Crexendo Inc (CXDO) 2020 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Crexendo Second Quarter 2020 Earnings Call. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to CEO and Chairman of the Board, Steven Mihaylo. Sir, the floor is yours.

Thank you, Karen. Good afternoon, everyone. I'm Steven Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo Second Quarter 2020 Conference Call.

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today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; and Jeff Korn, our General Counsel.

The call today is completely virtual, as Crexendo is following the CDC's guidelines. I'm going to ask

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safe harbor statement. After that, I will give some brief general comments about the quarter. Ron will provide more details on the numbers. Doug will provide a business and sales update, then we will open the call up to questions. Jeff, would you please read the safe harbor statement?

Thank you, Steve. 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 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.

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 31, 2019, and the Form 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 other reason.

I'd now like to turn the call back to Steve. Steve?

Thanks. Welcome, everyone. This is now our second conference call under the new COVID-19 normal and the digital transformation that's taking place throughout the world, especially in the developed world.

We hope

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finds everyone healthy and safe. Our company and our customers have been adapting to doing business in this environment and have always talked about the functionality of our firm's phone service. We built the Crexendo Ride the Cloud (inaudible) adaptable to move from the office to a remote location and back, again, while making the move seamless. Our functionality is one of the core parts of our business and that functionality is literally been a lifesaver for (inaudible).

Our customers have been able to continue their business, moving their telephones and apps while not skipping a beat. While we did not build our service with COVID-19 in mind, we built it knowing that (inaudible) this was to have adaptability to allow business to work from remote locations. Business has been transitioning to the Cloud and this digital transformation. COVID-19 has just accelerated the process (inaudible) the customers who are on legacy systems are going to need to move to the cloud to survive the new world of business.

We also believe that Crexendo is the perfect solution for almost all businesses. We have won many awards for our service, including recently receiving the TMC Communication Solution Service of the Year award. In addition to our core award-winning service, we work with our customers to tailor-specific solutions to their needs. And we are convinced that our solutions, products, people and service are the best in the industry.

I'm very pleased with the results in the second quarter. It shows our steady growth, UCaaS service

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increased 16% year-over-year to $3.5 million. GAAP consolidated revenue for the second quarter improved 15% year-over-year. Net income of $508,000 improved (inaudible) year-over-year, and we earned a solid GAAP profit of $0.03 per basic and diluted shares. All of these results are very impressive. We believe these results are a testament (inaudible) when we built the cloud services, we wanted to make sure we have the best solution available, and I believe we accomplished that.

We then worked to keep costs under control. And we have accomplished that. After that, we worked to achieve non-GAAP earnings, then followed by GAAP earnings, which we also accomplished. And things are getting the picture. This quarter, we accomplished a Nasdaq uplifting listing, which we did by organically growing the business. We now believe the time is right to grow the business both organically and through accretive acquisitions.

We believe the Nasdaq listing gives us both the ability and currency to

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In the future, we expect to continue to grow this business both organically and through accretive acquisitions. We believe the efforts we saw due to COVID-19 in the first quarter and the beginning of the second quarter have started to be mitigated. It appears we are now seeing less COVID-19-related downgrades and business terminations. The effort of our taking the keep America Connected Pledge, also seems to be lessening

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trends continue, but we obviously manage the business very carefully and we take appropriate action.

I continue to believe that Crexendo has a very unique position to capitalize on the post-COVID-19 world. We will work aggressively to meet the demand of customers who need the flexibility of the Crexendo Cloud to survive the pandemic and post-pandemic world. We continue to be -- invest in the business, but we still watch every penny

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and we worked every day in attempting to increase shareholder value.

With that, I'll turn the call over to Ron. Ron?

Thanks, Steve. Financial highlights for the second quarter of 2020 are as follows. Consolidated revenue for the second quarter increased 12% to $4.1 million compared to $3.6 million for the second quarter of the prior year. Our service revenue for the second quarter increased 15% and to $3.6 million compared to $3.1 million reported for the second quarter of the prior year.

Our Cloud Telecommunications segment service revenue for the quarter increased 16% or $487,000 to $3.5 million compared to $3 million reported for the second quarter of the prior year, offset by 18% decrease or $29,000 decrease in our Web Service segment revenue for the quarter.

Product revenue for the second quarter decreased 4% or $18,000 to $449,000 compared to $467,000 for the second quarter of the prior year. Our gross margin for the second quarter increased 2% to 71% compared to 69% for the second quarter of the prior year.

Our consolidated operating expenses for the second quarter increased 8% to $3.5 million compared to $3.3 million for the second quarter of the prior year. Net income for the second quarter of $508,000 or $0.03 per basic and diluted common share compared to $338,000 or $0.02 per basic and diluted common share for the second quarter of the prior year.

Our non-GAAP net income for the second quarter was $660,000 or $0.04 per basic and diluted common share as compared to $447,000 or $0.03 per basic and diluted common share for the same period of the prior year. EBITDA for the second quarter of $568,000 compared to $362,000 for the same period of the prior year. Adjusted EBITDA for the second quarter of $704,000 compared to $487,000 for the same period of the prior year.

So highlights for the 6 months ended June 30 are as followed. The 6-month period consolidated revenue increased 11% to $7.9 million as compared to $7.1 million for the same period of the prior year. Service revenue for the 6-month period increased 15% to $7.1 million compared to $6.2 million for the same period of the prior year.

Our Cloud Telecommunications service segment revenue for the 6-month period increased 17% or $989,000 to $6.8 million compared to $5.8 million reported for the same period of the prior year, offset by a 15% or $51,000 decrease in Web Service segment service revenue for the 6-month period. Product revenue for the 6-month period decreased 13% to $828,000 compared to $951,000 for the same period of the prior year. Our gross margin for the 6-month period increased 2% to 70% compared to 68% for the same period of the prior year.

Consolidated operating expenses for the 6-month period increased 10% to $7.2 million compared to $6.5 million for the same period of the prior year. Net income for the 6-month period of $648,000 or $0.04 per basic and diluted common share as compared to $577,000 or $0.04 per basic and diluted common share for the same period of the prior year.

Non-GAAP net income for the 6-month period was $935,000 or $0.06 per basic and diluted common share as compared to $790,000 or $0.05 per basic and diluted common share for the same period of the prior year.

EBITDA for the 6-month period of $852,000 compared to $625,000 for the same period of the prior year. Adjusted EBITDA for the 6-month period of $1.1 million compared to $811,000 for the same period of the prior year. Our cash, cash equivalents and restricted cash balance at June 30, 2020 was $5.1 million as compared to $4.3 million at December 31, 2019.

Operating activities provided $91,000 of cash, cash equivalents and restricted cash. Investing activities utilized $704,000 of our cash, cash equivalents and restricted cash for the purchase of property and equipment and asset -- intangible asset acquisitions. Financing activities provided $1.4 million of cash, cash equivalents and restricted cash.

I will now turn it over to Doug Gaylor, our President and COO for additional comments on sales and operations.

Thanks, Ron. I'm extremely pleased with our results for Q2 and how Crexendo was able to quickly react and adapt to the changes brought about by the COVID-19 pandemic.

I'll give you a quick recap on the quarter from a sales perspective and what impact we saw from COVID. I will also provide an update on our marketing efforts as well as our research and development efforts and finish with an overall assessment on our current environment.

At the beginning of the quarter, we saw a dramatic slowdown in sales bookings as businesses struggled with adapting to the stay-at-home orders initiated in most of the country.

And since our award-winning technology allows businesses to quickly migrate to a remote worker environment, we started seeing sales rebound quickly in April and May and June and tie a much higher sense of urgency in customers needing our technology during the digital transformation that the world is currently experiencing.

Crexendo immediately rolled out programs for new customers to rapidly migrate to our platform with no activation fees, deferred payments and free collaboration tools to assist in their transition to remote workers. The migration of businesses from premise-based equipment, the cloud was already in full swing prior to the pandemic and the new normal businesses now find themselves in will only hasten that migration in the future.

Even with the dramatic slowdown that we witnessed in April, we saw a rapid rebound that helped us increase our Unified Communications as a Service, or UCaaS service revenue by 16% year-over-year. The increase in revenue, along with cost management led to GAAP net income of $508,000 or $0.03 per share for the quarter. This is our sixth consecutive quarter posting positive GAAP net income and I'm very pleased that we are continuing that trend while most of our competitors in the industry struggle to reach or maintain profitability.

Despite all of the headwinds in the economy, I expect our success and momentum to continue. Our revenue and sales growth for the quarter helped increase our sales backlog by $750,000 to $27.4 million. This was a healthy increase considering the initial slowdown experienced at the beginning of the quarter related to COVID.

Our telecom sector gross margin was strong at 71% for the quarter. We are able to consistently sustain healthy gross margin since we have a very stable cost structure and since we own our intellectual property that is the foundation of our offering. Our continual focus on cost management within the organization helped us maintain profitability. This is a core message within our organization and has every employee focused on productivity and efficiency.

Our strong results for the quarter helped increase our cash position to $5.1 million at the end of the quarter. As we have discussed on our previous calls, we are reinvesting back into the business, including marketing initiatives, adding new hires and creating new incentives to generate more sales as well as additional R&D to further enhance our offerings.

In April, we hired a new Director of Marketing and have been busy updating our messaging and imaging to our partners, our customers, our prospects and our shareholders. We have updated all of our sales and marketing collateral. We have refined our e-mail campaigns, and we will be launching our new corporate website later this month.

Our uniformed look will be consistent across the board, whether we are presenting to an investor, prospect or partner, our message will be clear and consistent. We are also focused on increasing our lead generation efforts and our revised marketing campaigns have had an immediate positive impact. We are also continuously investing in research and development and saw an increase in our Q2 R&D spend as we are constantly enhancing the Crexendo platform with new features and capabilities. Our new phones with Bluetooth and WiFi capability have been a tremendous benefit in the remote work environment where people may not have the proper cabling infrastructure in their home, and our WiFi functionality allows them to perform flawlessly.

Our texting, our video, our collaboration tools are also providing a great benefit to our customers. And those capabilities were recognized last month by the industry authority, TMC as their communication solution product of the year for 2020.

I think we can all agree that the first 6 months of 2020 have changed the business world forever. I don't think anyone could have predicted how quickly our country's economy would shift and how quickly the business world would transform. We believe that we have positioned ourselves extremely well to weather this storm and emerge stronger than ever. Our strong balance sheet, combined with greater reliance on every business to have communication infrastructure that will support their needs, means it's a very bright future for Crexendo. Crexendo is one of the leaders in the UCaaS industry, and we are ideally suited to help businesses make the transition to the cloud. And we're extremely excited about the second half of the year and the opportunities that exist as businesses continue to adapt to the new normal of remote workforces. I'm confident that we will continue to execute on our plans for revenue and income growth and that we are in a strong position to deliver.

I will now turn the call back over to Steve.

Thank you, Doug. Karen, I think we're in a position to open this up to questions.

(Operator Instructions) We'll take our first question from Andrew King with (inaudible) Securities.

I just wanted to dig into operating expenses a little bit. It looks like you had sort of a decline quarter-over-quarter in operating expenses. I wanted to get an idea of how much of that was driven by COVID versus fundamental efficiencies through the quarter? Then I have a follow-up as well.

Ron Vincent is going to take that.

Thank you, Andrew, for the question. I appreciate that. We have definitely continued to run our business as smart as we possibly can with laser focus on our expenses. And so as we continue to see some increases year-over-year consecutive quarter-over-quarter, we are actually -- have less operating expenses in Q1 of this year. Some of that was related to some onetime expenses in the first quarter. But overall, it's just our continued focus on managing our business and expenses.

All right. Great. And then can you just also dig into a little bit into the changes that you saw in the selling motion, the sales cycle through the quarter as you started to see demand return? That would be great.

Yes, absolutely. Thank you, Andrew. So obviously, we saw -- April had a very big slowdown from a sales perspective with businesses shutting down and the state of home orders kicking in. But we saw a very strong rebound in May and June. And I think that was because twofold. One is businesses realized that their infrastructure was weak and not able to conform to the remote work environment, they were looking for alternatives. So we were getting a lot of inquiries from businesses that we have been quoting to fast track their implementations. We also saw quite a bit of success with our promos that we ran. So we put out some really significant promotions for businesses be able to adapt the cloud technology quickly and efficiently with very little out-of-pocket expenses.

We'll take our next question from Josh Nichols with B. Riley.

I think you noted before, the company was looking to potentially increase some marketing spend a little bit more as you continue to have this improving profitability trend. Could you talk a little bit about specifically what areas of marketing do you think would yield you potentially the best ROI? And is it fair to assume that you think that we could accelerate the company's UCaaS service revenue growth above this kind of mid-teens level if you reinvest a little bit more?

Absolutely, Josh. Thanks for the question. And so obviously, we do feel like investing in our marketing efforts will help return a healthy return and help us get out of the teens and into the low 20s. And so we anticipate seeing more and more spend going through those marketing efforts. As you're well aware of those marketing efforts tend to take a little bit of time to bake in. So currently, with email campaigns, marketing campaigns, digital marketing spend, that's all going to take a little bit of time to bake in, but we anticipate that, that will be money well spent. And with the messaging that we've got with a very structured messaging front with our new Director of Marketing, you'll see that, with changes to our website and see that with changes to our presentation material. We'll have a very consistent look and feel. So yes, we do feel like that increase in marketing spend will have a very positive return for us.

Great. And then I know the company has typically had over like 20-month stations per client historically. Are you going after the same type of market? Are there any opportunities you mentioned in the second half where you think you start to scale that up? Or what would you think the biggest opportunities for the company are -- for the company is in the back half of this year?

Yes. So the average number of stations has remained fairly consistent for us the last couple of quarters. So I think still today about 21 stations with average revenue per account of roughly about $450 revenue per account. So we are trying to push that number higher. Obviously, since we have about 70% of our sales coming from our partner channel and actually a little bit of an increase in Q2 that we saw a nice spike with our partner channel sales. We anticipate that we'll start seeing a little bit more of that. But again, our partners are working with their customer bases out there. And so as we see bigger customers coming on board with bigger clientele, we're starting to see some nicer-size transaction. So I'm encouraged by the funnel that we see out there for bigger transactions and hope that we can start seeing that average size account push up.

Great. And then last question for me since you mentioned it, like what's the concentration you're seeing as far as your partner channel sales? Is that fairly well distributed or I assume 1 or 2 that account for maybe a larger disproportionate percentage of revenue? And are there any big opportunities to continue to expand that partner channel that could accelerate your sales growth?

Yes. Obviously, we're always looking for more partners. But to me, it's always about quality, not quantity. So we're obviously focused on how do we get more out of our existing partner relationships and how do we continue to build on that. I think that we have a challenge that most sales organizations have with -- they get the high majority of their sales from the minority of their partners, and that is consistent with Crexendo. So I think we have some very high-performing partners that are very consistent. And then we have a lot of partners that we get an occasional sale from. So we're trying to increase those efforts with our partners that don't perform consistently to get them on a little bit more consistent cadence. And then we're obviously spending a lot of time with the partners that have continued success to raise the bar with them and continue to see greater success with them. Some of our larger partners had tremendous quarters for us in Q2.

We'll take our next question from Kevin Dede with H.C. Wainwright.

Yes, I was hoping that you generally could chime in as you saw fit on sort of consistency of revenue and the consistency that you posted in growth. Maybe talk a little bit to seasonality. I know you haven't formally offered guidance for the year, but it seems to me given the results you've posted, it shouldn't be too hard for you to offer some suggestions on what you think happens in the second half.

Well, Doug already mentioned that he expects, with our marketing up, for us to get into the low 20s organically. And as you know, from my dissertation in the press release, we also now have a stock price that's because of uplisting to the Nasdaq, that should allow us to do more acquisitions. So if history says anything at all, I think we'll see about half of our increase to come from the organic sales (inaudible) to come from the acquisitions, accretive acquisitions. Furthermore, I think Josh Nichols pointed out that we should grow our channel. There's approximate 100,000 companies in the United States that are capable of selling our platform and only about 250 of them are currently selling it. So we have a lot of headspace. And Doug, would you like to add anything?

Yes, Steve. So Kevin, obviously, as we look at seasonality. Our industry is not really an industry that sees a lot of seasonality. Now COVID obviously threw a curveball for everybody with the slowdown from a business perspective. But from our perspective, the migration to cloud communications has always been very rapid over the last few years, and I anticipate that, that momentum will continue as more and more businesses realize that their premise-based platforms are unable to take them to the next level. So I anticipate that the technology is going to require these businesses to move more to a UCaaS-type platform. That allows them to work remotely, and we're perfectly situated for that.

Okay. So Josh did mention partnerships, Steve. I caught that. But it isn't really clear how -- and I mean, this applies to the M&A pipeline, too. So maybe you could offer some insight on that as well. It didn't really talk about how that environment has changed, right? I know and Doug mentioned this in his prepared remarks that competitors haven't been as successful. So I was wondering if you could talk to maybe how the environment and partnerships and M&A has changed in light of other businesses struggling and not being -- not driving the profit as you guys have.

Well, let me add to this a little bit, and then I'm going to let Doug fill in the color. All, on the acquisition side, we're seeing a lot more companies that realize they need to be bigger and part of more substantial company. And as Nasdaq-listed company, we're getting a lot more exposure. We're (inaudible) more exposure because of our marketing efforts. So in that regard, we're starting to see a lot more activity.

As for the adding partners part, obviously, we can't travel right now because it's probably unsafe to do so. But once COVID is over, we're going to start beating the bushes, as Doug said, for bigger dealers and partners, folks that will be more in a position to sell bigger systems. And Doug, would you like to add anything to that?

Yes, Steve. So Kevin, the merger and acquisition opportunities are -- seem to be a little bit more plentiful at the moment. I think COVID has definitely changed the way a lot of smaller businesses are looking at their future. And as Steve said, this industry is really going at full speed right now. And so the combined efforts of a larger company obviously bode well for us. And so that's the message that we're looking to take forward is that, hey, by combining with Crexendo, there's a much bigger platform and a much bigger opportunity going forward. And so I really think that the M&A opportunity is going to continue to increase, and we're excited with some of the opportunities that we're talking to.

All right. Last question for me, Doug, is really on your marketing effort specifically. I'm wondering if you might consider offering us maybe KPIs on how to monitor your -- I mean aside from just watching sales growth, are you going to be able to give us production by headcount or some other quantifiable measure that we can monitor progress on?

Yes. So to answer your question in the short answer, yes, we will be doing that. We don't have those metrics today. But Ron and I have talked about putting additional metrics into future presentations. So that we can give you those guidance for productivity per employee, customer acquisition costs, et cetera. So those are details that we will have for you in the future.

We'll take our next question from Arham Khan with Eden Capital Investment Group.

Good to always hear from you. Ron, Doug and Steve. And then it's 40 years apart, and you're doing again. So it's pretty incredible. I think some people passed over the fact that management owns nearly 80% of the company. And I've heard people say that -- the Nasdaq uplist. I was hoping that you guys can provide some color into what happened before COVID and through COVID with your churn rates?

Doug, why don't you handle that one?

Okay. Steve, yes, Arham, great question. So we have been historically tracking our churn rates. And so we've historically had very low churn rates, and we did actually see a little bit of a spike in Q2 due to COVID, I'll have Ron give maybe a little bit more color on that. The fact that majority of our customers are in the SMB space. And our average sized customer account today is 21 stations, as we've mentioned earlier, puts us in a little bit of a volatile category and the fact that we do have smaller customers out there. But the nice part is, is that our customer concentration doesn't have any high exposure in the industries that are really getting hurt very hard, for example, restaurants, et cetera. So I'll have Ron add a little bit more color on the churn and give you a little bit more detail there.

Thanks, Doug. Yes. So for -- prior to COVID, for historical quarters, we were averaging somewhere around 4 tenths to 1% on a monthly basis from a seat count churn. COVID, we were ranging around 6 tenth of a percent. So at a 50% increase in our churn rate from 1 quarter to the next, we anticipate that, that's going to settle back down. But our small businesses are still struggling. And depending on what happens with COVID, we may sustain that for another quarter or 2. But look it's not alarming to us. It's not that material increase, but we had a very low churn rate going into COVID, but 6 tenths a percent on the seat basis month-over-month and then around the 1% on customer churn.

Okay. Okay. Got that. Final question for me is -- and I might have missed this because I came in late. Where does your backlog stand now?

Yes. Backlog had a nice increase of $750,000 for the quarter, and that puts us at the -- I'll get you the exact number, $27.4 million.

Okay. Well, excellent. I didn't expect it to be like that.

We'll take our next question from Edward Gilmore with Little Grapevine.

Congrats on a solid quarter. Question on gross margins. I was wondering how much are the promotions that are being offered, impacting the gross margins now? And then how long do you think you're going to need to continue offering these incentives?

Yes. I would say that our gross margins have been very stable and very consistent. The promotions that we're offering, I don't think we're going to have a dramatic impact on our gross margins because many of the promotions we're offering are deferred payments. So I'm just allowing customers to use the services and actually start their payments at a later date. So that doesn't have a dramatic effect on the gross margins. And then additionally, we've given some incentives with free items like collaboration tools and our mobile applications that, again, doesn't have a dramatic effect on gross margin. So I think we're very well positioned that we can continue these incentives without affecting gross margins negatively. And as far as how long we anticipate keeping those incentives as long as it's driving the business, but I don't anticipate change. We might change the messaging a little bit, but I would anticipate that we would continue having promotions, at least until the end of the year.

And Edward, I'd like to add a little bit to that. As you know, our gross margins improved about 2 (technical difficulty) quarter-over-quarter. And I would expect that as we get larger, our gross margins will increase, not decrease. Now, they're not going to increase as much, probably. But (inaudible) or a 1% increase per quarter as possible because our fixed expenses are pretty known. And as we get larger, more of that falls to the bottom line and more of it will be in the (technical difficulty) margins.

We'll take our next question from Ken Cayman with private investor.

I like just talk a little bit more about, your comments about acquisitions. You've always said consistently through these calls that you would only consider acquisitions that are accretive. And in the past, that those always seem to be kind of an aspirational stance because the currency that you had at the time was cash and cash was very tight at the company. Now all of a sudden, the stock is trading better, and I'm actually more interested in the daily trading volume because as a business owner, thinking selling the business that they to there was some liquidity that might be better. So my question is, what is the landscape that you're looking at in that, I'm not really sure I understand what is the gross margins? Is your 70% plus gross margins significantly above competitors? Is your accretiveness going to come from being able to buy accreditors and make them more efficient? Is it going to come from taking small companies that you don't need any of their infrastructure and because you just can't onboard that client? Can you talk a little bit about that and what the size of the acquisition revenue basis that are out there that you're talking to kind of in general terms?

Yes. Well, I'm going to give you a little bit of color, and then I'm sure Doug and Ron will want to chime in a little bit. But a smaller acquisition we do that over in a 2-step process. We pay about anywhere from 40% to 60% upfront, and then we adjust it for the amount of revenue over a period of 6 to 12 months. So it requires less cash and usually, we adjusted either up and most of the time down a little bit and it allows us to have some seller financing. And I would expect that any acquisition (inaudible) the $3 million will be done with cash. Larger acquisitions of $4 million or $5 million up to maybe $20 million or $30 million will be done with stock and cash. And of course, we're generating a lot of cash (inaudible) allow for us to do more and more acquisitions with cash, smaller acquisitions. Doug or Ron, would you like to add to that?

No, I think well positioned, Steve. I think that, again, Ken if we think about accretive acquisitions, 1 of the synergies that we look at is platform. So if we can migrate customers to our platform, obviously, there's cost synergies there that helped tremendously. So when we look at the acquisition targets out there, it's really how does the acquisition fit in with our short- and our long-term goals for Crexendo. So obviously, customer acquisition, revenue acquisition is critical for us. But then once we get that customer acquisition, revenue acquisition, what do we do with it to continue growing the company? And so I think the acquisitions that we're talking to that are in that range that Steve just highlighted are all fitting the picture. I mean we used to joke around here that we've got to kiss a lot of frogs and we do. But when we find a good opportunity, then we try and figure out how that's going to be a very seamless-type integration for us going forward. So we're excited about some of the opportunities that we're talking to, and we'll see where they leave us.

So let me just clarify something you said you wouldn't consider an acquisition that didn't move on to your platform. You wouldn't start with another platform with you, you wouldn't want to go into learning a new business.

We wouldn't want to learn a new business. But obviously, if there's technology that we're lacking, that would obviously be a good acquisition opportunity for us. So when we talk about a customer acquisition, a customer acquisition allows us to migrate those customers on to our platform. If we talk about a technology acquisition, it's also got revenue stream. That's a whole different picture because, obviously, we feel like we've got a very robust platform today for the SMB market. But there are areas that the technology enhancement could even benefit our product and our offering even more greatly. So.

Okay. So. Yes. And Ken, I'd also like to add that the larger (technical difficulty) the more opportunity they have. If they were to go with one of our competitors, there's very, very little opportunity for them. If they're in the $10 million to $20 million range, they've got all headspace and opportunity with Crexendo.

What is the gross margins for most of the industry? You feel (inaudible) is that average? Are you above average?

No, we're actually on the low side of average. Some of our competitors above 80%, and we'll eventually get there as we get larger.

(Operator Instructions) We'll take our next question from Michael Kaufman with MK Investments.

Steve, Doug and Ron, great quarter. It's refreshing to see a company scale and maintain and grow profitability these days, especially after looking at some of your competitors. Question I have is what kind of people have you added in the quarter? What's the current headcount? And what specifically are you going to do to try to get some bigger customers?

Yes, great question, and thanks Michael, for always being on the line and having great question for us. So current headcount, 59 employees at the end of the quarter. And we did add a couple of sales and marketing folks during the quarter, and I think 1 or 2 on the engineering side. So as we continue to grow the organization, we're always looking at good people that can help us continue that growth. So obviously, the marketing (inaudible) was critical for us. And sales is always a constant for us. So we're always looking for good salespeople to help increase those sales efforts. And second part of the question again, Mike?

Well, I'm just wondering specifically, what would be a larger kind of target account? What are the attributes of the larger accounts that will get you to ramp up your growth rate?

Sure. Yes. So obviously, at 21 stations, that's the epitome of a small- and mid-sized business. And so to get to those larger opportunities, our product fits perfectly with larger opportunities. In fact, we sold quite a few 6-figure total contract value deals during the quarter. And so we do sell a lot of deals that are in the couple of hundred phone range. As I've mentioned on previous calls, I think our largest account today is about 3,500 stations. So we can easily play in the larger size arena. It's getting to those opportunities. Our marketing efforts are focused on trying to find bigger opportunities. And as I mentioned on one of the previous questions, our focus with our partners is to find partners that have bigger customers in their customer base. So if we think about the fact that 75% or 79% of our business from our Q2 came from our partners. If I've got a partner that's a data bar or a managed service provider, and if their average customers, 10 employees or 15 employees, that's going to be the target market that they bring us into. But with some of our new partners that we've brought on in recent months, some of their customers are much higher in size and range. And so if I bring out a partner, that's got a lot of 100 phone or 200 phone opportunities in their customer base. That's going to bode very well for us. And so we're seeing those things changing in our funnel right now with some of the newer partners bringing bigger opportunities to the table right out of the gate.

Yes. I guess -- and stepping on the gas, if you bring in more the equivalent of like applications engineers, that can turnkey transition from their current system to your system because your gross margins are so high. You're going to recover those costs very quickly. So it may need more people on your end basically to make it a seamless transition to the customer?

Absolutely. That's an important factor is that in any of these acquisitions, we do a lot of diligence to make sure that integration moves migration for us and for the customer.

And Michael, I might add that in an acquisition, there's productivity gains because you don't need all of their back (technical difficulty). Obviously, if they have performing salespeople and performing engineers will want to retain them. But we look at productivity very, very closely. Right now, our productivity is about 280 or 290 ahead, and we'd like to get it over $300,000 per head, and that's our goal. And I quite frankly think we'll make our goal.

(Operator Instructions) We'll take our next question from Kevin Well, private investor.

Steve, Doug and Ron. I've got two questions for you. One, given the, I guess, maybe parabolic stock price rise we've seen in the past month. Are you considering a stock offering? And if you have a stock offering, even at a 1 million shares would be, let's say, $10 million to $12 million, would that cash be -- would you ever put that -- be able to put that cash to work to drive sales faster?

Well, let me answer that. And then I thank Jeff Korn and maybe the entire team would like to chime in. But obviously, today's volatility was caused by short sellers. That's the only explanation for (inaudible). So we need to have a slightly larger float. And in order to get a larger float, you're going to need to sell a little bit of stock. But I'm very, very keen on having anti-dilutive efforts here. As far as cash goes, if you get a bigger acquisition, we're going to have to have more cash and more stock, so that they have skin in the game. And so they have more upside, which they wouldn't have with a bigger competitor. At that, I'm going to turn it over to Jeff, Doug and Ron.

Okay. And I have one more question after the answer.

Okay.

Yes. This is Jeff. Obviously, as Steve said, being on NASDAQ and would have to consider everything we could and some of the things that suggested, would be things we will discuss with our Board and discuss as a management team. But no decisions have been made at this time. But rest assured, if we were to raise some money, it would be used to grow the business.

Doug, you or Ron want to add anything to that?

No. Obviously, as you pointed out, I mean, it takes money to make money. And so obviously, yes, additional capital that we can put forward into any of those efforts. Not only from an acquisition perspective, but for any marketing efforts. I don't anticipate when you look at some of our competitors that have SG&A expenses in the 60% to 65% range. We're not going to go crazy in that perspective, but reinvesting back into the business has been working well for us, and we'll continue to do that.

And you have another question, Kevin.

Yes, one more, and -- one more, Steve, is that given -- well, two, one, you can't comment on the short sellers. And I guess it wasn't at all surprising that at least weekends would be selling in to the news of the earnings release a 4:00 o'clock. So maybe, we'll recover tomorrow. But I was curious, given the huge stock price increase, it looks like there's what I call 1 big boy out there trying to get a big position with you. And do you have any color on that? And assuming it is someone that you're probably familiar with are you open to a BOD spot for a new large holder?

Well, our Board of Directors spot, obviously, we want to reserve the Board of Directors to either a CEO or a COO of a target company. As far as a large shareholder, you'd have to watch this on Bloomberg, and you'd have to watch it every second of every day. And frankly, we're more interested in growing the business than we are in determining who is a large shareholder and who isn't. But right now, unless we get a little bit more liquidity in the stock, we're going to have probably short sellers that are taking advantage of a situation. But I think, as Doug said earlier, organically, we should be able to grow at about 20% or more. And my goal is to grow on an acquisition and accretive acquisition basis by at least that much. So we're going to get a lot bigger, but it's going to take several years going forward. But I think any short seller in our stuff is going to be disappointed in the long run. And maybe, Jeff, you'd like to add to that.

Actually, Steve, I don't have a lot to add to that. Other than to answer your question, we are not aware of who's acquiring the stock. And frankly, if we didn't know, we probably wouldn't discuss it on the call anyway.

I understand. I'm a little guy stock holder so you can understand how I might come up with some of them questions.

We'll take our next question from Greg Hillman, private investor.

I had a couple of questions for you. Do you know what the Net Promoter Score is for Crexendo and how it's changed over time?

I do not know that, Greg, but I will get that information for you, and I've got your contact information, I can reach out to you after the fact that I do not have that handy.

Okay. And also, in terms of conferencing, how does the functionality of your system compared to Zoom for people doing meetings with multiple people?

Yes, we've got a great collaboration offering as part of our platform. It's called our Crexendo Crexconnexe. And so our Crexconnexe is actually a collaboration tool, very similar to Zoom. It's actually just a quick side funny story that the Founder of the person, we didn't actually build that in-house. We white-labeled that offering. And so the founder of the company that makes the product that we represent is one of the co-founders of Webex. The other Co-founder of Webex was the person that started Zoom. So when Webex was sold off to Cisco a few years ago, the 2 co-founders, both after their noncompetes expired, started up collaboration companies. One of them was Zoom, and 1 of them is the partner that we've associated with, which is called Moxtra. And so we've been very pleased with our association with Moxtra. The Moxtra product is very similar to Zoom. So for most of our customers that are Crexendo clients, they use our collaboration tool to remotely video conference and communicate and collaborate and screen share and file share with their customers and their employees all the time. So we've got a very robust offering there. It competes very nicely with Zoom.

That's great. And I also -- can you just update me on your relationship with the U.S. Cellular in terms of how many of their reps are trained in your platform right now? And how that's changing? And...

Yes. We had our strongest quarter ever with U.S. Cellular in Q2, so a very strong quarter. The relationship continues to grow and prosper. U.S. Cellular, I don't have the exact numbers, but I think I got about 100 to 125 direct reps out there. And then they've got their agent and their partner channel that has also come on board and has been extremely successful with us. So the partnership with them is extremely, extremely robust right now, and we've got a tremendous funnel and a tremendous amount of opportunity. And again, coming off our strongest bookings quarter that we've had with them since the relationship started.

That's great. And Doug, your comps relative to the competitors, how do your comps compare right now in terms of like enterprise value to EBITDA or price to sales or any other comps like that? Where do you stack up with some of the other ones, RingCentral, stuff like that?

Yes. If you think about RingCentral just announced this past week as it day-by-day had tremendous losses. And I think at this point in the street with their losses. I think that they had nice revenue growth, but again, at the expense of losing more money than anticipated. RingCentral had nice revenue growth, but continues to lose money. As I look at our competitors, I think that we feel like we're managing the ship extremely well. We had a little bit smaller percentage growth than our competitors, but much more profitability. And so we've always believed and we've always touted the fact that we're going to grow, but we're going to grow profitably. And so we're reinvesting back into the business, but we're not spending, as I mentioned earlier, in the 60% to 70% range, sales and marketing expenses, it's hard to ever get to profitability with those kind of numbers. So granted, they are growing their top line, but at the detriment to their bottom line. So I think that we compare well in a lot of the metrics that we've discussed. I think our churn rate is probably 1 of the lowest in the industry, and I think that our operating profits that we have today are probably 1 of the highest in the industry.

I'd like to add to that. On a valuation basis, we're probably less than half of the valuation of our larger (inaudible). As Doug pointed out, most of them are losing money. If you take 59 or RingCentral specifically, their cash flowing a little bit, but they're losing on a GAAP basis. And from the standpoint of valuation, we're at about 40% or 45% of their value. So there's a lot more headspace with Crescendo than any of those competitors. I don't know if you'd like to add to that, Jeff, or not, but -- and you, also, Doug?

(inaudible)

Yes, Okay and (inaudible).

Doug, just 1 final question. And on the sales cycle, how has the sales cycle changed over time? And how does that differ for 20 station organization versus a 300 station organization?

Yes. I always joke, Greg that sometimes it takes just as long to sell a 300 phone opportunity as it does a 20 phone opportunity and vice versa. So yes the sales process is fairly similar in both environments. You find your needs and pain points in the business and then you recommend solutions and hopefully, you've got a good ROI to help them move forward fairly quickly. The sales process really hasn't changed. I think if anything, COVID has set up the process because up until COVID, I think the businesses were looking at migrating to the cloud because they realize it was something that they needed to do eventually. I think COVID has split up that eventually to, boy, I need to do something much quicker than I anticipated. So we talked to a lot of businesses that say, yes, the communication solution is lacking, but it works. Well, in the COVID environment for many businesses, it doesn't work.

So before, when everybody still had all of their employees showing up at the office, even though their phone system may have been lacking in capabilities that still did the functions they needed for day-to-day. Now that in many cases and in our office, 80% of our employees are still working remotely. So if businesses are using premise-based systems, they've got employees using personal cell phones, using home phones and not having any consistency within the organization.

I think the sales process has sped up a little bit. We are seeing businesses, making quicker decisions. The larger businesses tend to actually make decisions quicker than smaller businesses because larger businesses realize that they can't wait, and they've got to reinvest to continue keeping their business running. Smaller businesses tend to have a lot of emotional decision-making aspects that are harder to control. So I would say that we tend to see the larger deals in our funnel, go through the funnel process in actually a quicker time frame than the smaller ones. But in an average size transaction for us from the time we start talking to them to the time we hopefully get an agreement to move forward, typically about 4 weeks.

Four weeks. Okay. And just one housekeeping, what's the churn rate right now? I think you said it, I forgot what it was, your churn rate?

Yes, our churn rate, so on a seat basis, we're -- for the quarter, we're averaging 0.6% on a monthly basis. And on a customer basis, it's around 1%.

Okay. 1% per month.

Yes, and from about 0.6% in the prior quarters.

We'll take our next question from Ronald Saul, private investor.

Yes. I just wondered about the peak feeling we took this quarter. What's the process going forward with them?

Jeff, you want to take that?

Sure. Obviously, we have not made a decision or we would've let you know. The PPP loan requires some review, and we will determine what action we're going to take. Just historically, as you understand, we're a CLEC, a regulated telephone company and we provide vital communications, and we take that responsibility very seriously. We're under -- we were at the time we took the PPP loan under various state regulations, which precluded us from canceling anybody services. We, as a company, stepped up and took to keep America connected pledge, where we agreed not to disconnect customers. We had to slam and add a bunch of customer service so that we could support on our customers who are moving from their office to their remote locations. We did this at a time with 0 visibility as to how many customers we're going to cancel or how many customers were going to go out of business.

At the time we were on OTC, and we had a limited ability to raise any money if we needed to. So we took the PPP loan when it was absolutely necessary for us to continue to provide absolutely necessary services to our customers. So we're reviewing all of that, and we'll determine what action we're going to take relative to the PPP loan.

And there appear to be no further questions at this time. We'll turn the floor back to Mr. Mihaylo for closing remarks.

Okay. Thank you, Karen. Obviously, this has been a good quarter for us, and we expect to see all of you back here when we announced the third quarter, which will be in early October, I'm sure. This time, we reported a little normal because we've got a couple of analysts on the call. And they have -- they also follow a couple of our competitors, which announced on the day we wanted to announce. So we'll see, if we announce the rest of the pack or if we announce a few days after the rest of the pack. At any rate, we'll see you all back here, be safe, follow the CDC guidelines, and we'll talk to you at the end of our third quarter.

Thank you, ladies and gentlemen. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.