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    Crexendo Inc (CXDO)

    Q3 2024 Earnings Summary

    Reported on Jan 15, 2025 (After Market Close)
    Pre-Earnings Price$5.98Last close (Nov 6, 2024)
    Post-Earnings Price$5.99Open (Nov 7, 2024)
    Price Change
    $0.01(+0.17%)

    What went well

    • Strong Growth in New Logos and Expansions: Crexendo added 8 new logos in the quarter, doubling sequentially, and had 5 expansions from existing licensees, indicating robust growth in customer acquisition and upselling.
    • Significant Opportunity from Microsoft Customers Migration: Due to Microsoft's end-of-life of its platform, Crexendo sees potential to capture a large portion of migrating customers. They have already secured 4 Microsoft Metaswitch wins in the last 4 months and had 180 attendees on a webinar for concerned Microsoft users, showing strong interest.
    • Expansion of Application Ecosystem and AI Offerings: Crexendo is expanding its application ecosystem with over 50 vendors at their user group meeting and 10 to 15 being onboarded, many leveraging AI, which can drive revenue and market differentiation.

    What went wrong

    • The company experienced increased customer churn from a national account in Q3, which negatively impacted services revenue growth and could indicate potential client retention issues.
    • Operating expenses are expected to continue increasing due to ongoing investments in cloud migration (OCI), the Oracle accounting system, and potential additional headcount, which may pressure profitability.
    • During the migration to the new platform, the company is facing gross margin pressure from double paying for private and public cloud services, and there's uncertainty about realizing the expected cost savings.

    Q&A Summary

    1. Future Investments
      Q: What are your biggest investments over the next year?
      A: We are focusing on three main investments: spending on OCI to accelerate customer migrations and gain competitive advantage; investing in the Oracle accounting system to support rapid growth; and actively looking at substantial acquisitions next year, enabled by our strong cash position.

    2. Microsoft Platform Opportunity
      Q: How big is the opportunity from Microsoft's uncertainty?
      A: We are very excited about the opportunity, which could be as large as Microsoft's platform itself. Many customers are considering moving to us, and we believe the probability of gaining a significant proportion is very high.

    3. Metaswitch Customer Webinar Feedback
      Q: What feedback did you get from the Metaswitch webinar?
      A: We had 180 attendees, and there was a lot of excitement. Customers who migrated to us shared positive experiences. We are working with many prospects, especially enterprise-level solutions, and are optimistic about onboarding them onto the NetSapiens platform.

    4. Gross Margin Impact from Migration Costs
      Q: Can you quantify the gross margin headwind from migration costs?
      A: We expect to complete migrating our legacy customer base to the VIP platform by the end of Q1 next year. After shutting down data centers, we anticipate cost savings of about 1% to 1.5% of revenue.

    5. Operating Expenses and Headcount
      Q: Are operating expenses at a run rate or will they ramp?
      A: There will be continued expenses on OCI and the Oracle accounting system, and some additional headcount. We are trying to defer hiring by moving existing employees into open positions once we're on OCI, but we will make necessary investments.

    6. Software Solutions Traction
      Q: Where are you seeing near-term traction in Software Solutions?
      A: We are experiencing good international growth with three new licensees. Significant growth is from partners converting from the Metaswitch community, seeking a new long-term strategy. We also had our first licensee in Continental Africa.

    7. Macro Impact on Services Revenue
      Q: Is there a macro issue affecting services revenue growth?
      A: No macro issue. The sequential flatness was due to increased churn from one national account and changes in the mix between service and product revenue. We are still seeing a strong sales channel and big funnel.

    8. Competitive Landscape
      Q: Any changes in the competitive landscape on service revenue?
      A: The market is very competitive with players like RingCentral, 8x8, and Vonage. We win more often due to our offering and customer service. Conditions are favorable as customers seek alternatives from struggling providers.

    9. Application Ecosystem Impact
      Q: Can you elaborate on the application ecosystem progress?
      A: We have over 50 vendors in our ecosystem and are onboarding 10 to 15 more, which will add to revenue. Applications range from automation tools to AI chatbots, enhancing retention and differentiation for our service providers.

    10. Balancing Direct Sales and Resellers
      Q: How do you balance direct sales versus reseller channel?
      A: We aim for balanced growth across both. Our direct sales interact with end customers, while we're investing heavily in Software Solutions sales due to higher margins and value, especially in the Metaswitch community.

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