CREXENDO INC 2026 Q2 Earnings Call

Thank you, Alan, good afternoon, everyone. It's my pleasure to welcome you to the Crexendo Q2 2026 conference call. I'm Jeff Korn, chairman of the board and CEO. Here with me today are Doug Gaylor, our president and COO, Ron Vincent, our CFO, Jon Brinton, our CRO. In a moment, Jon will read the safe harbor statement. After that, I will provide some brief comments on our performance and strategy. Ron will then provide a more detailed discussion of our financial results, Doug will provide a business sales and product update. After that, we will open the call for questions. Jon, would you please read the safe harbor statement?

Thank you, Jeff. I want to take this opportunity to remind listeners that this call will contain forward-looking statements with 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 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 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 31st, 2025, the Form 10-Q 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 Jeff. Jeff? Thank you, Jon. We delivered an exceptionally strong quarter.

Revenue increased 49% year-over-year to $24.6 million. We generated GAAP net income of $1.1 million, or $0.03 per diluted share, non-GAAP net income of $4.1 million, and adjusted EBITDA of $4.1 million, an increase of 46% from the prior year quarter. We also continued to improve our margins and generated $4.8 million of cash from operating activities during the first six months of the year, an increase of 89% compared with the same period last year. These high-level results demonstrate the growth, increasing scale, and operating leverage of the business. They are particularly encouraging because we remain GAAP profitable while absorbing the acquisition-related costs and amortization associated with ESI. Ron will provide a deeper discussion of the financial results, including our revenue mix, margin performance, and cash flow in a few minutes.

One of the most encouraging developments this year is the substantial increase in new platform customers. We secured 11 new platform logos through the first two quarters of 2026, compared with only two at the same point last year. That level of activity reinforces my conviction that the Crexendo NetSapiens platform is increasingly the platform of choice for communication providers seeking a modern, improved, and scalable solution. The increase in logos strengthens the long-term opportunity of the business. Our sessions-not-seats model gives providers a compelling economic advantage, especially in an uncertain economic environment. Our platform gives them the functionality, scalability, and flexibility they need to compete. We expect these wins to develop into a meaningful and durable stream of revenue. Doug will give more details on the specifics relating to the new logos. I could not be more pleased with the ESI acquisition. The integration is progressing exceptionally well.

The ESI employees are engaged. Sales have exceeded our initial expectations. We have already integrated or begun integrating accounting, legal, and marketing functions. The engineering teams are working closely together. ESI has significantly increased our revenue, strengthened our customer base, and added an experienced team that shares our commitment to innovation and outstanding customer service. It has also meaningfully expanded our telecom operations, adding to the strong growth in service and product revenue this quarter. The performance of ESI demonstrates why we are careful and deliberate in assessing acquisition opportunities. We look for companies that are strategically complementary, operationally actionable, and capable of contributing to both growth and profitability. ESI is delivering exactly the benefits we expected and further validates our disciplined approach. We are also continuing to invest in the platform. We currently expect to release our next major software version, volume 46, in Q2027.

It will include a fully redesigned user interface that creates a substantially stronger first impression, together with improvements throughout the product that should enhance both the sales process and the day-to-day user experience. We look genuinely forward to showcasing these platform updates, ecosystem, and product roadmap at our upcoming October user group meeting, which is on track to be the largest in our history. Our strong cash generation gives us additional strategic flexibility. We ended the quarter with $18.3 million in cash and cash equivalents after using $26.2 million for the ESI acquisition. The substantial increase in operating cash flow, together with our balance sheet strength, should allow us to continue evaluating strategic accretive opportunities while having the flexibility and ability to not substantially dilute shareholders. We will remain disciplined and will move forward only when the financial, operational, and strategic merits of an opportunity support the transaction.

We remained excited about our AI offerings. They are not yet a meaningful contributor revenue, but they continue to receive strong praise and market acceptance. We expect AI adoption to expand, and I continue to believe that AI-related revenue can become meaningful in 2027. Doug will discuss our AI initiatives in greater detail during his update. This was a very strong quarter. We delivered substantial revenue growth, continued GAAP profitability, improving margins, and significantly stronger operating cash flow. We are successfully integrating a highly beneficial acquisition, winning new platform customers at a dramatically higher rate, advancing an important software release, and maintaining financial flexibility to pursue additional accretive growth. We have built a stronger and more valuable company, and the opportunities in front of us continue to expand.

I am extremely enthusiastic about Crexendo's direction and confident in our ability to deliver profitable growth and meaningful long-term shareholder value. I'll turn the call over to Ron to walk through the financials in more detail. Ron. Thank you, Joe. We reported $24.6 million in total revenue, beating top-line analyst expectations.

That's a 49% increase over the second quarter of the prior year. Consolidated organic revenue came in a little light this quarter at 7% over the prior year. Year-to-date organic revenue growth of 11% is in line with our guidance of delivering double-digit organic growth for the year. Service revenue increased 78% to $14.9 million, and our growth margin was 67% for the quarter. Software solutions revenue increased 5% to $7.3 million, and our growth margin was 70% for the quarter. During the quarter, we booked six new logos and seven upgrade orders from existing customers. There are a couple items to note here.

Perpetual license revenue is down $700,000 compared to the prior year quarter, which is primarily the reason for the decrease in organic growth percentage year-over-year as Q2 of 2025 was a record sales quarter as the average order size was three times our average order size we typically book each quarter. Additionally, the acquisition of ESI eliminated approximately $180,000 of revenue recognized in the prior year quarter. For comparison purposes, if we had added back that $180,000 of ESI revenue to the current quarter, our growth rate would be more like 8% compared to the prior quarter. We are confident that these new customers will need larger upgrade orders in the future as they grow their customer base and migrate their existing customers over to our platform. Product revenue increased 104% to $2.5 million, and our growth margin was 44% for the quarter.

During the quarter, our service revenue growth margins improved by 400 basis points. Our product revenue growth margins improved by 1,300 basis points. Our software solutions revenue growth margins improved by 200 basis points compared to the first quarter of this year. Our consolidated revenue growth margin was 66% for the quarter. That's a 500 basis points increase compared to the first quarter of this year. Operating expenses increased approximately $8.1 million or 53% compared to the prior year. Estech Systems, LLC acquisition contributed $6.9 million of the increase in operating expenses. Operating margins improved to 4% for the quarter. That's a 200 basis point increase from the first quarter of this year. We reported net income of $1.1 million. That's $0.03 per basic and diluted common share, in line with analyst expectations. On a non-GAAP basis, we reported non-GAAP net income of $4.1 million for the quarter.

That's $0.12 per basic and diluted common share, 200 basis points higher than analyst expectations. We reported EBITDA for the quarter of $3 million and adjusted EBITDA of $4.1 million. Our adjusted EBITDA margin was 17% for the quarter, an increase of 200 basis points compared to the first quarter of this year. Our cash and cash equivalents at the end of the quarter was $18.3 million, compared to $31.4 million at the end of the prior year. Operating activities for the six-month period provided $4.8 million in free cash flows. For the quarter, we had $2.8 million in free cash flow. That's a 35% increase over the first quarter of this year. Investing activities for the six-month period utilized $26.2 million in cash related to the cash portion of the Estech Systems, LLC acquisition purchase price.