Q2 2024 Earnings Summary
- Crexendo's Software Solutions segment is experiencing rapid growth and increasing profitability, achieving 35% organic growth in Q2 2024 and improving gross margins from the low 60s to 73%. The company expects this segment to continue growing faster than the Telecom Services segment, potentially becoming the majority of revenue within a year or two.
- Significant market opportunity due to Microsoft's retreat from the telecom platform space, specifically the end-of-life of the Metaswitch MaX UC platform. Crexendo estimates about 500 licensees on the Metaswitch platform, presenting a large opportunity for customer acquisition. The company has already brought on several Metaswitch licensees in the last 6 to 9 months and sees continued interest from both Metaswitch and Cisco BroadWorks partners.
- Strong backlog indicating future revenue growth, with $24 million already queued up for 2025. This backlog provides strong visibility into future revenues, supporting the company's outlook for continued growth.
- The recent 35% growth in the Software Solutions segment may not be sustainable, as management cautioned that future growth rates will be lower. They stated they cannot commit to 35% growth and advised not to build that into models, suggesting potential slowdown in revenue growth.
- High market multiples and valuations are making acquisitions difficult for the company, which could hinder its ability to grow through inorganic means. Management expressed concerns about the difficulty of finding accretive acquisitions due to private equity paying high multiples, potentially limiting growth opportunities.
- The company's international expansion may face challenges due to differences in how products are consumed in those markets. Management indicated they have to "keep an eye" on these differences, which may require adaptations that could increase costs or slow growth.
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Software Solutions Growth
Q: Can you explain the acceleration in software business growth?
A: The software business has accelerated growth, reaching 35% over recent quarters. This surge is driven by both new customers and expansions with existing partners. However, management cautions that this rate may not be consistent due to lumpiness, but they expect to maintain strong double-digit growth going forward. -
Gross Margin Improvement
Q: Are the high gross margins in the software business sustainable?
A: Yes, the software business's gross margins remain healthy at 73%, up from the low 60s previously. Management believes margins can continue to improve, with software margins typically ranging between 75% and 80%. -
Backlog Growth
Q: What's driving the rapid acceleration in backlog growth?
A: The backlog has increased significantly, up 39% year-over-year, due to strong sales in both the Software Solutions and Telecom Services segments. With customers on 36- or 60-month agreements, the backlog continues to compound, reflecting robust demand. -
Oracle Migration and Cost Savings
Q: Can you update us on the migration to Oracle and expected cost benefits?
A: The integration with Oracle is in early stages, and significant migration won't occur until Q1 or Q2 of next year. Moving all hosted customers to the OCI platform is expected to eliminate the need for maintaining data centers, resulting in substantial cost savings and performance improvements. -
Metaswitch Opportunity
Q: How significant is the opportunity from Metaswitch customers?
A: There are approximately 500 Metaswitch licensees potentially seeking new platforms due to Microsoft's retreat from the telecom platform space. Crexendo has already onboarded several Metaswitch licensees migrating to its platform, presenting a substantial growth opportunity. -
Recurring Revenue Stability
Q: What's the breakdown of recurring versus point-in-time revenue in Software Solutions?
A: In the Software Solutions segment, 74% of revenue is recurring, providing a solid and predictable revenue base for the company. -
Synergy Between Divisions
Q: How integrated are the Software Solutions and Telecom Services offerings?
A: Both divisions are built on the same NetSapiens platform, branded as the VIP platform for direct customers. Approximately 90% of customers are already on the VIP platform, with full migration expected by the end of Q1, creating significant R&D synergies and operational efficiencies. -
Future Growth Expectations
Q: What are the expectations for Software Solutions growth next quarter?
A: Management anticipates continued strong growth in Software Solutions. While they may not replicate the recent 35% growth, they expect a "damn good number," reflecting ongoing market demand. -
Software Overtaking Telecom
Q: Do you foresee Software Solutions outpacing Telecom Services?
A: Absolutely. Software Solutions is currently growing at 3 times the rate of the retail division and could become the majority of revenue within a year or two due to strong demand. -
Acquisition Strategy
Q: Are you considering tuck-in acquisitions given market conditions?
A: While open to opportunities, management notes that current acquisition multiples are unattractive due to private equity activity. They remain cautious and will pursue acquisitions only if they are accretive and enhance the business. -
Full-Year Guidance Affirmed
Q: Has there been any change to your full-year guidance?
A: Management reaffirms expectations of double-digit or better organic revenue growth for the full year, potentially exceeding the low double digits (more than 10%). -
International Expansion
Q: How is international expansion, particularly in Australia, progressing?
A: The company continues to see growth in international markets, including Australia, adding resources and new partners, and capitalizing on opportunities from larger platform providers exiting certain markets. -
Contract Durations
Q: Are new contracts increasing in duration?
A: Yes, the majority of direct end-user customers are on 60-month contracts, offering the best pricing terms. This contributes to a growing backlog and predictable revenue streams. -
Backlog Breakdown Requested
Q: Can you provide details on backlog by domestic vs. international?
A: While this breakdown isn't currently disclosed, management acknowledges that international operations are becoming a material part of the business and will consider providing such details in future reporting. -
Investor Relations Efforts
Q: What are you doing to increase exposure to investors?
A: The company is actively participating in investment conferences and virtual meetings to share its story with investors, aiming to increase market awareness and highlight its performance.