Crexendo, Inc. — Q2 2019 Form 10-Q
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2019. Crexendo provides cloud communications and related services through its Cloud Telecommunications and Web Services segments. Unless otherwise noted, amounts below are in thousands of dollars.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $3,614 | $2,977 | $7,106 | $5,785 |
| Operating income (loss) | $340 | $50 | $581 | $(13) |
| Net income (loss) | $338 | $47 | $577 | $(16) |
| Diluted earnings per share | $0.02 | $0.00 | $0.04 | $(0.00) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $495 | $(32) |
Q2 revenue grew 21% year over year; first-half revenue grew 23%. Approximate gross margin was 69.1% in Q2 2019 versus 68.7% in Q2 2018, and 68.4% for the first half versus 68.1%. Operating margin was approximately 9.4% in Q2 and 8.2% for the first half, compared with 1.7% and negative 0.2%, respectively, in the prior-year periods.
- Revenue mix: Q2 service revenue was $3,147 and product revenue $467. First-half service and product revenue were $6,155 and $951.
- Segment results: Cloud Telecommunications revenue was $3,449 in Q2 and $6,763 for the first half; its operating income was $253 and $416, respectively. Web Services revenue was $165 and $343; its operating income was $87 and $165.
- Cash and liquidity: June 30 cash and cash equivalents were $2,508, plus $100 restricted cash. Working capital was $1,928, versus $1,322 at year-end 2018; current assets were $4,236 and current liabilities $2,308.
- Cash flow and investment: First-half investing cash outflow was $42, primarily for property and equipment. Financing cash inflow was $206, including $272 from option exercises, offset by $49 in note repayments and $17 in finance-lease repayments. Cash, cash equivalents and restricted cash increased $659 to $2,608.
- Debt and leases: Notes payable were $7 and finance-lease obligations $127. Operating-lease liabilities were $974; the company adopted the lease standard in January and recognized $1,088 of right-of-use assets and lease liabilities at adoption. Total liabilities were $3,583.
- Other measures: Backlog was $24,772 at June 30, up 19% from $20,774 a year earlier. Non-GAAP adjusted EBITDA was $457 in Q2 and $811 for the first half, versus $184 and $202, respectively. These are supplemental, non-GAAP measures and should not replace GAAP results.
Material changes versus the prior comparable period
- Cloud Telecommunications drove growth: its first-half service revenue increased 28% to $5,812, while product revenue increased 18% to $951. Management attributed service growth mainly to contracted service revenue and usage charges.
- Web Services weakened: revenue declined 21% in both Q2 and the first half, primarily due to lower website hosting revenue.
- First-half profitability improved from a small prior-year loss to net income of $577. Operating expenses increased $727 for the period, but revenue increased $1,321.
- Higher selling and marketing costs reflected commissions, sales staffing and lead-generation spending. Service costs also rose with installation activity, customer-support staffing and bandwidth needs.
- Stockholders’ equity rose to $3,035 from $2,000 at December 31, 2018, reflecting first-half earnings, option exercises and share-based compensation. Shares outstanding were 14,581,484 at June 30.
Outlook, commentary, risks and unusual items
- Management stated that operations and existing liquidity should meet cash requirements for at least the next 12 months; it may seek debt or equity financing if business assumptions change or unexpected needs arise. No specific revenue or earnings guidance is provided.
- The company expects to recognize its $24,772 telecommunications backlog over the next 36 to 60 months; backlog represents contract value less revenue already recognized and is not a guarantee of realization.
- Telecommunications service contracts generally run 36 to 60 months. Installation timing can delay product revenue, particularly for larger enterprise customers.
- The company reported a full valuation allowance against net deferred tax assets, citing uncertainty about future realization. First-half income tax provision was $7.
- Cash held at financial institutions exceeded federally insured limits by $2,361 at June 30. One telecommunications customer represented 14% of trade receivables, though no customer accounted for 10% or more of revenue.
- The Tempe office is leased from an entity owned by the CEO and a major shareholder; monthly rent is $25. Management considered a further three-year renewal reasonably certain.
- Management reported no pending or threatened legal matters expected to have a material adverse impact, no off-balance-sheet arrangements, and effective disclosure controls. The filing refers investors to the 2018 Form 10-K for material risk factors.
Important facts for investors to verify
- Whether telecommunications growth and backlog convert into recurring revenue and cash collections, and whether Web Services declines continue.
- Whether operating cash generation remains positive as equipment-financing receivables, contract costs and working-capital requirements increase.
- The effect of sales commissions, hiring and other growth-related costs on margins; assess GAAP performance alongside management’s non-GAAP measures.
- Lease commitments, including the related-party office lease, and the company’s liquidity assertion relative to future cash needs.
- Customer receivable concentration, uninsured cash balances, and the assumptions supporting the full deferred-tax-asset valuation allowance.
- Potential dilution from outstanding equity awards and option exercises; basic shares outstanding increased during the first half.