Crexendo - Q4 2023
March 5, 2024
Transcript
Operator (participant)
Greetings. Welcome to Crexendo's Fourth Quarter and Year-end 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Jeff Korn, CEO at Crexendo. You may begin.
Jeffrey Korn (Chairman and CEO)
Thank you, Paul. Good afternoon, everyone. Welcome to Crexendo's Fourth Quarter and Year-end 2023 Conference Call. I'm Jeff Korn, Chairman of the Board of Directors and CEO. On the call with me today are Doug Gaylor, our President and COO, Ron Vincent, our CFO, Jon Brinton, our CRO, and Anand Buch, our CSO, excuse me. In a moment, Jon will read our Safe Harbor statement. After that, I will give some brief comments on our performance for the year-end and fourth quarter. Ron will then provide more detail on the numbers before handing the call over to Doug to provide a business and sales update. After that, we'll open up the call to questions. Jon, would you please read the Safe Harbor statement?
Jon Brinton (CRO)
Thank you, Jeff. 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 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 assumption 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 31st, 2023, and the Forms 10-Q 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 otherwise. I'd now like to turn the call back over to Jeff. Jeff?
Jeffrey Korn (Chairman and CEO)
Thank you, Jon. I'm very pleased to report that in the fourth quarter, Crexendo once again achieved GAAP profitability. While my focus has been on cash flow and EBITDA as primary indicators of our operational health, maintaining GAAP profitability represents a significant milestone for us. This achievement is particularly meaningful as it marks roughly one year since I stepped into the CEO role, a period during which the management team last year deliberately paused our acquisition strategy to concentrate on maximizing the efficiencies of our existing operations and fully integrating the acquisitions we had already made. Our efforts have been very successful and continue to work well. In the fourth quarter, we maintained our commitment to driving robust growth alongside continual operational enhancements and sales improvements.
Our efforts bore fruit as we entered the fourth quarter with strong momentum, culminating in a remarkable 24% increase in fourth quarter revenue compared to the same period last year. This achievement is part of a broader success story for the year, with our total annual revenues climbing by an impressive 42% year-over-year to reach $53.2 million. These results are particularly noteworthy given the challenging start we had at the beginning of last year with an initial loss position in the first quarter. This turnaround reflects our team's hard work and dedication to not only achieving but exceeding our strategic goals. This hard work and dedication continues every day by everyone with me in this room and everyone working at Crexendo. The transition of our customers from our classic Crexendo system to the cutting-edge VIP platform is advancing smoothly and effectively.
We are very optimistic about completing the migration by year-end. Achieving this milestone will allow us significant operational efficiencies, including vacating the premises we currently lease and eliminating the expense associated with hosting and an additional system. Furthermore, it will enable us to relocate our workforce more effectively. Employees who had been dedicated to migrating customers and maintaining the old system will transition to new roles. This shift not only reduces costs but also enhances our support capabilities, aligning with our commitment to delivering exceptional service and value to our customers. Our journey over the last year has not been about chasing fleeting success. Rather, it's been a dedicated effort toward integrating our acquisitions thoroughly, enhancing operational efficiencies, and overall improving our company's standing.
The ability to quickly generate additional cash and achieve GAAP profitability is a testament to the strategic timing and value of our past acquisitions, affirming the strength of our business model and the mechanisms under which we review and approve acquisitions. As we move forward, we will again be pursuing accretive acquisitions with confidence in securing at least one meaningful addition to our portfolio this year. Though maintaining GAAP profitability might become more challenging as we embark on new acquisitions due to the associated intangible costs, I am optimistic about our continued profitability, positive EBITDA, and our capacity for growth and value creation. As part of our ongoing commitment to strengthening Crexendo, I'm pleased to announce a series of strategic investments aimed at enhancing our operational capabilities and ensuring our competitive edge in the market.
We are doubling down on our hosted platform, a cornerstone of our offering to maintain our position as the third largest and fastest-growing platform in the country. The demand for our hosted solution is accelerating, with more customers preferring our hosted platform over the hassle of managing and hosting themselves. Recognizing this shift, we are proactively investing in what we call Hosted 2.0. This initiative is not merely an upgrade. It's a transformation. Hosted 2.0 is designed to facilitate seamless growth, integration, and provide the essential tools our licensees need to run their business effectively. Our current solution, while excellent and effective, needs to evolve to accommodate the growth we anticipate. Through that investment, we are not just preparing for the future. We are shaping it.
Our aim is to continue offering unparalleled service to our customers while ensuring our platform remains robust, scalable, and capable of integrating new technologies and acquisitions effortlessly. We're also upgrading our accounting system. This upgrade is not just a step toward modernization. It's a move to seamlessly integrate future acquisitions and manage the growth we are anticipating. The updated system will provide us with the agility to effectively we effectively need to scale our future growth. In conclusion, our fourth quarter and year-end results have been highly encouraging, serving as a testament to our strategic and operational strengths. Our technology continues to receive exceptional reviews and awards. Our team is excited about that, and we're also looking forward to our communication system being used here in our hometown of Phoenix at the Final Four coming up next month.
Looking ahead, we anticipate not only sustaining our double-digit organic growth but also amplifying it through strategic acquisitions. The future is very, very bright for us. I, along with our dedicated team, am excited about the year ahead and our opportunities to continue our tremendous growth and success. We are committed to continual improvement and driving growth for our company, technological advancements for our customers and partners, and value for all of our shareholders. With that, I'll turn the call over to Ron for more detail on the numbers. Ron?
Ron Vincent (CFO)
Thank you, Jeff. Good afternoon, everyone. I'll start with some financial highlights for the fourth quarter of 2023. Total revenue for the quarter increased 24% to $14.2 million compared to $11.4 million for the prior year. Our service revenue for the quarter increased 26% to $7.7 million compared to $6.1 million for the prior year. Our software solution segment revenue for the quarter increased 21% to $5.3 million compared to $4.4 million for the prior year. Product revenue for the quarter increased 23% to $1.2 million compared to $947,000 for the prior year. Operating expenses for the quarter decreased 69% to $14.1 million compared to $46 million for the prior year. The significant decrease is primarily related to the goodwill and long-lived asset impairment of $32.7 million we reported in the prior year due to a sustained decrease in our stock price.
The company reported net income for the quarter of $61,000, which is break-even on a basic and diluted common share compared to a net loss of $32.6 million or $1.33 loss per basic and diluted common share for the prior year. Non-GAAP net income of $1.6 million for the quarter, $0.16 per basic and diluted common share. That's compared to $2.5 million or $0.10 per basic and $0.09 per diluted common share in the prior year. EBITDA for the quarter was $918,000 compared to a loss of $1 million for the prior year. Adjusted EBITDA for the quarter was $1.7 million. That's compared to $596,000 for the prior year. Now, I'll go give you some highlights for the full year ended December 31st, 2023. Total revenue for the year increased 42% to $53.2 million compared to $37.6 million for the prior year.
Service revenue increased 52% to $29.7 million. Our software solution segment revenue increased 19% to $18 million compared to $15.1 million in the prior year. Product revenue increased 90% to $5.5 million compared to $2.9 million for the prior year. Operating expenses for the year decreased 27% to $54.9 million compared to $74.9 million for the prior year. As discussed earlier, this significant decrease is primarily related to the goodwill and long-lived asset impairment that we recorded in the prior year. With two consecutive quarters of net income, the company was able to reduce a net loss for the full year to 320—sorry, $362,000 or $0.01 loss per basic and diluted common share. That's compared to a net loss of $35.4 million or $1.54 loss per basic and diluted common share in the prior year. Non-GAAP net income was $6.7 million for the year.
That's $0.26 per basic common share and $0.24 per diluted common share compared to non-GAAP net income of $4.1 million or $0.18 per basic and $0.16 per diluted common share for the prior year. EBITDA for the year was $1.9 million compared to a loss of $2 million for the prior year. Our adjusted EBITDA was $5.7 million for the year. That's compared to $2.4 million for the prior year. Our cash balance at December 31st was $10.3 million. That's compared to $5.5 million at the end of the prior year. We had positive cash flows from operating activities of $3.5 million. The fourth quarter had positive operating cash flows of $2.6 million compared to $887,000 for the first nine months of the year. Our investing activities provided $3.7 million of cash compared to $1.7 million used for investing activities in the prior year.
During the year, we received $3.8 million in proceeds from the sale of our corporate office building. We utilized $2.3 million of our cash for financing activities during the year. That's compared to $54,000 used in the prior year. In connection with the sale of our corporate office building, we repaid the note payable on the building of $2.3 million. I will now turn the call over to Doug Gaylor, our President and COO, for additional comments on sales and operations.
Douglas Gaylor (President and COO)
Thanks, Ron. I'm extremely pleased with our record Q4 and year-end numbers that we reported today and very excited about our strong momentum as we start 2024. Our 24% year-over-year increase in Q4 revenues, along with our 42% year-over-year increase in annual revenue, were the direct result of our focus on growing organically as well as through acquisition. Our growth, combined with our dedication to managing costs, allowed us to achieve GAAP profitability ahead of schedule and finish both Q3 and Q4 with positive GAAP earnings. We had GAAP net income of $60,000 for the quarter and a small GAAP loss for the year of $362,000. On a non-GAAP basis, we had strong non-GAAP net income of $1.6 million for the quarter and $6.7 million or $0.26 per share for the year.
Our results for the quarter and for the year highlight our success in managing costs and recognizing significant synergies from our acquisitions, allowing us to quickly leverage the opportunity to grow our business. Our entire team worked tirelessly together to improve business processes and make our company more efficient, and we believe that we will continue to see more efficiencies and cost synergies as we continue our growth. Our acquisition of one of our software solution licensees, Allegiant Networks, that we completed at the end of 2022 had a great first year under Crexendo. We saw nearly a 21% organic growth rate on a standalone basis for Allegiant as they benefited from transitioning from a local provider to a division of the fastest-growing UCaaS provider in the country.
We've also been able to benefit from cross-utilization of the talent from our acquisitions to help improve our revenue production per employee on an overall basis. As Jeff mentioned, we paused acquisition discussions in 2023 to maximize synergies from our previous acquisitions, and we're excited to be priming the pump for additional creative acquisitions of one or two in 2024. We've highlighted in the past that the 220 licensees that we have that are using the Crexendo platform to run their UCaaS business are the ideal stocking pond of candidates for us to find our highly accretive acquisition targets, and we look forward to landing our next big fish from the pond.
We continue to see tremendous demand and growth in the UCaaS industry, and are proud of the fact that Frost & Sullivan recently awarded us their 2024 North American Strategy Leadership Award and highlighted our outstanding 36% user surge in 2023, which was nearly double the industry average. Our platform now supports over 4 million users across the globe. Our Crexendo licensees and our agents continue to benefit from the rapid migration by small and midsize businesses and enterprise-level businesses to the cloud. As our licensees grow, they need additional services from Crexendo, which help drive a 19% organic growth rate on the software solution side of the business for the year.
Our unique pricing and support model for our software solutions platform, combined with our robust feature set, continues to drive new licensees to our platform and allows us to differentiate ourselves from our two largest competitors, Cisco's BroadSoft and Microsoft Metaswitch platforms. We had great success in adding new licensees in 2023 and have left—that have left the likes of Cisco, Microsoft, and Avaya for Crexendo and hope to see more of those in the year ahead. We also continue to see strong traction in our international efforts as we saw a large increase in bookings and new logos added in 2023 outside of the U.S. Our telecom services segment grew at 9% organically, excluding our Allegiant acquisition, and we saw strong demand for our offerings from our channel partners and saw 405% growth in sales for the year from our master agent partnerships.
Our channel partners sell our services to their prospects and customers on a revenue share basis, and we saw nice growth from our existing channel partners and added 28 new resellers to the program over the course of the year. Our channel partners have great confidence representing the Crexendo VIP offering because of our 100% uptime guarantee, along with our lifetime warranty on our Crexendo phones and our best-in-class customer service and customer satisfaction results. We continue to add new and larger agent partners to the program and are excited about the opportunities in the funnel that these new agent partners are bringing to the table. Our backlog continues to grow, and at the end of the year, it is now at $63.9 million, an increase of 36% from the end of 2022.
Our backlog number is the sum of the remaining contract values for our telecom services and software solutions, customers that will be recognized on a sliding scale over the next 60 months, and it's a very strong indicator of our future revenue stream. We continue to focus on improving our gross margins and saw a nice increase from 65%-69% for the year in our software solution segment. Telecom service segment gross margins continue to be affected by lower margins from some of the Allegiant acquisitions, but the telecom service, service margins were 58%, and telecom services product margins were 39%, including Allegiant. Excluding Allegiant, those margins were very consistent with prior year at 68% for telecom services and 42% on the product. Our amazing engineering team continues to add to and improve our award-winning technology.
We were ranked by G2.com, which is the premier business software and services review site, as the best usability solution in the hosted telecom sector for the fall of 2023. We were also honored with the Remote Work Pioneer Award as well as the Product of the Year Award from Internet Telephony magazine. In addition, we released our version 44 software in Q4 to great reviews. Version 44 allows for new communication platform as a service or CPaaS capabilities via our OpenAPI 2.0 release, and this offering also allows for new generative artificial intelligence or AI technology features to easily be integrated into the platform. The first AI solution released during Q4 allows for AI powered by ChatGPT in our company's contact center solution that enables the system to interact and answer commonly posed questions using AI without the need for a live body.
So as we start 2024, I couldn't be more excited about the future direction and opportunity for Crexendo. Three years ago, we had revenues of $16.4 million, and by executing well on our plan for organic and inorganic growth, we have more than tripled our size in three short years to over $50 to over $53 million. We are positioned perfectly with a combination of strong demand for our product offerings along with great solutions, with a disruptive pricing model, and the best and most talented workforce in the industry to continue our strong growth and our success. We're committed to delivering the best UCaaS, CPaaS, and CPaaS offerings in the sector to our customers and our partners and the best returns for our shareholders.
As the fastest-growing platform solution in the country, supporting over 4 million users, we are focused on enhancing our solutions, improving our efficiencies, and returning strong results. With that, I'll now turn it back over to Jeff for any further comments.
Jeffrey Korn (Chairman and CEO)
Thank you, Doug. Actually, I don't have any further comments. So, Paul, why don't we open the call up to questions?
Operator (participant)
Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one if you wish to ask a question. One moment, please, while we pull for questions. The first question today is coming from Mike Latimore from Northland Capital Markets. Mike, your line is live.
Michael Latimore (Managing Director and Senior Research Analyst)
All right. Thanks, Jeff. Congrats on the great year there. Very, very nice.
Jeffrey Korn (Chairman and CEO)
Thank you, Mike.
Michael Latimore (Managing Director and Senior Research Analyst)
Yep. Just on the, the users, 4 million or so relative to 3.5 million in the September quarter, can you just give a little more detail on what drove that strong growth? I mean, 14% sequential growth's pretty impressive. Were there, like, a couple big onboardings there, or was it just kind of broad-based demand, or?
Douglas Gaylor (President and COO)
Yeah. Great question, Mike, and it's really a combination of, of all of the above. So when we think about, last year, we added 21 new logos, that are new platform providers of our platform. So as those new logos come on board, they, they tend to ramp up very quickly. So if they're putting in a platform, once they go live, they move all of their customers or, or quickly try and move all of their customers from their old platform over to our new platform. So that obviously gives us a nice bump. But our existing licensees, 220-plus now, in total, they're growing at, the industry rate, if not higher. And so as they grow, we continue to grow. And so our licensees are doing great out there. There's still a lot of demand in the SMB market for our services and our solutions.
And so as our licensees continue to grow and add more users, you know, it really allows us to see that trajectory go. So, the 3.5-4 million was a pretty quick gate for us to eclipse, and we anticipate, you know, getting to 4.5 million and 5 million, you know, here in the course of this year, so.
Michael Latimore (Managing Director and Senior Research Analyst)
Great. Great. And then on Allegiant, you know, real, really strong growth for that entity alone. But how are you thinking about the cross-sale opportunity with that group this year?
Douglas Gaylor (President and COO)
Yeah. Great question again. So when we look at the cross-sales opportunity, a lot of opportunity for us to sell the MSP services and the internet services that they're selling. If you look at their average-size transaction with their customers, it's much larger than our average-size transaction on our direct side of the house. So, when we look at selling that bundle of services, we're excited about that prospect. Jon Brinton, our Chief Revenue Officer, is here, and so I'm gonna have him just comment a little bit on some of that cross-migration from the Allegiant team over to the Crexendo team.
Anand Buch (Chief Strategy Officer)
Yeah. Hi, Mike. How are you doing today? So backup real quick.
Michael Latimore (Managing Director and Senior Research Analyst)
Good.
Anand Buch (Chief Strategy Officer)
Good. Back up super quick on the growth. You know, one thing is Doug mentioned the Frost & Sullivan Leadership Award that we got, and in that, we are benchmarked at growing double the rate of the market, by them. That's something that we continue to appreciate 'cause of the success of our licensees and continuing to grow there. As it relates to the Allegiant, cross-sales opportunity, you know, we, we think that's gonna give us a, a significant opportunity to increase our share of wallet with customers for the services that make sense. We've, we've been integrating some of our operations and support teams, so customers continue to get the great experience like we talked about with our G2 rankings.
And we're now starting to look at those services that we can bring into the bundle on what we call the VIP that side of the house so that we can add those to our offerings there. So we're excited to do it. We're just doing it in a purposeful way so that we make sure we're still delivering the same customer experience and excellent outcome like we have in the past.
Michael Latimore (Managing Director and Senior Research Analyst)
Excellent. Excellent. One more quick one here. I guess, can you provide any color on just how January and February have played out from a bookings perspective? You know, kind of is it normal seasonality with, you know, better, worse? Just how did you see January and February relative to kind of those normal months, you know, the start of the year?
Jeffrey Korn (Chairman and CEO)
Josh, as you know, we don't give guidance, but I'm sorry. We don't give guidance, Mike. But, as I said in my comments, I'm very pleased with the results we're seeing for Q1, so I don't wanna say much more than that. But, I wouldn't have indicated that we expect double-digit growth if we didn't see Q1 going well.
Douglas Gaylor (President and COO)
Yeah. And I will tell you, Mike, that sales momentum is very strong right now. You know, we continue to add new reseller partners out there, and our funnel for sales opportunities is as strong as it's ever been. So, we're not seeing any slowdown in opportunities out there, and bookings continue to have great momentum.
Michael Latimore (Managing Director and Senior Research Analyst)
All right. Great. Best of luck this year.
Anand Buch (Chief Strategy Officer)
Thank you.
Douglas Gaylor (President and COO)
Thanks, Mike.
Operator (participant)
Thank you. The next question is coming from Josh Nichols from B. Riley. Josh, your line is live.
Josh Nichols (Analyst)
Yeah. Thanks for taking my question. Just 'cause you mentioned you've been doing a lot of work to finish the migration to the Crexendo VIP platform, and it looks like that's gonna be done this year. You said service gross margins excluding the Allegiant acquisition were around 68%. Do you expect that you'd get back to that level for the entire company by the end of this year if you do complete that migration?
Douglas Gaylor (President and COO)
Yeah. I'll tell you where the migration is, currently, and then I'll have Ron add a little bit more color on, where we see the pickup from a gross margin perspective, once that, migration is complete. But, we feel like we're about 70% complete with that migration right now, so, we're almost three-quarters of the way there. So, Jeff said by the end of the year, I'm a little bit more optimistic that, it might be towards the end of summer. And so we're extremely excited about that migration process. The customers are extremely happy because they're getting, more robust feature set, for in most cases, roughly the same, cost investment.
But once we get that full migration over, we get a lot of pickup because we'll have a lot of cost that will go away in supporting two platforms, and Ron will add a little bit more color on that.
Ron Vincent (CFO)
Yeah. Josh, so, so we will have a little bit of anticipated pickup in our gross margins as we no longer have to support two platforms and an extra data center. But it's hard to pinpoint exactly what that percentage point's gonna be to give guidance on that. You know, we're gonna continue to have lower margin sales out of the Allegiant acquisition, just due to the nature of the products and services they sell. And so that's gonna have a little weight on there. So we may not get back to the 70%-72% range that we were trending prior to the acquisition, but we expect some improvement as we go forward. Fair enough. Good, good to hear that there's probably gonna be some improvement.
And then just curious 'cause you did hit the pause button on acquisitions, understandably so, right, for last year, but it looks like you're, you're back at it. What are kind of, like, the company's KPIs or criteria in terms of, like, is it size, gross margin, growth, profitability, or how do you think of,
Jeffrey Korn (Chairman and CEO)
Well, all of the above. I mean. Yeah. All of the above, to be honest. As Doug likes to say, we look at our stocked fishing pond, and we have some natural people there. Obviously, our preference would be to pick up one of our licensees because that becomes a very easy acquisition. We essentially just have to change the billing from their name to Crexendo, and we've got everything working, and we can usually pick up some good engineers and/or customer service people. But we're open to an acquisition that incorporates technology or other aspects that can help us grow our business. I mean, we're obviously looking at a number of things now, and I don't wanna tip my hand on the call, but the metrics you mentioned are the things we look at.
Douglas Gaylor (President and COO)
There's plenty of opportunities out there, as we've talked about, and when we look at those types of opportunities, you know, it's not necessarily the size of the opportunity, but how well it's gonna integrate into our company and be an accretive acquisition. Plenty of opportunities out there, and we're excited about the opportunities that are surfacing.
Josh Nichols (Analyst)
Appreciate it. Thanks, guys.
Jeffrey Korn (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. The next question is coming from Max Michaelis from Lake Street. Max, your line is live.
Max Michaelis (Analyst)
Hey, guys. A nice quarter. First one out of me is just related to international revenue. Hey, where did that finish out in Q4 as a percentage of revenue? And then maybe if we're looking out into 2024, it sounds like Q4 bookings were strong there. What could we expect maybe as goalposts for percentages of revenue in 2024 from the international space?
Jeffrey Korn (Chairman and CEO)
I'm gonna let Ron answer the percentage question and then give it to Anand to discuss our international sales a little bit more. Go ahead, Ron.
Ron Vincent (CFO)
Okay. So currently, the international revenue is, you know, less than 5% of our total revenue, but we're continuing to see traction in that area. I'll let Anand give you some more details on our sales efforts and international location.
Anand Buch (Chief Strategy Officer)
Yeah. So, internationally, you know, even with a pretty small effective team, we've started seeing some growth in the Australian markets. We're seeing, obviously, because our team is based out of the U.K., we have a number of big partners now that are continuing to grow. And that's, you know, going back to the earlier question about the users, that's where you're seeing, obviously, an uptick, because we're kind of early in the journey with respect to the international partners that are out there. So Europe, we have some opportunities now in APAC as well that we're looking at. So it, it's a pretty widespread, but we're also being very, you know, purposeful, if you will, given the locations and the relationships that we have with the size of our team. So, EMEA is kind of target number one.
Australia, and New Zealand, partners in that area, and then APAC after that.
Max Michaelis (Analyst)
All right. Thank you. Next one. Just I wonder if you can go into more detail on the Hosted 2.0 investment as well as the accounting system. Maybe put a size to the investment you expect maybe in 2024.
Ron Vincent (CFO)
Yeah, Max. I think we're going to spend, well, we've put it in our 10-K, so we've contracted with Oracle, who's gonna be and providing hosting and backend support to us, which opens up a world of opportunities for us. I think we'll probably spend about $300,000 this year, Ron, and probably $1 million next year. We're as we expect the growth to accelerate substantially next year, as we have the Hosted solution fully up and running.
Max Michaelis (Analyst)
All right, guys. That's it for me. Thanks.
Operator (participant)
Thank you. Next question is coming from John Roy from WaterTower Research. John, your line is live.
John Roy (Managing Director)
Thank you. So to take a step back a little bit maybe, I, I know you mentioned you were getting started on AI. I was curious as to other areas you might be looking to exploit it. You know, is it more better customer experience, more cost control? Are you gonna try and look at it to help with sales? Just if you give us any color on projects you've got going on there, that would be great.
Douglas Gaylor (President and COO)
Yeah. So AI allows us a lot of different use case scenarios. And so when we talk about AI, it's really an opportunity for applications to integrate with our system. And so we've got a lot of third-party developers out there that are developing AI applications for different use cases. So currently, as I mentioned, on my comments, you know, one of the use cases is having contact center capabilities where a live body gets replaced with an AI interface, using ChatGPT to be able to pull up questions and answers and be able to eliminate maybe 80%-90% of commonly asked questions without having a human to interface with that.
But we've also got a lot of other AI applications: sentiment analysis, being able to do call recordings and be able to analyze those call recordings and be able to act on those call recordings and have a supervisor join in when something gets said or if there's a sentiment that is highlighted that needs to be elevated or escalated to a superior or manager. So a lot of applications there. But, you know, if Anand, you wanna maybe give a little bit more detail on some of our third-party application partners out there that are developing AI applications.
Anand Buch (Chief Strategy Officer)
Yeah. I'll be happy to. So yeah, just I mean, as Doug pointed out, I mean, I think AI as a tool, you know, opens us up to many, many different use cases. But one, you know, some of the examples that we're seeing is, for example, you know, generative voice prompts or music on hold and things of that nature that are customized to a particular SMB or a particular business. So you're seeing anything from actual, you know, voice system AI applications that are outward-facing.
But then one other point I'd like to make also is just from a productivity perspective, our developers are using it internally to code check, to, you know, provide an extra pair of eyes that ultimately just makes, you know, the tedious work. We're able to actually rapidly accelerate some of that work using internal AI systems to help guide our work as well. But in terms of the third-party applications, yeah, there's, you know, a whole host of folks.
If you know, if you think about the 4 million users that are out there and growing, there's, you know, whether it's CRM integrations, whether it's voice-specific integrations just Doug obviously mentioned, you know, voice services, whether it's sentiment analysis, summarization, things of that nature, a whole host of application providers that are now, you know, part of the ecosystem and growing into the ecosystem as we go forward.
John Roy (Managing Director)
Great. Hey, I'm a slightly different question. I believe you said you're gonna be moving out of some buildings. Can you give us some color on how much you expect to save there?
Jeffrey Korn (Chairman and CEO)
Well, I think Doug explained that, but Ron explained that before. We will have some substantial cost savings as we won't be maintaining two systems, but it's a little hard for us to quantify how much it is. But if we don't take out at least $1 million in costs, I would be very surprised.
Douglas Gaylor (President and COO)
And on top of that,
Jeffrey Korn (Chairman and CEO)
That's great.
Douglas Gaylor (President and COO)
On, on.
Jeffrey Korn (Chairman and CEO)
I'm really talking about buildings.
Douglas Gaylor (President and COO)
Yeah. On top.
Jeffrey Korn (Chairman and CEO)
Okay.
Douglas Gaylor (President and COO)
On top of that, yeah, we're currently doing a sale lease back. So after we sold our building, we did a 12-month lease back with a 6-month extension option. And so when we are looking at new spaces out there in the Phoenix market to relocate our corporate headquarters to, you know, we anticipate we'll pick up some significant cost savings on a monthly basis. There's a lot of empty space out there and some attractive deals out there. So we feel that once we relocate out of this building, we'll not only have the significant savings on the support of our data center, but we'll also have cost savings on our monthly expense for rent and services.
John Roy (Managing Director)
Great. Thanks so much, and congratulations on the growth.
Jeffrey Korn (Chairman and CEO)
Thank you. Thanks, John.
Operator (participant)
Thank you. The next question is coming from Chris Sakai from Singular Research. Chris, your line is live.
Chris Sakai (Director of Research)
Yes, hi. Good afternoon. I just had a question on Allegiant, and if you could. I know last quarter, you had a carve-out for gross margin. I know it was a little less than the overall segment. So wanted to see if there was any improvement there with the Allegiant gross margin.
Ron Vincent (CFO)
Yeah. So, we do have carve-out on that. So, our Crexendo Business Solutions service revenue came in in fourth quarter at 67%. Allegiant came in at 37% for service revenue. And our product revenue from Crexendo Business Solutions was 45%, up slightly from 42% in Q3. And Allegiant product revenue came in at 35% for the quarter.
Chris Sakai (Director of Research)
Okay. Sounds good. Just talking about AI, will that be leading to any, any cost savings as far as taking the place of any jobs?
Douglas Gaylor (President and COO)
Yeah. When we look at AI, it's really more from a sales perspective, and a revenue generator for us because all of our licensees and all of our end-user customers are looking for aspects where AI will help their businesses. We're gonna be using some of it internally for customer support, but it won't be replacing positions, but it'll just allow us to continue our great customer support. We're already ranked number 1 in G2.com, so maybe we'll be a 1 A-plus with our AI interfaces.
Ron Vincent (CFO)
It will improve our access to information to customer service and should shorten our response time. So to that extent, it may enable us not to use some of the future hires we have in our budget. But we certainly don't anticipate cutting anybody 'cause we're very proud of our customer support, and we won't do anything to mess up that apple cart.
Chris Sakai (Director of Research)
Okay. Sounds good. And then can you talk about license growth internationally? How is that going?
John Roy (Managing Director)
We'll give it back to Anand.
Anand Buch (Chief Strategy Officer)
Sure. Yeah. I mean, I think, you know, as Ron pointed out earlier, you know, the number of logos that we had coming in from international, and it continues to grow in that regard across the board. We've picked up, probably another three or four logos in the U.K., one out in Australia. And so that continues to see a chart. We've also, you know, increased our staff and focus in that area, with respect to the marketing that we're doing there. So that expansion continues, both companies that are headquartered out there. And then in general, we're actually seeing folks now starting to expand, which have operations in, you know, the U.K., but they may or in the U.S., but they may have, you know, remote offices, etc. So I think, you know, we continue to see that across the board.
Chris Sakai (Director of Research)
Okay. Thanks.
Jeffrey Korn (Chairman and CEO)
Thanks, Chris. Appreciate it.
Operator (participant)
Thank you. The next question is coming from Michael Kaufman from MK Investments. Michael, your line is live.
Jeffrey Korn (Chairman and CEO)
Good evening, Michael.
Michael Kaufman (Research Analyst)
Hi, Jeff. And Doug, I wanna congratulate you and the team for maintaining balanced growth in both revenue and profits, which is unusual in this segment of the industry. A specific question I had is the TelCloud partnership. Is there any way to get a handle on what the potential expansion of the total available market is, either for user growth or revenue potential? Because I don't have any statistics on that.
Jeffrey Korn (Chairman and CEO)
Mike, I'm gonna let John answer that. Jon, go ahead.
Jon Brinton (CRO)
Yeah. Hi, Michael. Good to hear from you again. So we're, TelCloud specifically is, what we call a POTS line replacement or a plain old telephone service replacement you may have seen recently that AT&T filed with the state to be able to, at their will, decommission all of their traditional copper line service in the state of California. And also seen recently where in some places, because this is a service that's detariffed by the FCC, that companies, individuals are being charged over $1,000 a line in some cases with price increases they're seeing. So the industry estimates are in the U.S., there's over 5 million lines of service that are currently traditional POTS services.
The TelCloud partnership is specifically targeted to find a way to migrate those type of services so they can be supported in the cloud as that copper infrastructure is retired. So if you think of, you know, the service that won't die, fax lines, alarm lines, fire alarm lines, and any other type of, analog line that hasn't been something that's been easily movable to the cloud in the past, the POTS line replacement service gives us and our licensees a great opportunity to be able to participate in the migration of those 5 million-plus lines of service.
Michael Kaufman (Research Analyst)
Yeah. It sounds like an interesting entrée, because of the legal requirements to sustain that stuff to get you in-into the, these companies and, enhance the growth prospects. So sounds like an interesting.
Jeffrey Korn (Chairman and CEO)
Yeah. Absolutely.
Michael Kaufman (Research Analyst)
Opportunity.
Jeffrey Korn (Chairman and CEO)
Yeah. We're very excited about it.
Michael Kaufman (Research Analyst)
But great job overall.
Jeffrey Korn (Chairman and CEO)
Thank you, Michael.
Operator (participant)
Thank you. There were no other questions in queue at this time. I would now like to hand the call back to Jeff Korn for closing remarks.
Jeffrey Korn (Chairman and CEO)
Thank you, Paul. I wanna thank everybody for their time and attention. We will, in the not-too-distant future, be having our Q1 results. And I can tell you, everybody in this room is excited about the results we've seen to date and exceptionally excited about our future results. So, enjoy the ride with us, and we'll look forward to speaking with you in May. Have a great evening. Thank you.
John Roy (Managing Director)
Thanks, everyone.
Operator (participant)
Thank you. This does conclude today's conference.
John Roy (Managing Director)
Thank you.
Operator (participant)
We'll connect your lines at this time.