Crexendo, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in millions of dollars unless otherwise stated. Crexendo provides cloud telecommunications services and software solutions.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $13.874 | $9.108 | $39.035 | $26.112 |
| Operating income/(loss) | $0.364 | $(0.544) | $(1.727) | $(2.789) |
| Net income/(loss) | $1.704 | $(0.696) | $(0.423) | $(2.812) |
| Basic EPS | $0.07 | $(0.03) | $(0.02) | $(0.13) |
| Operating cash flow | Not separately presented for the quarter | $0.887 | $(2.665) |
- Q3 revenue rose 52%; nine-month revenue rose 49%. Q3 service revenue was $7.517 million, software solutions revenue $4.691 million, and product revenue $1.666 million.
- Q3 operating margin was approximately 2.6%, compared with negative 6.0% in Q3 2022. Nine-month operating margin was negative 4.4%, compared with negative 10.7% in 2022.
- Approximate Q3 gross margin, calculated from reported revenue and direct costs of service, software solutions, and products, was 60.9%, compared with 67.4% a year earlier.
- Q3 net income included a $1.459 million gain on the sale of the company headquarters. Excluding that gain, the quarter remained profitable before tax, but reported net income was materially supported by the transaction.
- Management-reported non-GAAP Adjusted EBITDA was $2.094 million for Q3 and $4.081 million for the nine months, versus $0.938 million and $1.866 million, respectively, in the prior-year periods. These are non-GAAP measures and should be considered alongside GAAP results.
Balance sheet, liquidity, and cash flow
- At September 30, cash and cash equivalents were $7.737 million, versus $5.475 million at December 31, 2022. Current assets were $15.618 million and current liabilities $10.096 million.
- Total liabilities were $11.648 million and stockholders’ equity $43.687 million. Notes payable totaled $1.160 million; finance lease obligations were $0.117 million. The $0.700 million line of credit was undrawn and available; it expires February 27, 2024 and is subject to financial covenants.
- Nine-month operating cash flow was $0.887 million. Investing activities provided $3.700 million, chiefly from the headquarters sale, while financing activities used $2.324 million, including $2.143 million in note repayments. Cash increased $2.262 million over the period.
- The headquarters was sold for $4.0 million in August, generating $3.792 million in reported cash proceeds; proceeds funded repayment of the $1.8 million Bank of America note and transaction costs. Crexendo leased the property back for an initial 18 months.
Changes and business drivers
- The November 2022 Allegiant Networks acquisition materially contributed to reported growth: management attributed $3.368 million of Q3 revenue growth and $9.692 million of nine-month revenue growth to the acquisition. Organic product revenue also increased.
- Cloud telecommunications revenue was $9.183 million in Q3, up from $5.233 million; software solutions revenue was $4.691 million, up from $3.875 million. Segment operating income was $0.073 million and $0.291 million, respectively, in Q3. Both segments reported operating losses for the nine-month period.
- Reported backlog increased 43% to $43.114 million for cloud telecommunications and 52% to $20.319 million for software solutions, compared with September 2022. Backlog is contract value less revenue recognized and is expected to be recognized over the next 36–60 months.
- Goodwill remained $9.454 million after a $32.609 million impairment in 2022. Intangible assets were $24.348 million at quarter-end and are subject to ongoing amortization.
Outlook, risks, and other items
- No formal revenue or earnings guidance is provided in the supplied filing text. Management stated that operations and existing liquidity sources should meet cash requirements for at least the next 12 months.
- Management said achievement of at least 90% of the 2023 annual revenue, Adjusted EBITDA, and cash-balance bonus targets was probable as of September 30; the company accrued $0.488 million for employee bonuses. Additional accruals may be needed if targets are exceeded.
- The company adopted the current expected credit loss standard in January 2023, recording a $0.159 million cumulative reduction to opening equity. At September 30, allowances included $0.110 million for trade receivables, $0.161 million for equipment financing receivables, and $0.034 million for contract assets. Management noted that equipment-financing loss estimates may change with economic and collection trends.
- A $3.179 million valuation allowance remained against gross deferred tax assets because management concluded realization was not more likely than not, citing cumulative pretax losses.
- The filing reports no material pending or threatened legal matters, no recorded liability for estimated legal losses, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
- Key risks include execution and integration of growth, customer migrations to the new VIP platform, competition and technology change, credit losses, and the assumptions used to value goodwill, intangible assets, and deferred tax assets. The filing reports no customer representing 10% or more of revenue or trade receivables.
Investor verification priorities
- Separate acquisition-driven growth from organic performance and monitor whether recurring service and subscription growth persists.
- Assess underlying profitability and margins apart from the headquarters-sale gain, and review the reconciliation and adjustments in non-GAAP measures.
- Track operating cash generation against net income, working-capital needs, capital requirements, and future debt and lease payments.
- Review backlog conversion, cancellation and renewal patterns, and the timing and economics of customer migrations to the VIP platform.
- Monitor credit-loss allowances, bonus accruals and targets, goodwill impairment assumptions, deferred-tax-asset realizability, and potential dilution from equity awards.