Crexendo Inc (CXDO) 2017 Q2 法說會逐字稿

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  • Operator

  • Good day, and welcome to the Crexendo Second Quarter 2017 Earnings Call.

  • Today's conference is being recorded.

  • At this time, I'd like to turn the conference over to Chief Executive Officer, Steve Mihaylo.

  • Please go ahead.

  • Steven G. Mihaylo - Chairman and CEO

  • Thank you, Melissa.

  • Good afternoon, everyone.

  • I am Steven Mihaylo, Chairman and CEO of Crexendo.

  • I want to welcome all of you to the Crexendo Second Quarter 2017 Conference Call.

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

  • I'm going to ask Jeff to read our safe harbor statement.

  • After that, I will give some brief general comments relative to the quarter and year end.

  • Ron will then provide some granularity to the numbers, Doug will provide a business and sales update and then we will open the call up to questions.

  • Jeff, would you please provide the safe harbor statement?

  • Jeffrey Korn

  • Yes.

  • 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 such as like, believe, expect, anticipate, estimate, will and other similar statements of expectation identifying forward-looking statements.

  • Investors should be aware that any forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today.

  • These risk factors are explained in detail in the company's filings with the Securities and Exchange Commission, including the Form 10-K for the fiscal year ended December 31, 2016, and the Forms 10-Q for 2017 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 to Steve.

  • Steve?

  • Steven G. Mihaylo - Chairman and CEO

  • Thank you, Jeff.

  • Before we continue here, I'd like to correct one thing.

  • I said, there will be some brief general comments relative to the quarter and year end.

  • I meant, relative to the quarter and the 6 months ended June 30, 2017.

  • With that, I will continue.

  • Our sales continued to be strong.

  • Our Cloud Telecommunications Service segment revenue for the 6 months ended June 30, 2016, (sic) [2017] increased 27% to $3.7 million compared to $2.8 million (sic) [$2.9 million] for the 6 months ended June 30, 2016.

  • That increase is very impressive.

  • And it's the second quarter in a row we have double-digit quarterly growth year-over-year.

  • On a GAAP basis, the company reduced its net loss from $0.12 per share to $0.06 per share diluted common shares for the 6 months ended June 30, 2017.

  • I am highly encouraged that we could cut our loss in half.

  • This is in line with our internal plan towards reaching cash flow breakeven and profitability.

  • This is the second quarter in a row we have been able to cut our year-over-year GAAP loss in half.

  • Another very important factor is the way we manage cost.

  • Consolidated operating expenses for the 6 months ended June 30, 2017, decreased 8% to $5.6 million compared to $6.1 million for the 6 months ended June 30, 2016.

  • This is highly impressive, particularly when compared with our substantial sales growth.

  • The change in the sales management I discussed last quarter beginning to show results.

  • We made significant sales management and sales rep changes.

  • Those changes should continue and have a positive impact on sales going forward and allow us to accelerate our growth.

  • The partner channel continues to grow.

  • We are adding very highly qualified partners, and I have high expectations that sales from our partners will show significant increases.

  • Backlog continues to grow.

  • All the metrics we use to manage and review the business have been positive.

  • We also continue to put up the best products and services.

  • We continue to provide the top Unified Communicator as a Service solution out there.

  • As you may well know, the Crexendo Call Center Solution has received a 2017 Communications Solution Product of the Year Award.

  • This is the second year in a row we have won this award.

  • We continue to update and improve even our award-winning products.

  • We have won awards for our services, our products, and I believe this shows that even with keeping a tight lid on costs, we never skimp on quality.

  • I am convinced that Crexendo provides best services and products in the industry.

  • Our solutions can save most customers a substantial amount of money, while at least maintaining or improving the quality of the service they have.

  • We are working to be more efficient in packaging our services, as I said, our Unified Communications as a Service, or UCaaS, provider.

  • This is the future of the industry, and Crexendo is already there.

  • We will work to make clear to our potential customers that Crexendo is their one stop shop, where we provide all the unified communications needs.

  • Our goal is to lead the industry on innovation.

  • I am convinced our sales will continue to increase.

  • We will continue to manage our costs effectively, and we will run the business for the high degree of efficiency.

  • I continue to believe that we will reach cash flow breakeven and GAAP income in 2017.

  • This business is continuing to grow and improve.

  • I think our story an increasingly -- very interesting story, and we are beginning to attain investor confidence.

  • The first conference we are attending in 2017, Rodman & Renshaw's Annual Investment Conference in New York, taking place September 10 through 12.

  • We look forward to bringing the Crexendo Ride The Cloud story to a wider audience.

  • I believe -- I continue to believe in our company, and we will continue to grow the business through our sales force and our partner channel.

  • We are always reviewing appropriate accretive opportunities, and we believe if the right opportunity comes along that they will be a way to further accelerate growth.

  • I continue to be a believer -- a strong believer in the future of Crexendo.

  • With that, I'd turn the call over to Ron.

  • Ron?

  • Ronald Vincent - CFO

  • Thanks, Steve.

  • Consolidated revenue for the second quarter of 2017 increased 10% to $2.5 million compared to $2.3 million reported for the second quarter of the prior year.

  • Approximately 89% of the revenue for the quarter was contributed by our Cloud Telecommunications segment, which contributed $2.2 million for the quarter.

  • That's an increase of 15% compared to $1.9 million contributed for the second quarter of the prior year.

  • Service revenue for the second quarter of 2017 increased 19% to $2.2 million compared to $1.8 million reported for the second quarter of the prior year.

  • Our product revenue for the second quarter of 2017 decreased 30% to $303,000 compared to $430,000 for the second quarter of the prior year.

  • Quarterly product revenue can fluctuate significantly from quarter -- one quarter to the next.

  • Product revenue is deferred until installation is complete and services commence.

  • Our average customers install within weeks have completed the sales cycle.

  • Large enterprise-sized multi-location customers can take several months to install depending on the number of locations and complexity.

  • And delay in product revenue until recognition -- until the final location is installed, results in spikes -- this can result in spikes in our product revenue recognition.

  • Year-to-date, consolidated revenue increased 9% to $4.8 million compared to $4.4 million reported for the same period of the prior year.

  • The Telecommunications Segment contributed 89% of the -- or $4.3 million of the consolidated revenue for the 6-month period ended June 30, 2017.

  • Service revenue increased 16% to $4.3 million compared to $3.7 million for the same period of the prior year.

  • And product revenue decreased 25% to $582,000 compared to $781,000 for the same period of the prior year.

  • We continue to watch every dime.

  • Our consolidated operating expenses for the second quarter of 2017 decreased 10% compared to $3 million reported for the second quarter of the prior year.

  • Year-to-date, consolidated operating expenses decreased 8% to $5.6 million compared to $6.1 million for the same period of the prior year.

  • Our net loss decreased $497,000 or 67% to $281,000 for the second quarter of 2017 or a $0.02 loss per diluted common share compared to a net loss of $778,000 or $0.06 loss per diluted common share for the second quarter of the prior year.

  • Year-to-date, our net loss decreased $822,000 or 50% to $824,000 for the 6 months period ended June 30.

  • That's a $0.06 loss per diluted common share compared to a net loss of $1.6 million or a $0.12 loss per diluted common share for the same period of the prior year.

  • On a non-GAAP basis, we reported net loss of $91,000 for the quarter or a $0.01 loss per diluted common share.

  • That's compared to a non-GAAP net loss of $279,000 or a $0.02 loss per diluted common share for the second quarter of the prior year.

  • Year-to-date, the company reported a non-GAAP net loss of $502,000 or $0.04 loss per diluted common share when compared to a non-GAAP net loss at $1.1 million or $0.08 loss per diluted common share for the same period of the prior year.

  • EBITDA for the second quarter was a loss of $217,000 compared to a loss of $699,000 for the second quarter of the prior year.

  • Adjusted EBITDA for the quarter was a loss of $85,000 compared to a loss of $269,000 for the second quarter of the prior year.

  • EBITDA for the 6 months ended June 30 was a loss of $740,000 compared to a loss of $1.6 million for the same period of the prior year.

  • Adjusted EBITDA for the 6 months ended June 30, 2017, was a loss of $525,000 compared to a loss of $1.1 million for the same period of the prior year.

  • Our total cash and cash equivalents, excluding restricted cash, at June 30 was $929,000 compared to $619,000 at December 31, 2016.

  • During the period, we used $143,000 of cash for operating activities for the 6 months ended June 30 compared to $710,000 used for the same period of the prior year.

  • Cash provided by investing activities for the 6 months ended June 30, 2017, was $252,000 compared to $11,000 for the same period of the prior year.

  • During the period, we sold $252,000 worth of certificates of deposits.

  • Cash provided by financing activities for the 6 months ended June 30, 2017, was $201,000 compared to $125,000 for the same period of the prior year.

  • During the period, we received proceeds from stock option exercises totaling approximately $166,000.

  • And with that, I'll turn it over to Doug Gaylor, our President and COO, to discuss our sales results for the quarter.

  • Douglas Walter Gaylor - President and COO

  • Thanks, Ron.

  • We had a good quarter in Q2 with increases in total revenue, telecom revenue, new bookings, backlog and gross margins, while at the same time decreasing our operating expenses and losses as we get closer to cash flow breakeven and profitability.

  • The sales personnel changes, as Steve mentioned, and the additions that we made at the end of the Q1 had a positive impact during Q2 and that is reflected in our new sales bookings for the quarter.

  • We are excited about the future with our new members continuing and increasing their contributions.

  • As we continue to fine-tune our business, we are seeing the very positive results that we believed we could achieve.

  • The increase in our gross margins on telecom to 64% in Q2 along with a decrease in our operating expenses of 10% compared to Q2 2016 has allowed us to get extremely close to cash flow breakeven and non-GAAP profitability.

  • We expect these trends to continue going forward.

  • Our partner channel continues to grow and expand as more organizations are signing up to sell our great product offering.

  • We added 18 new partners in Q2 with many of them already contributing sales bookings shortly after their onboarding and training.

  • Our partners continued to sell larger multi-location sales, which helped contribute to a 5% increase in new sales bookings from the partner channel over the previous quarter.

  • As we continue to train and onboard these new partners, we expect their contributions to improve.

  • Our direct sales efforts also saw an increase in quarter-over-quarter sales, as our new additions to the sales team complemented the efforts of our tenured direct sales reps.

  • Working on specific verticals and targeting strategic accounts continues to be the focus for our direct sales team, and our increased sales, combined with our partners improved sales numbers, helped increase our contracted backlog by 7% during the quarter and 17% compared to June 30, 2016.

  • Our product offering continues to improve and our in-house engineering team has done a great job enhancing our platform, as evidenced by our Crexendo Contact Center Solution being awarded the 2017 Communications Solution Product of the Year Award that we received in July.

  • This is the second consecutive year that Crexendo has been recognized for our outstanding Ride The Cloud platform and this is also the fourth award that we have received for our Crexendo Solutions in the last 12 months, further highlighting the strength of our platform.

  • All of these positive trends have helped reduce our cash used for operating expenses by 80%, year-over-year, and helped reduce our non-GAAP losses by 55% over the same period of time.

  • With these consistent improvements, I am confident that we are on the verge of cash flow breakeven and GAAP profitability.

  • We are encouraged by our results in Q2, and we are confident that our revenue growth will continue to accelerate.

  • Our products and solutions are some of the strongest in the industry.

  • And as we continue to see increases in new customers that recognize the strength of our offering through our direct and partner channels, we will be poised for future growth and profitability.

  • I am more confident than ever that we are on the right track and I am very excited to continue to execute on our business plan for growth, cash flow and profitability.

  • I will now turn it back to Steve for any additional comments.

  • Steven G. Mihaylo - Chairman and CEO

  • Thank you, Doug.

  • I'd like to congratulate everyone on the team for doing a superb job.

  • Our people are clicking on all 8 cylinders here, and we look forward to next quarter.

  • With that Melissa, I will open it up to questions from those people that are on the conference call.

  • Operator

  • (Operator Instructions) And we'll take our first question from [Ken Kamen].

  • Unidentified Analyst

  • I'm going to start with an observation, then a question.

  • It appears as being a long time shareholder that the company really is kind of turning the corner here.

  • I mean, the numbers not only are moving in the right direction.

  • Cash is moving up, your expenses are going down.

  • So I guess, kudos to you and the team for doing it.

  • I guess, maybe I am reading into it that you're now going to go to a conference in New York to start telling the story as maybe your perception that it's really turning the corner.

  • With that said, and you can comment on that, if you want.

  • But can you explain a little bit more to me about the in-house sales channel versus the partner channel?

  • What you're seeing from them?

  • And then maybe less of a numbers way, but more of a narrative way, kind of talk about what's the difference between them?

  • And what the partners are doing as opposed to your in-house channel?

  • Steven G. Mihaylo - Chairman and CEO

  • Absolutely, and thank you.

  • First, I'm going to comment on your thought about us going to the conference in New York.

  • You're absolutely right on.

  • We now have the confidence to share our story with the rest of the world.

  • So we're going to be -- actively going to conferences, at least 2 or 3 next year, after we do that all Rodman conference.

  • As far as our direct sales versus our channel, our channel is growing on a much faster clip.

  • I'm actually going to let Doug Gaylor comment on this because he is right in the thick of things.

  • Doug, could you handle that one?

  • Douglas Walter Gaylor - President and COO

  • Sure.

  • Thanks, [Ken].

  • Thanks for the question.

  • So to differentiate between the 2, our partner channel is really going out and getting like-minded business partners out there that have organizations with sales, individuals already out on the street.

  • And so when we look at our business partners, our business partners are a combination of traditional telecom interconnects, which are telecom companies selling telephone systems, data bars, managed service providers and other business-to-business type sales organizations.

  • So our focus there is going out and finding business partners that are looking for new and improved revenue streams that involve the cloud.

  • And in most cases, we're the perfect fit for them because we have a very lucrative compensation plan for those partners.

  • And for those partners, for the right partners, it's really a matter of going out to their existing customer bases and having them work a already known entity, which is their customer and giving their customer a better solution for their telecom offerings.

  • Most of the time with our partners, they're going out to that low-hanging fruit, which is their existing customer base.

  • And they're allowing their customers to see significant cost savings and more efficient, more productive future functionality off of the Crexendo platform.

  • That in comparison to our direct sales, we started out with direct sales 3 years ago.

  • 100% of our sales were coming out of the direct side with no percentage coming out of the channel side.

  • Now the channel is dominating our sales contributions, but our direct side is still very tenured organization, and they're really focusing on the day-to-day going out and meeting with customers, mainly.

  • In their local markets, we've got representatives in a number of different cities, and they're going out and working with existing customers or finding new customers.

  • And again, selling them on the same benefits that Crexendo brings to the table.

  • But as we look at our future growth, we'll continue to see a good mix of sales coming from our direct channel as well as significant increases coming from our partner channel, as we increase the number of partners more and more quarter over quarter.

  • Unidentified Analyst

  • So just a follow-up, the partner channel, they are already selling these types of services and your thesis is that you are not only better, which awards would seem to say that you have a good product there, but that your compensation structure will start squeezing out the other people that they're representing to make them represent that you've got more than others.

  • Douglas Walter Gaylor - President and COO

  • Yes and no.

  • So quite a few partners can't -- don't sell any telecom services today.

  • So when I talk about data bars, and then I talk about managed service providers, and I talk about other business-to-business type organizations out there, a lot of those organizations don't have a telecom offering in their stable today.

  • And so we make for a great offering because we're their one and only telecom play.

  • The traditional telecom interconnects that already have maybe a premise-based solution or 2 premise-based solutions and don't have a cloud offering or have a premise-based solution and a cloud offering and are looking for a better solution.

  • Those are good partners as well, but I would tell you our higher success rate is with the nontelecom offering partners because we don't have to compete for their business on a daily basis.

  • We do a great job, but we don't have to go in there and supplant the relationship that maybe they've had already in place for many, many years.

  • So if we look at our success with our partners, we have good success out of our telecom partners, but we have even better success with our data bars, our MSPs and our other business-to-business providers.

  • Steven G. Mihaylo - Chairman and CEO

  • Let me just add a little bit to that.

  • I'm going to reiterate what Doug said about the channel growing faster than the direct sales.

  • And that's really a function of putting bigger and better partners on with more and more feet on the street.

  • So that's one of the reasons why they'll grow a little bit -- well, not a little bit faster but a lot foster.

  • We'd hope to keep our direct sales at about 20% or 25% of sales for a couple of reasons.

  • Number one, it has us dealing directly with the end user.

  • And we learn an awful lot, which we bring out additional features based on what these folks want.

  • And that helps us understand the market better.

  • So you're going to see both channels grow, the direct channel and the indirect channel, but the indirect channel will be growing faster.

  • Any additional questions, Melissa?

  • Operator

  • We'll take our next question from Kevin Dede with Rodman.

  • Kevin Darryl Dede - Research Analyst

  • I've got a couple of things for you.

  • Doug, could you quantify the number of sales folks that you have?

  • And maybe the number of partners that you have?

  • And speak to the changes that you made to the first half of the year more specifically?

  • Douglas Walter Gaylor - President and COO

  • Sure.

  • So as we look at our partner channel, our partner channel continues to increase.

  • We've got in the range of about 175 partners today.

  • And of those partners, some of them are new and just starting to get their feet away we've got other partners that have been with us for quite some time and have continued success month-over-month.

  • So as we continue to grow our partner channel, as you've heard on the -- my comments earlier, we added 18 partners in the quarter.

  • So when we add 18 partners, some of those partners may have a few salespeople, feet-on-the-street, other partners may have 15 or 20.

  • Now it's still a matter of trying to get that mindshare with those partners.

  • So when they're selling other products and other offerings, even a data bar or managed MSP or a network provider, they are usually comfortable selling their product offering that they have in their stead first and foremost.

  • And so even though we add telecom, and we get them trained and get them excited, it's a little bit of learning curve for them to add a new product to their portfolio, new language and lingo of the industry, when you're out there dealing with customers.

  • So there is a little bit of a ramp-up time for a new partner to come onboard.

  • Our existing sales team, our direct sales team, currently we have right at a dozen direct sales reps that are selling to our end-user customers.

  • And those sales reps are selling everything from small standalone opportunities to multi-location larger enterprise opportunities.

  • Our direct folks are usually fairly tenured in the industry.

  • So they've got experience selling directly, and they're going out there and targeting customers whether it's through specific verticals or specific strategic customers that we're targeting or again, many cases, those multi-location and larger enterprise-type customers that's where our direct sales team is typically focused.

  • We've got very, very little channel conflict in all cases.

  • We're supporting our partner channel out there to continue to increase and help grow that channel.

  • Kevin Darryl Dede - Research Analyst

  • Okay.

  • So on the product revenue side, sales were off year-over-year.

  • I was just wondering, if we could talk to that a little bit from a seasonality perspective, from a new equipment introduction perspective or a new equipment release schedule perspective?

  • Douglas Walter Gaylor - President and COO

  • Yes.

  • So if you look at revenues -- I mean, sales -- new sales bookings continued to increase and our overall revenues were up.

  • So if you look at our overall revenues, telecom is up 8% quarter-over-quarter.

  • You will notice that the Web Services division is continuing to slowly have attrition.

  • So we're still supporting all those web customers, but all the growth is going to be telecom going forward.

  • We don't see a lot of seasonality in our industry.

  • I mean, customers that are using telecom equipment, they're using it, whether it's the hot summertime or the cold wintertime and every other day in between.

  • So we don't see a lot of seasonality in our business.

  • We do see a little bit of spikes here and there.

  • But that's really just due to typical business variances.

  • In the middle of the summertime, you might have decision-makers that are taking a week or 2 off, but that's not going to affect overall from a consistent perspective.

  • So we're constantly out there in front of customers, the reality is every business out there has got a telephone system and 75%, 80% of them still today are still using legacy premise-based equipment.

  • So there's lots of opportunity for us to continue to expand and grow as more of these customers migrate from the traditional premise-based to the cloud.

  • Kevin Darryl Dede - Research Analyst

  • Okay.

  • I guess, Doug, I was hoping you could peel the onion back to just a little bit deeper and look at specifically equipment -- the telecom equipment.

  • It looked to me like that line item was down year-over-year.

  • And I was just wondering, if there -- that might be tied to a release schedule?

  • Douglas Walter Gaylor - President and COO

  • Yes.

  • So you were talking about hardware versus services so.

  • Yes, we look at our revenue, most of our revenues coming off of the services.

  • The hardware, it's not necessarily seasonal or releases.

  • Our hardware platform is pretty rock-solid today.

  • What we do notice is that if we have a large installation, we don't take revenue on the hardware side until the job is completely installed.

  • So if we have a large job, where we can't take full revenue on it for the quarter.

  • We don't take any revenue on that equipment side.

  • And so you will see some fluctuations there, if a large job pushes for some reason from one quarter to another quarter.

  • But the hardware component is a small, much smaller component than obviously the monthly residual.

  • Steven G. Mihaylo - Chairman and CEO

  • Yes.

  • There's another thing that's driving that, Kevin.

  • I think last year at this time, we had 1 or 2 significant deals that pushed the hardware up a little.

  • Another thing is, we're bringing our hardware costs down, and our sales price of the hardware is coming down at a little bit slower pace.

  • The long and the short of it is, we probably have the best margins of any company on the planet in our hardware because we control both the hardware and the software.

  • And everything else the recurring revenue is all software revenue that's being charged a month at a time instead of upfront like you would in a premise-based systems.

  • So we're transitioning to the point where we're almost 100% software or communication as a service company as opposed to a normal company that sells hardware, software and boxes and all of that stuff.

  • We're becoming a pure services company.

  • Kevin Darryl Dede - Research Analyst

  • Well, thanks, Steve, for the detail and actually kind of a good segue to my next question, which is about the ShoreTel and Mitel buy up.

  • I was wondering, if you think that might change competitive posturing, if that might give you an opportunity to work with larger partners?

  • And maybe it's too early to tell, but I was wondering if you had any insight on that?

  • Steven G. Mihaylo - Chairman and CEO

  • Actually, Doug will be able to answer that better than me.

  • But from my standpoint, it's a net positive for Crexendo, and I will let Doug explain why.

  • Douglas Walter Gaylor - President and COO

  • Yes.

  • I think it's truly a net positive for us.

  • I think that the acquisition of those 2 or the acquisition of ShoreTel by Mitel is going to create a lot of opportunity in the industry.

  • There will be a lot of chaos associated with that integration of those 2 organizations.

  • I mean, 2 large organizations that have a very, very, very similar footprint and so there's going to be a lot of overlap.

  • The traditional marketplaces where you saw a Mitel dealer and a ShoreTel dealer, those dealers were typically vary competitive with each other.

  • Now that they are going to be overlapping in each other’s own product offerings.

  • It's going to lead to a lot of unhappy partners out there.

  • And so we've already reached out and already been contacted by quite a few partners on each side that are now looking for maybe another alternative because if they were hailing Mitel and now they've got the Mitel and ShoreTel in there, now the ShoreTel dealers are going to be able to sell the Mitel, and the Mitel dealers are going to be able to sell the ShoreTel.

  • So it's going to create a lot of uncertainty in their minds.

  • And so if they're looking for a stable ground, Crexendo is at stable ground.

  • So we are excited about that merger because as with any merger it's going to create some distractions out there for both of those organizations so they can get their future a lot promoted.

  • And so while that destruction and while that chaos is happening, we're going to take full advantage of it.

  • Steven G. Mihaylo - Chairman and CEO

  • And you can only imagine when it does to morale and a lot of other factors involved, there's going to be an awful lot of partners that are going to say the heck with it and they're going to look for a better solution.

  • And we think we've got the better solution.

  • Douglas Walter Gaylor - President and COO

  • And they're talking about $60 million worth of synergies in the first year alone and that means a lot of good employees that might be looking for alternatives.

  • And so we're always looking for adding good additional talent to our team.

  • So I wouldn't be surprised if you see us getting a lot of interest from Mitel and ShoreTel employees as they look for alternatives out there.

  • Kevin Darryl Dede - Research Analyst

  • Okay.

  • Last question from me, gentlemen.

  • Backlog was up 7% sequentially and 17% year-over-year, if I heard you correctly.

  • I was just that wondering what that hard number might be, if you are offering it?

  • Steven G. Mihaylo - Chairman and CEO

  • Well, I don't know what hard number you're talking about.

  • But on the telecom side, Kevin, I think we were up 27% or 28% year-over-year for the quarter.

  • And as I mentioned before, the Web Services continues to shrink.

  • And eventually at some point in time maybe the next 2 or 3 years, we expect it to go to 0 in which case, we won't have that boat anchor slowing down sales...

  • Ronald Vincent - CFO

  • I think that number...

  • Steven G. Mihaylo - Chairman and CEO

  • I'm going to let Ron Vincent talk about this one.

  • But our growth rate in the telecom side is closer to 27% or 28%.

  • Is that correct, Ron?

  • Ronald Vincent - CFO

  • Yes.

  • Telecom backlog at 6/30/2017 is $18,045,000.

  • The backlog at June 30, 2016, was $15,434,000.

  • So -- and at March 31 of this year, it was at $16,000 or $16,888,000.

  • Steven G. Mihaylo - Chairman and CEO

  • Yes.

  • The bottom line, Kevin, is both sales are going to start to accelerate, profit will accelerate, gross margins will accelerate, and we intend to manage our costs very, very tightly, whether or not we can continue to reduce them is probably difficult, given the fact that sales and margins are increasing at such a rate.

  • But the costs are always going to go up at a much slower rate than our sales and margins do.

  • Operator

  • (Operator Instructions) We will take a question from Kevin O'Connell with Crexendo.

  • Steven G. Mihaylo - Chairman and CEO

  • Kevin, I realize you put down Crexendo on the call, but you're actually a private investor, it's my understanding.

  • Because we're not paying you.

  • You are one of our shareholders.

  • Unidentified Shareholder

  • That's right.

  • Longtime shareholder.

  • So here's my question.

  • So you start to go out to some of these conferences, and presumably as the story gets better, you're going to get more and more institutional interest.

  • What do you think the pathway is to graduate to a national exchange and...

  • Steven G. Mihaylo - Chairman and CEO

  • I am glad that you brought that up because my goal, and we may miss it by a quarter or 2, but my goal would be back to have the company back on a national exchange by the end of next year, either the NASDAQ or The New York Stock Exchange.

  • But as you know, there is very stringent requirements, and we should be able to meet those requirements by the end of next year.

  • Operator

  • We'll take a question from [Michael Bell].

  • Unidentified Analyst

  • One question that I had, which the other listeners may have an interest in, is that you built most of your infrastructure yourself in comparison to other cloud providers out there who are using AWS or other companies that are providing such services.

  • And these companies typically really invest a lot of time and resources and manpower in the security of their platforms.

  • So in the case of Crexendo, since you pretty much built it all yourself, how are you prepared to take on a security breach, which now it's really increasing these days to the Crexendo cloud platform?

  • Steven G. Mihaylo - Chairman and CEO

  • Believe it or not, [Michael] -- and that's a great question.

  • Believe it or not, we've actually been designing the software now for 8 years.

  • And we've deployed it for about 5.5 years.

  • And during that period of time, most of the security issues are in your session border controller.

  • We've probably done about 8 or 10, maybe even 15 updates on the session border controller to address that issue alone.

  • We think we've got some of the tightest security in the industry, and we'll continue to update the software and write algorithms that address that problem.

  • But I'm very, very confident that our services is good, if not better when it comes to security than anybody else out there in the market.

  • And maybe, Doug, you'd like to add something to that.

  • Douglas Walter Gaylor - President and COO

  • Yes.

  • Our network operations center is constantly monitoring everything that is going on on our network.

  • We're aware of any denial of service attacks, and we've got proactive measures in place to identify and prevent those from happening.

  • They're happening out there to our network and to everybody's network constantly.

  • I mean, it's amazing, when you read the statistics out there about potential penetrations, but we've been -- we've been phenomenal at making sure that those don't affect our network extremely, extremely proud of our 99.9999% uptime.

  • And so we continue to monitor and measure our network and the encryption and security that we have in place today, as Steve said, is extremely robust and gives us good reason to know that we're not going to be vulnerable in the future.

  • Steven G. Mihaylo - Chairman and CEO

  • This is just a little sidebar, [Michael], but we have multiple carriers coming into our building here.

  • And they come in from different sides of the building.

  • I don't know, if you remember, but about 4, 5, 6 months ago, Level 3, which is one of the biggest carriers in the world, had a catastrophic failure, and they are one of our carriers.

  • But none of Crexendo's customers experienced any outage at all because of the way we've arranged our network.

  • And that's just a small example of how we shine compared to our competitors.

  • Operator

  • No further questions in queue, sir.

  • Steven G. Mihaylo - Chairman and CEO

  • Okay.

  • Well, it looks like that's it for today.

  • I might also add that this conference call went about 20 minutes longer than last conference call.

  • So that shows you guys are paying attention out there.

  • And we appreciate all the questions, we appreciate your being on the call, and we look forward to speaking with you next quarter.

  • And we'll have even better news, I'm sure, next quarter.

  • Thank you, everyone, and good day.

  • Have a good evening.

  • Operator

  • That concludes today's conference.

  • And thank you for your participation.