also joining marketing efforts and we are realizing that there is a great deal of cross functionality between our two teams, which should enable us to reduce new hiring. There will be additional cost savings as we continue the process. I am very pleased and excited about our quarterly results. We were able to increase our quarterly revenue by 43% year over year. That is even more impressive when you realize that included only one month that included only one month of MedSapiens revenue.
In addition, our telecom service revenue increased 20% year over year, which shows me we are making great progress. I will be disappointed, very disappointed if we do not continue to have year over year growth of at least 50% with non GAAP profit. We have an expected GAAP loss for the first half of twenty twenty one. Considering the investments we made in the business, the cost of acquisition and the intangible asset amortization costs, the loss was not at all surprising. As I discussed in the press release, going forward GAAP results will not be what we used to internally measure the business due to the substantial intangible asset amortization expense that will continue for probably the next couple of years.
We will be carefully monitoring cash flow from operations, non GAAP income, EBITDA and adjusted EBITDA as our key performance indicators. I am fully convinced that those numbers will continue to improve and will impress our shareholders and allow us to grow from internally generated cash. I am carefully monitoring growth at NetSapiens and Crexendo Telecom. I have high expectations on both counts. I expect that within the next couple of or so next couple of months or so, we will be announcing that NetSapiens have grown to 2,000,000 end users.
I'm convinced that this will allow we'll also see growth on the Crexendo services side and the expansion of new VIP platform. Our results are very promising. The integration of these two companies is very promising and I am very, very excited about the future. With that, I'm going to turn the call over to Ron Vincent. And Ron, will you give us more granularity on the numbers?
Speaker 3
Thank you, Steve. Good afternoon, everyone. Before I go over some of the details for the quarter, I'd like to take this time to point out that we have reorganized our segment reporting as a result of the NetSapiens acquisition. Going forward, we will be reporting two operating segments, Cloud Telecommunications Services segment and Software Solutions. The new Software Solutions segment includes the operations of our NetSafetyan subsidiary.
For the second quarter of twenty twenty, our Cloud Telecommunications segment service revenue for the quarter increased 20%, as Steve mentioned, to $4,300,000 compared to $3,600,000 reported for the second quarter of the prior year. Our Software Solutions segment revenue was $1,000,000 for the second quarter and that Software Solutions revenue represents revenue from NetSapient's business combination from the acquisition date of June 1. As Steve mentioned, only one month of revenue in the quarter. Product revenue for the second quarter came in basically flat with a 2% decrease of $9,000 to $440,000 compared to $449,000 for the second quarter of the prior year. Our consolidated total revenue for the second quarter was an increase of 43% compared to $5,800,000 compared to $4,100,000 for the second quarter of the prior year.
Second quarter gross margins were as follows: Telecommunication Services segment service revenue gross margin of 69% our Software Solutions had a gross margin of 48% for the month of June and product revenue had a gross margin of 35% for the quarter. Consolidated operating expenses for the second quarter of twenty twenty one increased $3,500,000 or 99% to $7,000,000 compared to $3,500,000 for the second quarter of the prior year. As you know, during the second quarter, acquisition related expenses accounted for $377,000 of additional general and administrative expenses. Acquisitions also contributed $2,000,000 of the additional operating expenses. Our net loss for the second quarter was $1,003,000 or $05 per basic and diluted common share, as compared to net income of $508,000 or $03 per basic and diluted common share for the second quarter of the prior year.
Non GAAP net income for the second quarter was $37,000 or breakeven per basic and diluted common share. That's compared to $660,000 or $04 per basic and diluted common share for the same period of the prior year. EBITDA for the second quarter was a loss of $983,000 compared to $568,000 of earnings for the same period of the prior year. Adjusted EBITDA for the second quarter was a loss of $153,000 That's compared to earnings of $704,000 for the same period of the prior year. Now, let's go over some highlights for the six months ended June 30.
For the six month period, our consolidated revenue increased 30% to $10,300,000 compared to $7,900,000 for the same period of the prior year. The Telecommunications segment service revenue for the six month period increased 19% or 1,400,000.0 to $8,500,000 compared to $7,100,000 The Software Solutions segment revenue of $1,000,000 for the
Speaker 4
six month
Speaker 3
period, again from the acquisition date of June 1. Forward. Product revenue for the six month period decreased 2% or $20,000 to $808,000 compared to $828,000 for
Speaker 2
the same period of the prior year.
Speaker 3
Our consolidated operating expenses for the six month period increased 71% to $12,400,000 compared to $7,200,000 for the same period of the prior year. During that six month period, acquisition related expenses accounted for $1,100,000 of the additional general and administrative expenses, and acquisitions contributed $2,400,000 of the additional operating expenses. Our net loss for the six month period was $1,700,000 or $09 per basic and diluted common share as compared to $648,000 of income and $04 per basic and diluted common share for the same period of the prior year. Non GAAP net income for the six month period was $345,000 or $02 per basic and diluted common share as compared to $935,000 or $06 per basic and diluted common share for the same period of prior year. Our EBITDA for the six month period was a loss of $1,700,000 Our adjusted EBITDA for the six month period was earnings of $92,000 compared to $1,100,000 for the same period of the prior year.
Our cash, cash equivalents and restricted cash balance at 06/30/2021 was $7,900,000 as compared to $17,700,000 at 12/31/2020. Operating activities utilized $224,000 of our cash, cash equivalents during that six month period. Investing activities utilized $10,500,000 of our cash, primarily related to the cash outlay for Syntrix Telecom and NetSAPN's business combinations. Financing activities provided $966,000 of cash, cash equivalents and restricted cash, primarily provided by stock option exercises. With that, I'll turn it over to Doug Gabler, our President and COO, for additional comments on sales and operations.
Speaker 2
Thanks, Ron. We had a very significant increase in revenue of 43% year over year during Q2, which included the one month of Vetapiens revenue as we closed on that acquisition on June 1. In addition to the $1,000,000 in revenue that Vetapiens had for the quarter, we are pleased that our traditional UCaaS revenue grew by 20% during the quarter. It was a busy quarter for us as we not only completed our game changing acquisition, but we also released our new Crexendo VIP platform, which has already been recognized by the industry leading authority, TMC, as its Communication Solutions Product of the Year. The need for work from anywhere systems helped increase our UCaaS revenues by 20% for the quarter.
The demand for UCaaS technology and collaboration tools still remain high and Frost and Sullivan recent industry reports still estimates that 60% S. Business market is yet to migrate to the cloud for their communications. The same report also highlighted the Crexendo NetEquence division platform as the fastest growing UCaaS platform in America and with a rapidly growing 1,700,000 end users. It is this platform along with the tremendously talented engineering sales and support teams that made the acquisition the perfect fit for Crexendo.
Our first major initiative from the acquisition is launching the Crexendo VIP platform that utilizes the SAPIEN system as its foundation. With the launch of Crexendo VIP, which stands for video, interactions and phone, our customers will have an all inclusive system that combines video collaboration, mobility, text messaging, call center and softphones along with the power of Crexendo's award winning telephone sets for the ultimate UCaaS offering. The demand for UCaaS providers looking for either their own platform or looking to migrate from their existing platform remains high. NetSapient had a 30% increase in revenue in 2020 and we continue to see strong demand there. As Steve mentioned, we expect to soon be able to announce over 2,000,000 users on the NetSapiens platform.
Our unique sessions not seats pricing model differentiates ourselves from our two largest competitors Cisco's BroadSoft and Microsoft's Metaswitch offerings. We have a very favorable pricing model combined with the tremendous suite of features and capabilities. It is not surprising that the platform was recently recognized for the 2021 Internet telephony product of the year as well as the 2021 tmc dot net Remote worker pioneer award. We're working diligently to integrate the two organizations together so we can start recognizing the operational benefits and synergies from the combined company. We have a tremendous engineering talent on both teams that are already working well and benefiting from best practices, and we have seen immediate synergies from consolidating our marketing efforts.
Our sales teams are benefiting from the exceptional industry knowledge and experience both organizations bring to the table, and we are in the process of consolidating all of our accounting systems and personnel and our operations and customer service departments are executing on our plans to maximize efficiencies, productivity and cost. I'm very pleased with how the first two months of the combined organizations have progressed and I'm very excited about our go forward plans. As Steve mentioned with the acquisition costs associated with the merger, we expected GAAP losses for the quarter, but I am pleased that we were able to show a slight non GAAP earnings for the quarter. We continue to be diligent about cost management and we are focused on the buying power leverage of our larger organization along with the consolidation of overlapping costs as we continue to grow the organization. Our UCaaS service gross margin decreased slightly to 69% as we introduced our new VIP platform offering.
We believe we will continue to see cost synergies as we consolidate onto one platform. Our Crexendo partners and our NetSapiens community are excited about our combined organization. I had the pleasure of meeting with quite a few of the NetSapiens partners at the IT Expo Show in Miami at the June, and all of them are extremely optimistic about the merger and the combination of resources to further enhance the platform. Likewise, the Crexendo partner community is very excited about the new VIP platform powered by NetSapiens combined with our 100% uptime guarantee and lifetime warranty on the Crexendo phone devices and that has increased our funnel of opportunities and partner engagement. As we enter the second half of twenty twenty one, I couldn't be more excited about the future direction and opportunity for Crexendo.
In the last thirteen months, we organically uplifted to the NASDAQ, had a successful S1 offering and made a significant acquisition that puts us in a very solid position to take the company to much higher levels. We're committed to delivering the best UCaaS offering in the industry to our customers and our partners and the best return to our shareholders. We are confident that the synergies of combining our two great organizations will make us a major force in the industry and fuel our continued growth. I'll now turn it back over to Steve for any further comments.
Speaker 1
Thank you, Doug, and thank you everyone for tuning in today. Jess, we'd like to open this up to questions of anybody here. If they have the answer, if we don't, we'll let you know. Jess?
Speaker 0
Thank you, Mr. Mihaylo. Ladies and gentlemen, the floor is now open for your questions. We'll take our first question from Josh Nichols at B. Riley.
Your line is open sir. Please go ahead.
Speaker 2
Afternoon, Josh. How is
Speaker 4
it going Steve? Hope everything is going well. Know a lot of work went into getting this deal done. So good to see everything moving in the right direction. I did want to ask maybe start things off with a higher level question since you mentioned some of the awards and notoriety that Crexendo VIP communications platform has already kind of received.
There's a lot of UCaaS providers in the space. But I guess how is the Crexendo VIP cloud communications platform a little bit different than how it's targeting the market? And what makes that a little bit unique and value added offering would you say?
Speaker 1
I'm going to let Doug talk about that and anybody else that he wants will comment on it. But obviously TMC and Crexendo and NetSapiens thinks it's the best. And what are your
Speaker 2
Yes, obviously, what's on that The IP platform, Josh, I mean, it's just it's really kind of an evolution of where we were. And so, UCaaS as an offering continues to expand and increase in capabilities. And so, with the rollout of our VIP platform and again underscoring the VIP, which understandably stands for video interactions and phone. So, when we think about where UCaaS is today, it's much more about collaboration, it's much more about interactions like text messaging and unified messaging along with the traditional telephone and along with the video collaboration offerings. And so as we bring that offering to the table, the 100% uptime guarantee with our geo redundant setup with multiple data centers is pretty unique out there.
So, not anybody else that we know of is offering 100% uptime guarantee. We've also backed that with our lifetime guarantee on our Crexendo phone devices out there. But much more than that, the mobility applications, contact center application and what we include in our basic and standard offerings for all of the seat licenses is pretty unique. John Britton has been extremely instrumental in getting the product rolled out. And so, I'll just turn it over to John for any additional color that he wants to add on the VIP platform.
Yes. And I would add in addition to what Doug said, we try
Speaker 5
to make it very consumable for partners to sell and then customers to understand the basic mix and match seat type kind of a good, better, best with add ons for contact center agent and contact center supervisors. So, I think when you put that all together, you can look at the needs of the target market that we're addressing, combine it with the 100% uptime guarantee and the customer life lifetime warranty on devices.
Speaker 6
That's really what we're seeing
Speaker 5
is the winning formula for the VIP platform.
Speaker 1
Does that answer your
Speaker 4
Thank you. And then, I think I read in part in the comments that you said that you're making some additional investments in sales and marketing and those are you've seen some good early indications there. Where do you think that's a little bit of extra capital
Speaker 1
It's a moving target, but I think Ron is best qualified to give you or John, excuse me. I meant John. John is best qualified to give you an answer to that one.
Speaker 2
Yes. So, would tell you a couple
Speaker 5
of things with our approach to the market now with the VIP platform. I mentioned how it was really designed for it to be easy for agents to sell and understand. So, we're expanding our presence in the agent channel. We've added a couple of new master agents in the last quarter that will be launching our product over the next few months. And then, in direct sales capacity, we've made some investments into some demand generation in order to generate opportunities for our own direct sales teams that then work those and convert them in.
In addition to that, we've improved some of the tools in our sales and marketing stack in order to get some better business intelligence tools, proposal management and other things to help streamline our sales process. So, it kind of meets the speed of the market that we're in today.
Speaker 1
And Josh, just so you're aware of it, this is a moving target. It's not something that's static. But in addition to that, I've told the team here that the two most important things are growth and at least GAAP breakeven with non GAAP profitability. And you have to realize there's approximately $2,000,000 just on this transaction and we're finishing up on the accounting for it, but there's about $1,800,000 or $1,200,000 in amortization that will fall to the bottom line. There's also all the other things that go into non GAAP accounting such as stock options and so on.
My goal, as long as you understand is after the next one or two or three acquisitions is to be able to be strong enough to finance this internally. And we're going to finance any acquisition with a little bit of stock, a little bit of seller financing and a little bit of debt. I do not want to dilute our existing shareholders. Now having said that, there may be a little bit of dilution but not nearly as much dilution as we get accretion. And that's our position on that.
And I realize I may have answered a question you never even asked.
Speaker 4
No problem. I appreciate you clarifying the point. Last question for me, then I'll someone else a turn. I guess if I'm just looking here, I think the other thing related to cost, seems like the integration is already well underway, but you see some opportunities here to move some of the Crexendo customers to the NetSapience platform. How long would that take and like as far as a potential upside to the gross margin on a percentage basis as that happens, could you kind of help quantify that in terms of timing and magnitude?
Speaker 2
Yes. Obviously, that's high on our priority list. And so obviously, running one platform is a lot more efficient than running two platforms. So that process is already underway. So we anticipate that process could take upwards of twelve months, but we anticipate that being a very smooth process.
The two systems have very like foundations. So, it's just a matter of prioritizing the databases to get everything finalized and moved over. So, we're currently working on that process now. We'll start migrating customers. We've already started migrating customers, very easy process for us and we anticipate that being very smooth.
And once that happens, then we can see an additional benefit from a gross margin perspective having just one operating platform and seeing some synergies from just having one platform.
Speaker 1
Does that answer your question, Josh?
Speaker 4
Yes. Thank you. I'll hop back in the queue.
Speaker 1
Right. Jess, do you have another question?
Speaker 0
I do. We'll go next to Andrew King at Collier Securities. Andrew, your line is open. Please go ahead.
Speaker 2
Hey, guys. Good afternoon. Hey, thanks for taking question.
Speaker 7
Really good quarter here, guys. Just to drill into gross margins a little bit. Last quarter, you guys announced a small acquisition of a UCaaS company in Northern Virginia that had some pressure on your gross margins that you're paying core down $6 per user. Can you talk about those headwinds to gross margins and how much of an impact that had to the Crexendo gross margins versus the VIP platform?
Speaker 1
Well, right now the gross margins as you mentioned were all over the place. My particular goal is to get it up to where they were, but that's going
Speaker 2
to take a little while. I'm going
Speaker 1
to let Ron talk to exactly where we expect them to be.
Speaker 3
Yes, Andrew, we continue to experience a little bit of downward pressure on our margins. We're still hosting the majority of those customers on the core dial platform. And so, we still have that added exposure or expense. During the quarter, we started the process. So, we've been planning and mapping out our migration plan and I know we've started that process, but it's early stages.
We expect to complete that majority of it in the third quarter, if not by the end of the year. And then we'll start to see some improvement in our gross margin from the Retail Communication Service segment.
Speaker 2
Go ahead.
Speaker 1
I'm sorry to interrupt you, Ron. Just be aware of this. We're acutely aware of gross margins. And I'm sorry for stepping on your No,
Speaker 3
it's fine Steve.
Speaker 8
Go ahead.
Speaker 3
have additional questions around that, Andrew?
Speaker 7
No, that's good there. Then I just wanted to get an idea of, obviously, you guys have in the past been very focused on running the company GAAP and non GAAP profitable. And you guys already still rolled those out. But how should we think about your willingness to increase operating expenses to drive that further growth versus driving back to profitability? Thank you.
Speaker 1
Well, I can tell you that me personally, this is Steve Mihaylo talking, understands that we have to compensate people a little differently. And we are interested in growth, non GAAP profit, GAAP breakeven and whatever it takes we're going to do that. Did you want to add anything, any of you guys?
Speaker 3
Yes. I would like to add that for the foreseeable future, the next two quarters, we are going to be focused on really integrating NetSAPI acquisition into operations and identifying all the synergies that we possibly can through the duplicate services and processes. And so as we identify those and consolidate the accounting, legal, HR, we are going to identify some synergies and some cost savings there that is going to drive back. And so as we get to more of a normal run rate on our expenses, then we'll look at the expansion of operating expenses. But we're going run the business the way we always have.
We're going to look at every dollar that we're spending and determine if it's a necessary expenditure. And we are still going to continue to focus on that bottom line. So, we haven't lost sight of that. I know the first two quarters of this year have been muddied with the additional costs associated with the acquisition. It is hard to put a number on that.
You guys see that in our non GAAP disclosures, but there are other costs associated with driving those synergies. There will be costs, but we're
Speaker 9
going to
Speaker 3
manage those as best we can.
Speaker 1
Thank you, Ron. And just as I mentioned before, this is a moving target, but you know where I'm coming from. And our Board feels the same way and everyone feels the same way.
Speaker 7
During the quarter, guys there was BCM1 acquisition of SkySwitch. Can you talk about how this affects the competitive environment specifically for NetSapient?
Speaker 1
I'm going to let Doug answer that one.
Speaker 2
Yes, I'll answer that and then I'll let Anh add a little color. But SkySwitch is obviously our largest NetSapiens partner. I think the BCM1 acquisition is a great opportunity for them to grow. We actually met Anh and I met with the BCM1 folks and the Status folks down at the IT Expo down in Miami in June. And they're extremely optimistic about their future growth and how we play a part in that.
Anand, any additional color?
Speaker 7
Yes, sure. I'd like to yes,
Speaker 6
I mean, just to echo really what Doug said, SkySwitch is a big partner for us. This was actually a testament to additional growth in that segment, BCM1 coming in and the folks that are involved with BCM1 to go out to make that investment to take SkySwitch to the next level actually just continues to show the commitment that our partners are having and what part we're playing in the community to continue to grow the market as a whole.
Speaker 4
So we're pretty excited by that acquisition.
Speaker 0
We'll take our next question from Michael Kaufman at MK Investments.
Speaker 9
Hi, Steve. Hi, Steve and Doug, I really applaud the way you're integrating this company, the Sapiens, and maintaining the financial prudence that you've always shown of growth with profitability. I did get some color which I liked on expanding the customer base, what you're doing there. I
Speaker 3
have
Speaker 9
a question on what are you doing to expand the investor base and to tell the story of a new Crexendo to the financial community so that we get some more coverage?
Speaker 1
Well, now, of course, we do that as necessary. I've turned over talking to investors to Doug Gaylord. So it would be better if he answers that question. Go ahead, Doug.
Speaker 2
Yes. Thanks, Steve. So, obviously, getting our message out to the investor community is mission critical. We currently have two analysts following us, Michael and Cauthors International and B. Riley, where we're looking for additional analysts to follow and cover us.
We've got a lot of analysts that follow us that haven't written coverage on us yet. We will be presenting at a couple of conferences coming up. We're presenting at the SNN Network Virtual Summit on August 18. We're presenting at the Colliers Virtual Investor Conference on September 9, and we'll continue to do additional investor conferences. We did LD Micro and the Little Grapevine Conference in June.
And so we're always reaching out to the investment community and trying to get our message out there. If this is any indication, we've got a record number of people on our conference call today. So we're excited about the fact more and more people are following the stock. And so, we'll continue to getting the message out there and looking forward to more and more people finding out about how great our story is.
Speaker 1
And one of the things you have to realize, Michael, we're not only totally focused on the balance sheet and the P and L, but we're also focused on the amount of float in the investors and so on and so forth. I doubt that there's going to be a question asked that we haven't considered amongst all of us. So just be aware of that.
Speaker 9
Now clearly you guys are true professionals with a lot of experience and that's why I've continued to invest. And I think this is going to be a home run for everybody on the management team, the employees and the investors. I wish you the best of luck. I was just wondering what's the current headcount with the company now that you have NetSafety? It wasn't clear from anything that I've seen so far.
Speaker 1
One of the things I look at is productivity and the productivity is not nearly what it has the capability of being. And we're so right in the middle of this thing, I'd rather not talk about that. But around 100 people and we've got more than that, but around 100 people is the right number for the size of operation we are today. I would rather talk about productivity and I think productivity should be north of 300,000. Right now that's where Crexendo was, but right now we'll have it to that probably by the end of this year.
Just be aware of the fact that net margins, the gross margins are going to be coming up, the headcount is going to be looking at productivity. But we're right in the middle of that. So I can't give you a number right today, but it's going to work.
Speaker 9
That was a very satisfying answer. Again, I wish you guys the best of luck. And I don't think anybody can do it better than you're doing it.
Speaker 1
You, Michael. And we appreciate your confidence in us. Jess, do you have the next question?
Speaker 0
I sure do. We'll go next to Charles Ronson at Amato and Partners.
Speaker 1
Thank you very much for taking me. Look, first of all, congratulations on super quarter. Everyone said that, but I mean, it's we all say it because it's true.
Speaker 2
So it's great to be able
Speaker 8
to say that.
Speaker 1
I wanted to ask you two questions without putting you on the spot. But to be fair, and I was going ask about your own revenue projection and acquisitions. You've already twice hinted at revenues. So I don't know if you really can be any more explicit. When you say you're shooting at a with your headcount of 300,000 production a person, I mean that's pretty explicit.
And I assume that's probably the low end. So we can work on that as we want. But maybe if possible, could you just are you willing to go into any of your ongoing acquisition strategy or basically just the ongoing strategy if you sort of talk on it? Well, first of all, let's fly in the sky at this point in time. But I have committed to 50% growth over the next year or two.
And I've talked about productivity, which should give you an indication where headcount is going to be. This is an algebraic equation. You can get the answers just plug in the numbers that you want to plug in. But I've committed to breakeven GAAP numbers, a positive non GAAP number and 50% growth, it's all there, but I can't talk about anything that hasn't happened yet. And I
Speaker 2
will add, Chuck, that from an acquisition perspective, I mean, we're always looking for opportunities. But right now, the most important thing for us is to integrate the existing merger with NetSapiens and that's what we're focused on. So although there's going to be opportunities out there, we know there's going to be opportunities. We've got the Golden Gate right in the palm of our hands. And so we're working on that integration.
So that's our main focus at this point.
Speaker 1
I totally appreciate that comment.
Speaker 8
I mean,
Speaker 1
I'll give you some examples and nothing imminent. I just want you to understand that. But there's 200 partners that we've added from NetSapience. All of those eventually need an exit strategy. And you can just take do the math, take the number of desktops that we have and multiply it by $20 20 1 dollars each, that's $400,000,000 there.
We're starting to see people approach us. And long and the short of it, I've told you that half of our growth will be organic and half of it will be through acquisitions. And trust me, we haven't fallen asleep at the switch. We're going to be following that guiding light. But you also have to understand we're in a catch-twenty two here.
And as we get bigger, acquisitions get easier. So as we get bigger, the acquisitions are going to be bigger, the end users are going to be bigger, the partners are going to get bigger, everything gets better, the bigger we get. And I'm just not satisfied at what we are now.
Speaker 0
We'll take our next question from R. H. Khan at R. H. Khan and Partners.
Speaker 8
Congratulations on another excellent quarter. Had a few questions that I was hoping you can answer for me. Primarily around Sapiens, are there any kind
Speaker 2
of new customers that you can now target
Speaker 8
now that you're largely consolidating into Sapiens and Crescendo into one? And so what does this mean for scalability going forward at the current rate, not accounting for any future acquisitions?
Speaker 1
Arham, believe me, I wish I could answer that question for you. But the best people are the salespeople. And I'm going to turn it over to Doug and he may turn it over to Anand and he may turn it over to John or vice versa. So Doug, will you? Thanks, Arham.
Speaker 3
Great to talk
Speaker 2
to you again. And yes, obviously, as we continue to grow, growing the Miss Sapiens partners community out there is top on our list. They currently have tremendous community of partners and we will continue to grow that. We are continuing to grow that. I think this allows us to go after bigger opportunities there in that space.
One of the things that we bring to the table now with the combined forces of and Tuxedo is more power to leverage those opportunities. So before where somebody was maybe with BroadSoft or Metaswitch, they're already in bed with Cisco or Microsoft, they may have looked at as maybe too small of an opportunity for them to take a chance on now with the combined entity with NetSapiens and Crexendo. They can see our financials, they can see our growth and our stability. And so maybe some of those bigger opportunities will start making that migration. So that's always been a focus for us.
We've had a lot of good success in that fishing ground. And so hopefully, this opens up opportunities for bigger partners and more partners to migrate from their existing platforms over to the Netafings platform. Anand, any other color? Yes. I mean, again,
Speaker 6
I think Doug hit it right on the head. I think that the biggest thing for us was even when we embarked on the next level of growth, hence that's why we're here, was this ability to go at scale to the customers that we're competing against to not have to second guess about our size, about our wherewithal, our sustainability. So I think that's a key factor for us. And so we continue to see that. I think the prospects that we talked to are that much more comfortable now with our backing and our longevity.
Speaker 2
Okay, great. Thanks. Are you able to
Speaker 8
yes, yes, I see. Thank you, guys. Are you able to give me an updated screenshot of the backlog where it stands today?
Speaker 2
Backlog was flat year over year, only due to the fact that we haven't been able to get the backlog for our acquisition included in there. So when we look at our backlog, we didn't see a large increase in our backlog from Q2 twenty twenty, but we don't have any of the acquisition backlog built in there. We're working on those backlog tables now and we'll have those in Q3. So, you should see a significant increase backlog in Q3.
Speaker 1
And just remember that, as I mentioned before, this is a moving target. And those are all things that we're working on. And as Doug mentioned to you, we'll have the answer in Q3.
Speaker 8
Okay, great. And final question for me. One of the main reasons we got into Crexendo was the cloud migration. We saw that, you know, kind of proliferate earlier, couple years ago, and it's still going on. What can you say about the industry in itself, not just Crexendo and the Sapiens?
What can you say what's remaining in the cloud migration? How much is left? And finally, what kind of cloud migration characteristics of NetSafety impact? Is there more of a room to grow? Is it somewhere to crescendo?
And and how how does it change for you now that you require NetSafety?
Speaker 1
Well, I am I'm going to turn that over to Doug, but let me just tell you after the bulk of the market which is probably three, four years from now has migrated onto the cloud. I've given the edict to our people that they better offer the best service in the entire world to these end users so we can get them to switch from Brand X to Brand Crexendo. It's that simple. Do you want to add to that?
Speaker 2
Yes, I will, Steve. So, Arum, as I mentioned in my comments, the Frost and Sullivan report that I mentioned just came out only about two or three months ago and they highlighted that there's still only about 39% adoption of cloud communications in The United States. That means 61% of the businesses in The U. S. Still have not migrated over to the cloud for their communication solution.
I think the pandemic, although it was a silver lining for our industry that it forced a lot of people to move over, it also put a lot of people on ice until the pandemic was in the rearview mirror. So, we still see extremely high demand out there for UCaaS services. It's not a matter of if these businesses move to the cloud, it's when. And so, with 61% still not migrated to the cloud over the next couple of years, that number will continue to decrease down to the teens probably in the next three or four years according to Gartner. And so, when we look at where we are in the industry, there's plenty of opportunity for growth for the next few years, because all of those businesses will still be migrating over to the cloud.
And that works well for not only Crexendo on a direct and on our agent basis, but also works extremely well for NetSapiens because all of their partners, resellers are going after those same customers. So, it's ideal for us and we don't see that growth slowing anytime soon because there's still a plethora of businesses out there that have to and will be moving to the cloud in the short term.
Speaker 1
Just so you're aware of it, Arham, the edict is for us to have bigger and bigger end users and bigger partners. But everything Doug said is absolutely true.
Speaker 8
Okay. Excellent. That that answers all my questions. I'll leave it
Speaker 3
up to somebody else. Best of luck
Speaker 8
to you guys. Excellent results, and, you guys are a high quality management team, and I
Speaker 1
I wish you the best of luck. Very pure. Thanks, Lauren. Good talking to you.
Speaker 4
Bye.
Speaker 0
We'll take our next question from Damon Fanalbi, a Private Investor. Your line is open.
Speaker 1
Afternoon, Damon.
Speaker 4
Good afternoon, gentlemen. Nice to hear you guys report on the positive results. Thank you. I was asking Steve, what is the strategy to compete with Zoom Phone? And now that they've acquired Five9, how are you guys viewing that?
Speaker 1
Well, of the things we have is our VIP platform, which includes video. And that isn't even in any of the numbers, but that will be made available to all of our partners and end users. And Doug or want to Yes.
Speaker 2
No, I think we've got a great solution out there. I mean, Zoom is a player in our field now, obviously leveraging their positioning with the video collaboration and trying to get into UCaaS. The acquisition of Five9 puts them into the high end call center application space. We feel like we've got a great call center application for the SMB market. And so, think with Zoom and Five9s, that's a big acquisition.
I was talking to somebody the other day and they said that's putting two unicorns together. So, when you put two unicorns together, then you got to figure out what you got. I know that with what we've got with NetSapience, we've got a tremendous UCaaS offering with a great contact center application. So, for the market that we're going after, I see Zoom as competitor, but not a serious competitor because we've got our mission and I don't worry about Zoom getting into our lunch.
Speaker 4
Thanks, Doug. Do you see that Frost and Sullivan report, are they considering the seats being used by Zoom as part of the market penetration?
Speaker 3
I don't believe they are. I
Speaker 2
don't believe they are. I think in the Frost and Sullivan in the other category, I know they have RingCentral and 8x8 and Vonage in the other category, but I don't believe they had Zoom in the UCaaS consideration because at the time, Zoom was just getting into the UCaaS offering. So I'm not sure if Frost and Tullen really included Zoom as part of that report.
Speaker 4
Got it. Okay. I'm not going to bring up the other 800 pound gorilla of Teams, but if you want
Speaker 3
to comment on that, I'm curious to hear
Speaker 5
your thoughts of Microsoft.
Speaker 2
Yes. I mean, I think the Teams is a great offering for us to integrate with. And I think we've got tremendous, tremendous uptake of our integrations with Teams. We've got a Teams offering with VIP and we've got a Teams offering with the Methadian platform as you're well aware. And so actually the first customer that we implemented on the VIP platform for Crexendo was an opportunity that had 50 Teams integration licenses.
So we see it as a true complement to Teams. I think most people out there that are using Teams don't want to put all their eggs in one basket with Microsoft. And so I think we've got a tremendous offering for folks that are using Teams to be able to have a high end UCaaS offering that integrates extremely, extremely well with Teams. Anand, any other color?
Speaker 6
Yes. So, Damon, I mean, I think in relation to the same discussion, Zoom, Microsoft, all of these folks are actually just creating more opportunity. The likes of Microsoft and Zoom are really trying to go after the wider commoditized market. But if you look at the sub segment of really the behemoth providers that are competing with those folks, the fragmentation is a very, very interesting thing. And so the approach that we want to take and continue to take is to offer the tool set so that providers and partners can compete with the likes of the biggest players.
And so we're competing on different dimensions and not necessarily trying to be everything to everybody, which is what these players do. The advantage that we have is the agility and the flexibility of the platform to go after those sub segments that are in many cases more valuable on a per seat basis.
Speaker 1
And let me add something to that, Damon. With the advent of APIs today, all we have to do is write an API and we can integrate with anybody.
Speaker 4
Is
Speaker 1
there anyone else, Jess?
Speaker 0
I do not have any other questions holding.
Speaker 1
Okay. Well, I want to thank everyone for being on the call today, and we look forward in early November to chatting with you about the third quarter and telling you all about our progress. Thank you very much and look forward to talking to you.
Speaker 2
Thank you, Lee. Appreciate it.
Speaker 0
Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time and have a great day.