Crexendo, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial amounts below are in thousands of dollars unless noted. Crexendo provides cloud communications and UCaaS, call center and collaboration services, and web services through its Cloud Telecommunications and Web Services segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3,602 | $3,026 | $10,708 | $8,811 |
| Operating income (loss) | $336 | $(193) | $917 | $(206) |
| Net income (loss) | $334 | $(199) | $911 | $(215) |
| Diluted EPS | $0.02 | $(0.01) | $0.06 | $(0.02) |
| Operating cash flow | Not stated separately | Not stated separately | $1,157 | $350 |
- Revenue and mix: Q3 revenue grew 19% year over year; nine-month revenue grew 22%. Service revenue was $3,259 for Q3 and $9,414 year to date; product revenue was $343 and $1,294, respectively.
- Segments: Cloud Telecommunications revenue rose 22% in Q3 to $3,443 and 25% for nine months to $10,206. Web Services revenue fell 22% in Q3 to $159 and 21% for nine months to $502.
- Margins: Gross margin, calculated as revenue less service and product costs, was approximately 72% in Q3 2019 versus 67% in Q3 2018, and 70% for nine months versus 68%. Operating margin was approximately 9% in Q3 and 9% year to date, compared with losses in the 2018 periods.
- Cash and liquidity: Cash and cash equivalents were $3,308 at September 30, 2019, compared with $1,849 at December 31, 2018; restricted cash was an additional $100. Working capital was $2,361, up from $1,322. Operating cash flow of $1,157 was partly offset by $72 of investing outflows; financing provided $374, including $447 from option exercises. Management stated that operations and existing liquidity should meet cash requirements for at least 12 months.
- Debt and leases: Notes payable were $4 and finance lease obligations were $123. Operating lease liabilities were $915, recognized following adoption of ASC 842; these are lease obligations, not borrowings. Total liabilities were $3,735.
- Other metrics: Backlog was $25,335, up 17% from $21,734 a year earlier; the company expects to recognize it over the next 36–60 months. Adjusted EBITDA, a non-GAAP measure, was $468 for Q3 and $1,279 for nine months, versus $2 and $204 in 2018.
Changes versus the prior comparable periods
- Revenue growth and a comparatively modest increase in operating expenses moved the company from operating and net losses to profits in both the quarter and nine-month period.
- Cloud Telecommunications drove growth, especially contracted service revenue and usage charges. Web Services continued to contract, primarily from lower hosting revenue.
- Nine-month selling and marketing expense increased 14% to $2,865, primarily reflecting higher commissions, lead generation, and marketing costs. Service delivery costs also rose with business growth.
- Cash and cash equivalents increased by $1,459 during the nine months. Stockholders’ equity rose to $3,651 from $2,000, reflecting net income, option exercises, and share-based compensation.
- The company adopted lease accounting Topic 842 on January 1, 2019, recording $1,088 of right-of-use assets and lease liabilities at adoption. It reported no material effect on earnings or cash flows.
Outlook, commentary, and risks
- The filing gives no formal revenue or earnings guidance. Management’s stated liquidity assessment covers at least the next 12 months.
- Management cited growth in monthly recurring and contracted telecommunications revenue; contracts typically run 36–60 months. Backlog is not a guarantee of future revenue.
- Product revenue can vary with installation timing; typical installations take 30–60 days, while larger enterprise deployments can take several months. The company also reported a temporary change in desktop-phone supplier while functionality was added to its manufactured phones.
- The company has a full valuation allowance against deferred tax assets. It said a 2019 incentive bonus may be payable depending on revenue and adjusted EBITDA targets, but it could not reasonably estimate the liability.
- The Tempe office lease is with an entity owned by the company’s CEO and major shareholder; rent is $25 per month. Cash held at financial institutions exceeded federally insured limits by $3,254 as of September 30, 2019.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no pending or threatened legal matters expected to have a material adverse impact and no off-balance-sheet arrangements.
- Forward-looking statements are subject to risks described in the company’s 2018 Form 10-K. The filing identifies no customer accounting for 10% or more of revenue or trade receivables.
Most important facts for investors to verify
- Whether Cloud Telecommunications growth and backlog convert into recurring revenue and cash, and whether Web Services’ revenue decline stabilizes.
- Whether profitability and operating cash generation continue after considering commissions, share-based compensation, working-capital needs, and capital spending.
- The extent and timing of potential dilution from outstanding stock options and equity awards; common shares outstanding were 14,711,474 at September 30, 2019.
- The status and commercial impact of the desktop-phone supplier change, and any related installation or product-cost effects.
- The 2019 bonus-plan outcome, deferred-tax valuation allowance, related-party office lease terms, and total lease commitments.
- The assumptions behind backlog and management’s 12-month liquidity assessment; these are not formal earnings guidance.