Crexendo, Inc. (CXDO) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen and welcome to the Crexendo’s Second Quarter 2021 Earnings Conference Call. At this time, it is my pleasure to turn the floor over to your host, Mr. Steve Mihaylo, Crexendo’s Chairman and CEO. Sir, the floor is yours.
Steve Mihaylo: Thank you, Jess. Good afternoon, everyone. I am Steve Mihaylo, Chairman and CEO of Crexendo. I want to welcome all of you to the Crexendo’s second quarter 2021 conference call. On the call with me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; and Jeff Korn, our General Counsel. Also here today joining us for the first time is Anand Buch, our Chief Strategy Officer. I am going to ask Jeff to read our Safe Harbor statement. After that, I will give some brief comments. Ron will provide extra detail on the numbers, Doug will provide a business and sales update, and then we will open the call up to questions. Jeff, would you please read the Safe Harbor statement?
Jeff 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 facts, are forward-looking statements. Forward-looking statements include, but are not limited to words like believe, expect, anticipate, estimate, will and other similar statements of expectation identifying forward-looking statements. Investors should be aware that any forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. The risk factors are explained in more detail in the company’s filings with the Securities and Exchange Commission, including the Form 10-K in the fiscal year ended December 31, 2020 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, further events or any circumstance. I would now like to turn the call back to Steve. Steve?
Steve Mihaylo: Thank you, Jeff. I am very excited to be joining you today from our San Diego office, where Doug, Ron, Jeff and I have been continuing the ongoing meetings with the newly acquired NetSapiens team. I believe our meetings have been going extremely well. We are working together to make sure that the teams are integrated and to make sure we maximize the operational benefits we have from the acquisition of NetSapiens. We have made clear our mission is to – excuse me, I have got a frog in my throat, to maximize shareholder value, while providing the best products and service to the Crexendo customers and NetSapiens community. We are beginning to see substantial dividends from our joining with NetSapiens. We have been able to introduce the best telecom offering in the business, the Crexendo VIP Cloud Platform. This is built using the best of Crexendo right to cloud technology, combining with the NetSapiens platform, which supports over 1.7 million end users globally. This offering is so good we provide an uptime guarantee. And I might add we think it’s the first in the business. It’s not just us who is impressed with the new platform. We were recently awarded the TMC 2021 Communications Solutions product of the year. Our being able to rollout VIP is just the first of many benefits to our putting these two companies, NetSapiens and Crexendo together. We are beginning to see other benefits from the acquisition. The Crexendo engineers who lived telecom have been working closely with the NetSapiens team to continue to make NetSapiens the best communications platform in the business. We want to make sure that the institutional knowledge of both companies becomes a benefit for all of our shareholders, customers and employees. The synergies and the integration do not end with VIP and our engineers working together we will start to see cost savings that will be realized by moving the Crexendo customers to the NetSapiens platform. Investing in one platform will be a substantial benefit to our shareholders, customers and employees. We are integrating other processes too. We have merged the legal and accounting teams as we will be having HR emerge soon. And I might add to that we are doing an upgrade to our accounting to get everyone on the same billing platform. We are also joining marketing efforts and we are realizing that there is a great deal of cross functionality between our two teams, which should enable us to reduce new hiring. There will be additional cost savings as we continued the process. I am very pleased and excited about our quarterly results. We were able to increase our quarterly revenue by 43% year-over-year. That is even more impressive when you realize that included only 1 month of NetSapiens revenue. In addition, our telecom service revenue increased 20% year-over-year, which shows me we are making great progress. I will be disappointed, very disappointed if we do not continue to have year-over-year growth of at least 50% with non-GAAP profit. We have an expected GAAP loss for the first half of 2021. Considering the investments we made in the business, the cost of acquisition and the intangible asset amortization cost, the loss was not at all surprising. As I discussed in the press release, going forward, GAAP results will not be what we used to internally measure the business due to the substantial intangible asset amortization expense that will continue for probably the next couple of years. We will be carefully monitoring cash flow from operations, non GAAP income, EBITDA and adjusted EBITDA as our key performance indicators. I am fully convinced that those numbers will continue to improve and we will impress our shareholders and allow us to grow from internally generated cash. I am carefully monitoring growth at NetSapiens and Crexendo telecom. I have high expectations on both accounts. I expect that within the next couple of months or so, we will be announcing that NetSapiens have grown the 2 million end users. I am convinced that this will allow – you will also see growth in the Crexendo services side and the expansion of new VIP platform. Our results are very promising. The integration of these two companies is very promising and I am very, very excited about the future. With that, I am going to turn the call over to Ron Vincent. And Ron, will give us more granularity on the numbers?
Ron Vincent: Thank you, Steve. Good afternoon, everyone. Before I go over some of the details for the quarter, I would like to take this time to point out that we have reorganized our segment reporting as a result of the NetSapiens acquisition. Going forward, we will be reporting two operating segments, Cloud Telecommunications Services segment and Software Solutions. The new Software Solutions segment includes the operations of our NetSapiens subsidiary. For the second quarter 2020, our Cloud Telecommunications segment service revenue for the quarter increased 20% as Steve mentioned, to $4.3 million compared to $3.6 million reported for the second quarter of the prior year. Our Software Solutions segment revenue of $1 million for the second quarter and that software solutions revenue represents revenue from NetSapiens business combination from the acquisition date of June 1, as Steve mentioned, on one month of revenue in the quarter. Product revenue for the second quarter came in basically flat was a 2% decrease of $9000 to $440,000 compared to $449,000 for the second quarter of the prior year. Our consolidated total revenue for the second quarter was an increase of 43% compared to $5.8 million compared to $4.1 million for the second quarter of the prior year. Second quarter gross margin were as follows. Telecommunication Services segment, service revenue, gross margin of 69%. Our software solutions had a gross margin of 48% for the month of June, and product revenue had a gross margin of 35% for the quarter. Consolidated operating expenses for the second quarter of 2021 increased $3.5 million or 99% to $7 million compared to $3.5 million for the second quarter of the prior year. As you know, during the second quarter, acquisition-related expenses accounted for $377,000 of additional general and administrative expenses. Acquisitions also contributed $2 million of the additional operating expenses. Our net loss for the second quarter was $1,003,000 or $0.05 per basic and diluted common share as compared to net income of $508,000 or $0.03 per basic and diluted common share for the second quarter of the prior year. Non-GAAP net income for the second quarter was $37,000 or breakeven for basic and diluted common share, that’s compared to $660,000 or $0.04 per basic ending diluted common share for the same period of the prior year. EBITDA for the second quarter was a loss of $983,000 compared to $568,000 of earnings for the same period of the prior year. Adjusted EBITDA for the second quarter was a loss of $153,000 as compared to earnings of $704,000 for the same period in the prior year. Now, we will go over some highlights for the 6 months ended June 30. For the 6 month period, our consolidated revenue increased 30% to $10.3 million compared to $7.9 million for the same period of the prior year. The Telecommunications Segment service revenue for the 6 months period increased 19% or $1.4 million to $8.5 million compared to $7.1 million. The Software Solutions segment revenue of $1 million for the 6-month period, again, from the acquisition date of June 1 forward. Product revenue for the 6-month period decreased 2% of $20,000 to $808,000 compared to the $828,000 for the same period in the prior year. Our consolidated operating expenses for the 6-month period increased 71% to $12.4 million compared to $7.2 million for the same period of the prior year. During that 6-month period, acquisition-related expenses accounted for $1.1 million of the additional general and administrative expenses, and acquisitions contributed $2.4 million of additional operating expenses. Our net loss for the 6-month period was $1.7 million or $0.09 per basic and diluted common share. That’s compared to $648,000 net income and $0.04 per basic and diluted common share for the same period of the prior year. Non-GAAP net income for the 6 months period was $345,000 or $0.03 per basic and diluted common share, net compared to $935,000 or $0.06 per basic and diluted common share for the same period the prior year. Our EBITDA for the 6-month period was a loss of $1.7 million. Adjusted EBITDA for the 6-month period was earnings of $92,000 compared to $1.1 million for the same period of the prior year. Our cash, cash equivalents and restricted cash balance at June 30, 2021, was $7.9 million as compared to $17.7 million at December 31, 2020. Operating activities utilized $224,000 of our cash and cash equivalents during that 6-month period. Investing activities utilized $10.5 million of our cash, primarily related to the cash outlay for the Centric Telecom and NetSapiens business combinations. Financing activities provided $966,000 of cash, cash equivalents and restricted cash, primarily provided by stock option exercises. With that, I will turn it over to Doug Gaylor, our President and COO, for additional comments on sales and operations.
Doug Gaylor: Thanks, Ron. We had a very significant increase in revenue of 43% year-over-year during Q2, which included the 1 month of NetSapiens revenue as we closed on that acquisition on June 1. In addition to the $1 million in revenue that NetSapiens had for the quarter, we are pleased that our traditional UCaaS revenue grew by 20% during the quarter. It was a busy quarter for us as we not only completed our game-changing acquisition, but we also released our new Crexendo VIP platform, which has already been recognized by the industry leading authority TMC as its Communication Solutions Product of the Year. The need for work from anywhere systems helped increase our UCaaS revenues by 20% for the quarter. The demand for UCaaS technology and collaboration tools still remained high and Frost & Sullivan recent industry reports still estimates that 60% of U.S. business market is yet to migrate to the cloud for their communications. The same report also highlighted the Crexendo NetSapiens division platform as the fastest growing UCaaS platform in America and with a rapidly growing 1.7 million end users. It is this platform along with a tremendously talented engineering sales and support teams that made the acquisition a perfect fit for Crexendo. Our first major initiative from the acquisition was launching the Crexendo VIP Platform that utilizes the NetSapiens system as its foundation. With the launch of Crexendo VIP which stands for Video, Interactions and Phone, our customers will have an all-inclusive system that combines video collaboration, mobility, text messaging, call center and smartphones along with the power of Crexendo’s award winning telephone sets for the ultimate UCaaS offering. The demand for UCaaS provider is looking for either their own platform or looking to migrate from their existing platform remains high. NetSapiens had a 30% increase in revenue in 2020 and we continue to see strong demand there. As Steve mentioned, we expect to soon be able to announce over 2 million users on the NetSapiens platform. Our unique sessions not see pricing model differentiates ourselves from our two largest competitors, Cisco’s BroadSoft and Microsoft’s Metaswitch offerings. We have a very favorable pricing model, combined with the tremendous suite of features and capabilities. It is not surprising that the platform was recently recognized as the 2021 Internet Telephony Product of the Year as well as the 2021 TMC.net Remote Worker Pioneer award. We are working diligently to integrate the two organizations together, so we can start recognizing the operational benefits and synergies in the combined company. We have a tremendous engineering talent on both teams that are already working well and benefiting from best practices and we have seen immediate synergies from consolidating our marketing efforts. Our sales teams are benefiting from the exceptional industry knowledge, experience both organizations bring to the table, and we are in the process of consolidating all of our accounting systems and personnel and our operations and customer service departments are executing on our plans to maximize efficiencies, productivity and cost. I am very pleased with how the first 2 months of the combined organizations have progressed and I am very excited about our go-forward plans. As Steve mentioned with the acquisition cost associated with the merger, we expect to be GAAP losses for the quarter, but I am pleased that we were able to show a slight non-GAAP earnings for the quarter. We continue to be diligent about cost management and we are focused on the buying power, leverage of our larger organization, along with the consolidation of overlapping costs as we continue to grow the organization. Our UCaaS service gross margin decreased slightly to 69% as we introduced our new VIP platform offering. We believe we will continue to see cost synergies as we consolidate onto one platform. Our Crexendo partners and our NetSapiens community are excited about our combined organization. I had the pleasure of meeting with quite a few of the NetSapiens partners at the IP Expo Show in Miami at the end of June and all of them are extremely optimistic about the merger and the combination of resources to further enhance the platform. Likewise, the Crexendo partner community is very excited about the new VIP platform powered by NetSapiens, combined with our 100% uptime guarantee and lifetime warranty on the Crexendo phone devices and that has increased our funnel of opportunities and partner engagement. As we enter the second half of 2021, I couldn’t be more excited about the future direction and opportunity for Crexendo. In the last 13 months, we organically uplisted to the NASDAQ, had a successful S-1 offering and made a significant acquisition that puts us in a very solid position to take the company to much higher levels. We are committed to delivering the best UCaaS offering in the industry to our customers and our partners and the best return to our shareholders. We are confident that the synergies of combining our two great organizations will make us a major force in the industry and fuel our continued growth. I will now turn it back over to Steve for any further comments.
Steve Mihaylo: Thank you, Doug and thank you everyone for turning in today. Jess, we would like to open this up to questions of anybody here. If they have the answer, if we don’t, we will let you know. Jess?
Operator: Thank you, Mr. Mihaylo. We will take our first question from Josh Nichols at B. Riley. Your line is open sir. Please go ahead.
Steve Mihaylo: Good afternoon, Josh.
Josh Nichols: Hey, how is it going, Steve? Hope everything is going well. I know lot of work went into getting this deal one. So, good to see everything moving in the right direction. I did want to ask maybe starting off with a higher level question since you mentioned some of the awards and notoriety that Crexendo VIP Communications Platform has already kind of received like there is a lot of UCaaS providers in the space, but I guess how is the Crexendo VIP Cloud Communications Platform a little bit different and how it’s targeting the market and what makes that a little bit unique at this value-added offering, would you say?
Steve Mihaylo: I am going to let Doug talk about that. And anybody else that he wants will comment on it. But obviously, TMC and Crexendo on NetSapiens, thinks it’s the best. And what is your…
Doug Gaylor: Yes. Obviously, with the VIP platform, Josh, I mean, it’s really kind of an evolution of where we were. And so UCaaS as an offering continues to expand and increase in capabilities. And so with the rollout of our VIP platform and again, underscoring the VIP, which understandably stands for Video Interactions and Phone. So, when we think about where UCaaS is today, it’s much more about collaboration, it’s much more about interactions, like text messaging and unified messaging, along with the traditional telephone and along with the video collaboration offerings. And so as we bring that offering to the table, the 100% uptime guarantee with our geo-redundant setup with multiple data centers is pretty unique out there. So, not anybody else that we know of is offering 100% uptime guarantee. We have also backed that with our lifetime guarantee and our Crexendo phone devices out there, but much more than that, the mobility applications, the contact center applications and what we include in our basic and standard offerings for all of the seat licenses, it’s pretty unique. Jon Brinton has been extremely instrumental in getting the product rolled out. And so I will just turn it over to Jon for any additional color that he wants to add on the VIP platform.
Jon Brinton: Yes. And I would add in addition to what Doug said, we try to make it very consumable for partners to sell and then customers to understand, use a basic mix and match seat type kind of a good, better, best with add-ons for contact center agent and contact center supervisors. So, I think when you put that altogether, you look at the needs of the target market that we are addressing, combine it with the 100% uptime guarantee in the customer lifetime warranty on devices. That’s really what we are seeing is the winning formula for the VIP platform.
Steve Mihaylo: Does that answer your questions, Josh?
Josh Nichols: Yes, thank you. And then I think I read and heard in the comments that you said that you made some additional investments in sales and marketing and those are – you are seeing some good early indications there. Where are you investing a little bit of extra capital to accelerate growth?
Steve Mihaylo: This is a moving target, but I think Ron is just qualified to give you – Jon, excuse me, I meant Jon, Jon is best qualified to give you an answer to that one.
Jon Brinton: Yes. So I would tell you a couple of things with our approach to the market now with the VIP platform, I mentioned how it was really designed for it to be easy for agents to sell and understand. So we are expanding our presence in the agent channel, we have added a couple of new master agents in the last quarter that will be launching their product over the next few months. And then in direct sales capacity, we have made some investments into some demand generation in order to generate opportunities for our own direct sales teams that then work those and convert them. And in addition to that, we have improved some of the tools in our sales and marketing stack in order to give some better business intelligence tools, proposal management and other things to help streamline our sales process. So, it kind of meets the speed of the market that we are in today.
Steve Mihaylo: And Josh, just so you are aware of it, this is a moving target. It’s not something that’s static. But in addition to that, I have told the team here that the two most important things are growth and at least GAAP breakeven with non-GAAP profitability. And you have to realize there is approximately $2 million just on this transaction and we are finishing up on the accounting for it, but there is about $1.8 million or $2 million in amortization that will fall to the bottom line. There is also all the other things that go into non-GAAP accounting such as stock options and so on. My goal, as long as you understand is after the next one or two or three acquisitions is to be able to be strong enough to finance this internally. And we are going to finance any acquisition with a little bit of stock, a little bit of seller financing and a little bit of debt. I do not want to dilute our existing shareholders. Now having said that, there maybe a little bit of dilution, but not nearly as much dilution as we get accretion and that’s our position on that. And I realized I may have answered a question you never even asked.
Josh Nichols: No problem. I appreciate you clarifying the point. Last question for me then I will give someone else a turn. I guess if I am just looking here, I think the other thing related to cost, it seems like the integration is already well underway, but you see some opportunities here to move some of the Crexendo customers to the NetSapiens platform. How long would that take? And like as far as a potential upside to the gross margin on a percentage basis as that happens, could you kind of help quantify that in terms of timing and magnitude?
Ron Vincent: Yes. Obviously, that’s high on our priority list. And so obviously, running one platform is a lot more efficient than running two platforms. So, that process is already underway. So we anticipate that process could take upwards of 12 months, but we anticipate that being a very smooth process. The two systems have very like foundation. So, it’s just a matter of prioritizing. The database is to get everything finalized and moved over. So we are currently working on that process now. We will start migrating customers. We have already started migrating customers, very easy process for us and we anticipate that being very smooth. And once that happens then we can see an additional benefit from a gross margin perspective having just one operating platform and seeing some synergies in just having one platform.
Steve Mihaylo: Has that answered your question, Josh?
Josh Nichols: Yes. Thank you. I will hop back into queue.
Steve Mihaylo: Alright. Jess, do you have another question?
Operator: Thank you. We will go next to Andrew King at Colliers Securities. Andrew, your line is open. Please go ahead.
Steve Mihaylo: Good afternoon.
Andrew King: Hey, guys. Thanks for taking the question. Really good quarter here guys. Just to drill into the gross margins a little bit. Last quarter, you guys announced a small acquisition, you have company in Northern Virginia that had some pressure on your gross margins as you’re paying $4, $6 per user. Can you talk about those, how you look to gross margins? And how much of an impact that had to the Crexendo gross margins versus the VIP platform?
Steve Mihaylo: Well, right now, the gross margins, as you mentioned, we’re all over the place. My particular goal is to get it up to where they were, but that’s going to take a little more, and I’m going to let Ron talk to exactly where we expect them to be.
Ron Vincent: Yes, Andrew, we continue to experience a little bit of downward pressure on our margins. We’re still posting the majority of those customers on the $4 platform. And so we still have that added exposure or expense. We during the quarter, we started the process. So we’ve been planning and mapping out our migration plan and I know we’ve started that process, but it’s in early stages, we expect to complete that majority of it in the third quarter, if not by the end of the year. And then we will start to see some improvement in our gross margins and in the Telecommunication Service segment.
Steve Mihaylo: Well, I’m sorry to interrupt you, Ron. Just be aware of this, we’re acutely aware of gross margins. And I’m sorry for stepping on your side. Go ahead.
Ron Vincent: Do you have additional questions around that, Andrew?
Andrew King: Well let’s go there. Again, I just wanted to get an idea. Obviously, you guys have in the past, been very focused on running the company GAAP and non-GAAP profitable. You got already rolled that out this year. But how should we think about you’re willing to increase operating expenses to drive that further growth versus driving back to profitability? Thank you.
Steve Mihaylo: Well, I can tell you that me personally, this is Steven Mihaylo talking, understand that we have to compensate people a little differently. And we are interested in growth. Non-GAAP profit, GAAP breakeven and whatever it takes, we’re going to do that. Did you want to add anything, any of you guys?
Ron Vincent: Yes. I’d like to add that for the future, the next two quarters, we’re going to be focused on really integrating the NetSapiens acquisition into operation and identifying all the synergies that we possibly can through the duplicate services and processes. And so as we identify those and consolidate the accounting, legal, HR, we’re going to identify some synergies, mix some cost savings there that’s going to drive back. And so as we get to more of a normal run rate on our expenses, then we will look at the expansion of operating expenses. But we’re going to run the business the way we always have. We’re going to look at every dollar that we are spending and determine if it’s a necessary expenditure, and we’re still going to continue to focus on that bottom line. So we haven’t lost side of that. I know the first two quarters of this year have been muddied with the additional costs associated with the acquisition. It’s hard to put a number on that. You guys see that in our non-GAAP disclosures, but there are other costs associated with driving those synergies, there will be costs, but we’re going to manage those as best we can.
Steve Mihaylo: Thank you, Ron. And just as I mentioned before, this is a moving target, but you know where I’m coming from. And our Board feels the same way, and everyone feels the same way.
Andrew King: During the quarter, you guys – there was BCM One acquisition uplist, can you talk about how that affects the competitive environment, specifically, perhaps Sapiens?
Steve Mihaylo: I’m going to let Doug answer that one.
Doug Gaylor: Yes, I’ll answer that, and then I’ll let Ron add a little color, but SkySwitch is obviously our largest NetSapiens partner. I think the BCM One acquisition is great opportunity for them to grow. We actually met online that was BCM One folks and the SkySwitch folks down at the IP Expo down in Miami in June, and they are extremely optimistic about their future growth and how we play a part in that. Ron, any additional color?
Ron Vincent: Yes. Sure. I’d like to – yes. I mean, just to echo really what Doug said. SkySwitch is a big partner for us. This is actually a testament to additional growth in that segment, BCM One coming in and the folks that are involved with BCM One to go up to make that investment to take SkySwitch to the next level actually just continues to show the commitment that our partners are having and what part we’re playing in the community to continue to grow the market as a whole. So we’re pretty excited by that acquisition.
Andrew King: Great. Thanks for taking my questions and congrats on the good quarter and welcome to team, Anand.
Anand Buch: Thank you. Thanks, Andrew.
Doug Gaylor: Thanks, Andrew.
Steve Mihaylo: Jess?
Operator: We will take our next question from Michael Kaufman, MK Investments.
Steve Mihaylo: Good afternoon, Michael.
Michael Kaufman: Hi, Steve. Yes, hi, Steve. I really applaud the way you’re integrating this company, the NetSapiens and maintaining the financial prudence that you’ve always shown of growth with profitability. I did get some color which I liked on expanding the customer base, what you’re doing there. I have a question on what are you doing to expand the investor base and to tell the story of a new Crexendo to the financial community so that we get more coverage?
Steve Mihaylo: Well, right now, of course, we do that as necessary. I’ve turned over talking to investors to Doug Gaylor. So it would be better if he answers that question. Go ahead, Doug.
Doug Gaylor: Yes. Thanks, Steve. So obviously, getting our message out to the investor community is mission-critical. We currently have two analysts following us, Michael at Colliers International and B. Riley, where we’re looking for additional analyst to follow and cover us. We’ve got a lot of analysts that follow us, that haven’t written covered on it yet. We will be presenting at a couple of conferences coming up or presenting at the SNN Network Virtual Summit on August 18. We are presenting at the Collier Virtual Investor Conference on September 9 and we will continue to do additional investor conferences. We did LD Micro and the Little Grapevine Conference in June. And so we’re always reaching out to the investment community and trying to get our message out there. If this is any indication, we’ve got a record number of people on our conference call today. So we’re excited about the fact that more and more people are following the stock. And so we will continue to getting the message out there and looking forward to more and more people signing out of that have read our stories.
Steve Mihaylo: And what of the thing you have to realize, Michael, we’re not only totally focused on the balance sheet and the P&L, but we’re also focused on the amount of float, the investors and so on and so forth. I doubt that there is going to be a question as that we haven’t considered amongst all of us. So I’ll just be aware of that.
Michael Kaufman: Now clearly, you guys are too professionals with a lot of experience, and that’s why I’ve continued to invest. And I think this is going to be a homerun, serve everybody on the management team, the employees and the investors, and I wish you the best of luck. I was just wondering what’s the current headcount with the company now that you have met trade it wasn’t clear from anything that I’ve seen so far?
Steve Mihaylo: One of the things I look at is productivity and the productivity is not nearly what it has the capability of being. And we’re so right in the middle of this thing, I’d rather not talk about that. But around 100 people, and we got more than that, but around 100 people is the right number for the size of operation we are today. I would rather talk about productivity. And I think productivity should be north of $300,000. Right now, that’s where Crexendo was, but right now, we will have it to that probably by the end of this year. Just be aware of the fact that net margins, the gross margins are going to be coming up. The headcount is going to be looking at productivity. But we’re right in the middle of that. So I can’t give you a number right today, but it’s going to.
Michael Kaufman: That was a very satisfying answer. Again, I wish you guys the best of luck. And I don’t think anybody can do it better than you’re doing it.
Steve Mihaylo: Thank you, Michael. And we appreciate your confidence on us. Jess, do we have a next question?
Operator: I sure do. We will go next to Charles Ronson at Amato and Partners.
Steve Mihaylo: Good afternoon, Charles.
Charles Ronson: Thank you very much for picking me. Look, first of all, congratulations on super quarter, everyone said that, but I mean, it’s real, because it’s true. So, we are starting to be able to say that. I wanted to ask you two questions without putting you on the spot. But to be fair – and I was going to ask about your own revenue projection and acquisitions. You’ve already twice hinted revenues. So I don’t know if you really can be any more explicit. When you say you’re heating – with your headcount, 300,000 reduction in person, I mean that’s pretty explicit. And I assume that’s probably the low end. So we can work on that as we want. But maybe if possible, could you just – are you willing to go into any of your ongoing acquisition strategy? Or basically, just the ongoing strategy of if you could talk on?
Steve Mihaylo: Well, first of all, let’s plan the sky at this point in time although I have committed to 50% growth over the next year or two. And I’ve talked about productivity, which should give you an indication where headcount is going to be. This is an algebraic equation. You can get the answers, just plug-in the numbers that you want to plug in. But I’ve committed to breakeven GAAP numbers, a positive non-GAAP number and 50% growth, it’s all there, but I can’t talk about anything that hasn’t happened yet.
Doug Gaylor: And I will add, Charles. From an acquisition perspective, I mean, we’re always looking for opportunities. But right now, the most important thing for us is to integrate the existing merger with NetSapiens, and that’s what we’re focused on. So although there is going to be opportunities out there, we know there is going to be opportunities. We’ve got the gold meeting right in the palm of our hands, and so we’re working on that integration. So that’s our main focus at this point.
Steve Mihaylo: And I appreciate that comment. I may give you some examples. And nothing imminent, I just want you to understand that. But there is 200 partners that we’ve added from the NetSapiens. All of those eventually need an exit strategy. And you can just take – do the math, take the number of desktops that we have and multiply it by $20, $21 each. That’s $400 million there. We’re starting to see people approach us. And long and the short of it, I’ve told you that half of our growth will be organic and half of it will be through acquisitions and trust me, we haven’t followed the sweep at the switch. We’re going to be following that guiding light. But you also have to understand, we’re going to catch 22 here. And as we get bigger, acquisitions get easier. So as we get bigger, the acquisitions are going to be bigger. The end users are going to be bigger. The partners are going to get bigger. Everything gets better, the bigger we get, and I’m just not satisfied at what we are now.
Charles Ronson: Okay, understood. Thank you very much. I will get back into queue, Steve.
Steve Mihaylo: Okay, thank you.
Doug Gaylor: Thanks, Steve. Appreciate it.
Charles Ronson: Thank you. My pleasure.
Operator: We will take our next question from Arham Khan at Arham Khan and Partners.
Unidentified Analyst: Hi, guys. Good afternoon. Congratulations on the excellent quarter. I had a few questions that I was hoping you can answer me. Early around the NetSapiens, are there any kind of new customers that you can now target now that you’re largely consolidating into a NetSapiens and Crexendo into one and so what does this mean for scalability going forward at the current rate, not accounting for any future acquisitions?
Steve Mihaylo: Well, Arham, believe me, I wish I could answer that question for you. But the best people are the salespeople and I am going to turn it over to Doug, and he may turn it over to Anand and he may turn it over to John or vice-versa. So Doug, will you?
Doug Gaylor: Thanks, Arham. Great to talk to you again and yes, obviously, as we continue to growing in the NetSapiens partners’ community out there is top on our list. They currently have a tremendous community of partners, and we will continue to grow that. We are continuing to grow that. I think this allows us to go after bigger opportunities there in that space. One of the things that we bring to the table now with the combined forces of NetSapiens and so just is more power to leverage those opportunities. So before where somebody was maybe with BroadSoft or Metaswitch, they are already embedded with Cisco or Microsoft, they may have looked NetSapiens is maybe too small of an opportunity for them to take a chance on now with the combined unity with NetSapiens and Crexendo. They can see our financials. They can see our growth and our stability. And so maybe some of those bigger opportunities will start making that migration. So that’s always been a focus for us. We’ve had a lot of good best success in that fishing ground. And so hopefully, this opens up opportunities for bigger partners and more partners to migrate from their existing platforms over to the NetSapiens platform. Anand, do you have any other color?
Anand Buch: Yes. I mean, again, Doug hit right on the head. I think the biggest thing for us was even when we embarked on the next level of growth, and hence, that’s why we’re here was this ability to scale to the customer that we’re competing against to not have to second, not our size, about our wherewithal, our sustainability. So I think that’s a key factor for us. And so we continue to see that. I think the prospects that we talked to are that much more comfortable now with our backing and our longevity.
Unidentified Analyst: Okay, great. That’s fair enough. Are you able to – yes, absolutely, thank you, guys. Are you able to give you an updated screenshot of the backlog where you stand today?
Doug Gaylor: Yes. Backlog was flat year-over-year, only due to the fact that we haven’t been able to get the backlog for our acquisition included in there. So when we look at our backlog, we didn’t see a large increase in our backlog from Q2 2020, but we don’t have any of the acquisition backlog built in there. We’re working on those backlog tables now, and we will have those in Q3. So you should see a significant increase in backlog in Q3.
Steve Mihaylo: And just remember that as I mentioned before, this is a moving target. And those are all things that we’re working on. And as Doug mentioned to you, we will have the answer in Q3.
Unidentified Analyst: Okay, great. And final question from me, one of the main reasons we got is in Crexendo was the cloud migration. We saw that kind of proliferate earlier a couple of years ago and it’s still going on. What can you say about the industry in and of itself, not just Crexendo and the take in? What can you say what’s remaining in the cloud migration? How much is left? And finally, what kind of cloud migration characteristics of NetSapiens is there more room to grow? Is it somewhere to Crexendo? And how does it change for you now that you have acquired NetSapiens?
Steve Mihaylo: Well, Arham, I am going to turn that over to Doug, but let me just tell you, after the bulk of the market, which is probably 3, 4 years from now since migrated onto the cloud. I have given the edict to our people that they better offer the best service in the entire world to these end users, so we can get them to switch from brand X to brand Crexendo. It’s that simple. And do you want to add to that?
Doug Gaylor: Yes. Well, Steve, so Arham, as I mentioned in my comments, the Frost & Sullivan report that I mentioned just came out only about 2 or 3 months ago and they highlighted that there is still only about 39% adoption of cloud communications in the United States that means 61% of the businesses in the U.S. still have not migrated over to the cloud for their communication solutions. I think the pandemic, although it was a silver lining for our industry that it forced a lot of people to move over. It also put a lot of people on ice until the pandemic was in the rearview mirror. So, we still see extremely high demand out there for UCaaS services. It’s not a matter of, if these businesses move to the cloud, it’s when and so if 61% still not migrated to the cloud over the next couple of years, that number will continue to decrease down to the team probably in the next 3 or 4 years according to Gartner. And so when we look at where we are in the industry, there is plenty of opportunity for growth for the next few years, because all of those businesses will still be migrating over to the cloud. And that works well for not only Crexendo on a direct and on our agent basis, but also works extremely well for NetSapiens, because all of their partners, retailers are going after those same customers. So, it’s ideal for us and we don’t see that growth slowing anytime soon, because there is still a plethora of businesses out there that had to and will be moving to the cloud in the short-term.
Steve Mihaylo: Just so you are aware of it, Arham, the edict is for us to have bigger and bigger end users and bigger partners. But everything Doug said is absolutely true.
Unidentified Analyst: Okay, excellent. That answers all my questions. I will leave it up to somebody else. Best of luck to you guys. Excellent results and you guys are a high quality management and I wish you the best of luck.
Steve Mihaylo: Thank you.
Doug Gaylor: Thanks, Arham. Good talking to you.
Operator: We will take our next question from Damon Tanabe, a Private Investor. Your line is open.
Steve Mihaylo: Good afternoon, Damon.
Damon Tanabe: Good morning, gentlemen. Nice to hear you guys report on the positive results. Thank you. I was asking Steve, what is the strategy to compete with Zoom Phone and now that they have acquired 59, how are you guys viewing that?
Steve Mihaylo: Well, one of the things we have is our VIP platform, which includes video and that isn’t even in any of the numbers, but that will be made available to all of our partners and end users. And Doug or one of them?
Doug Gaylor: Yes. No, I think we have got a great solution out there. I mean, Zoom is a player in our field now, obviously, leveraging their positioning with the video collaboration and trying to get into UCaaS. The acquisition of 59 puts them into the high-end call center application space. We feel like we have got a great call center application for the SMB market. And so I think with Zoom and 59s, that’s a big acquisition. I was talking to somebody the other day and they say that putting two unicorns together. So when you put two unicorns together, then you got to figure out what you got. I know that with what we’ve got with NetSapiens, we have got a tremendous UCaaS offering with a great contact center application. So for the market that we are going after, I see Zoom as a competitor, but not a serious competitor because we have got our mission and I don’t worry about Zoom getting into our launch.
Damon Tanabe: Thanks. So, do you see that Frost & Sullivan report? Are they considering the seats being used by Zoom as part of the market penetration?
Doug Gaylor: No, I don’t believe they are. I don’t believe they are. I think in the Frost & Sullivan in the other category, I know they have RingCentral and 8x8 and Vonage in the other category, but I don’t believe they had Zoom in the UCaaS consideration, because at the time Zoom just getting into the UCaaS offering. So I am not sure if Frost & Sullivan really included Zoom as part of that report.
Damon Tanabe: Got it. Okay. I am not going to bring up the other 800 pound gorilla of Teams, but if you want to comment on that, I am curious to hear your thoughts of Microsoft?
Doug Gaylor: Yes. I mean, I think the Teams is a great offering for us to integrate with. And I think we have got tremendous, tremendous uptake of our integrations to the Teams. We have got a Teams offering with VIP and we have got a Teams offering with the NetSapiens platform as you are well aware. And so actually, the first customer that we implemented on the VIP platform for Crexendo was an opportunity that had 50 Teams’ integration licenses. So, we see it as a true complement to Teams. I think most people out there that are using teams don’t want to put all their eggs in one basket with Microsoft. And so I think we have got a tremendous offering for folks that are using Teams to be able to have a high-end UCaaS offering that integrates extremely, extremely well at Teams. Anand any other color?
Anand Buch: Yes. So Damon, I mean, I think in relation to the same discussion Zoom, Microsoft, all of these folks are actually just creating more opportunity. The likes of Microsoft consumer really trying to go after the wider commoditized market, but if you look at the sub-segment of really the Behemoth providers that are competing with those folks, the fragmentation is a very, very interesting thing. And so the approach that we want to take and continue to take is to offer the toolset so that providers and partners can compete with the likes of the biggest players. And so we are competing on different dimensions and not necessarily trying to be everything to everybody, which is what these players do. The advantage that we have is the agility and the flexibility of the platform to go after those sub-segments that are in many cases more valuable on a per seat basis.
Steve Mihaylo: And let me add something to that, Damon. With the advent of APIs today, all we have to do is write an API and we can integrate with anybody.
Damon Tanabe: Thanks, Steve. Thanks, guys.
Steve Mihaylo: You bet. Is there anyone else, Jess?
Operator: I do not have any other questions holding.
Steve Mihaylo: Okay. Well, I want to thank everyone for being on the call today and we look forward in early November to chatting with you about the third quarter and telling you all about our progress. Thank you very much and look forward to talking to you.
Doug Gaylor: Thank you. Appreciate it.
Operator: Ladies and gentlemen that will conclude today’s conference. We thank you for your participation. You may disconnect at this time and have a great day.
