Crexendo Inc Stock

Greetings, and welcome to the Crexendo Second Quarter 202 Earnings Conference Call. [Operator Instructions] And please note, this conference is being recorded.

I will now turn the conference over to your host, Mr. Jeff Korn, Chairman and Chief Executive Officer with Crexendo. Sir, the floor is yours.

Thank you, Ali, and 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; and 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, and 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 31, 2025, and the Forms 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, 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 6 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 2 quarters of 2026 compared with only 2 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. And our platform gives them the functionability, 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 and sales have exceeded our initial expectations. We have already integrated or begun integrating accounting, legal and marketing functions and the engineering teams are working closely together. ESI has significantly increased our revenue, strengthened our customer base and add 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 continuing -- 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 Q 2027. (sic) [ Q2 2027 ] 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 road map 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 we'll move forward only when the financial, operational and strategic merits of an opportunity support the transaction.

Finally, we remain excited about our AI offerings. They are not yet a meaningful contributor to 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.

In summary, 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.

With that, 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. However, 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 gross margin was 67% for the quarter. Software Solutions revenue increased 5% to $7.3 million, and our gross margin was 70% for the quarter. During the quarter, we booked 6 new logos and 7 upgrade orders from existing customers.

There are a couple of 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 3x 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 gross margin was 44% for the quarter. During the quarter, our service revenue gross margins improved by 400 basis points. Our product revenue gross margins improved by 1,300 basis points, and our software solutions revenue gross margins improved by 200 basis points compared to the first quarter of this year. Our consolidated revenue gross margin was 66% for the quarter. That's 500 basis points increase compared to the first quarter this year.

Operating expenses increased approximately $8.1 million or 53% compared to the prior year. ESI acquisition contributed $6.9 million of the increase in operating expenses. Operating margins improved to 4% for the quarter. That's a 200% -- or 200 basis point increase from the first quarter 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 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 6-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 6-month period utilized $26.2 million in cash related to the cash portion of the ESI acquisition purchase price.

Financing activities for the 6-month period provided $8.4 million in cash, primarily related to $4.9 million in proceeds from the term loan we entered into with Wells Fargo and $3.6 million in net proceeds from stock option exercises.

With that, I'll turn it over to Doug Gaylor, our President and COO, for additional comments on sales operations and products.

Thanks, Ron. It was a great quarter for Crexendo, and we had a lot of significant accomplishments. As Jeff stated, we added 6 new logos on the NetSapiens platform during the quarter. Combine that with the 5 new logos we had in Q1, we have added 11 new logos for the first 6 months of this year compared to 2 new logos for the first 6 months of 2025. Of the 6 new logos in Q2, 2 of them migrated from Metaswitch and 1 of them migrated from Cisco's BroadSoft. Of the 11 new logos so far for this year, 4 have been Metaswitch migrations.

In addition, we also had 7 add-on orders during the quarter from our existing licensees, and we're extremely excited about the new logo momentum in our pipeline for new licensees and the pipeline is very solid, and we continue to see strong demand for our award-winning software platform.

As Ron mentioned, we saw a $700,000 decrease in perpetual license purchases in the quarter. I believe the economy's financial climate is driving new licensees to launch with a smaller initial investment of sessions and subscription, and that tends to be more attractive as it has a lower upfront cost. The 6 new logos for the quarter were smaller than average deal booked in the prior year quarter as we have seen a trend with our new licensees to start with a smaller initial commitment and grow that commitment over time.

It's worthwhile to note that although the average order size was smaller this quarter than the average deal booked in the prior year quarter, our average upgrade order value is increasing and averages 50% higher than our initial orders. As our base of over 250 licensees continues to grow and expand, we have seen and expect to continue to see continual strong add-on orders.

We also had strong sales bookings on the Telecom Services segment of the business. During the quarter, we sold 15 6-figure opportunities that helped contribute to a very successful quarter. Most notably, we saw a huge increase in sales from our technology service distributors or TSDs. We saw sales increase by 39% for the quarter. And year-to-date, we have seen sales increase by 42% over the same periods for 2025. We continue to see great momentum in this area of the business and are excited about the number and size of opportunities that we're seeing brought in by the TSDs.

As Jeff mentioned, our ESI acquisition is paying off very nicely for us. We saw very strong sales during the quarter, which helped propel us from $2.1 million in revenue that ESI contributed in March of Q1 to an average of $2.3 million per month for a total of $6.9 million in revenue for Q2. We have great momentum with ESI resellers and are excited about the results that we have seen in very short order. We continue to work on synergies and cost savings from the ESI acquisition and are confident these synergies will continue improving our bottom line.

Our strong sales bookings in both segments of the business helped increase our remaining performance obligation to $139 million, a 97% increase over Q2 of 2025. And as a reminder, our remaining performance obligation number is the sum of the remaining contract values for our Telecom Services and our Software Solutions customers that will be recognized on a sliding scale over the next 60 months, and it's a very strong indicator of our future revenue stream.

We are very pleased with our gross margin improvements for the quarter on both sides of the business. On the Software Solutions side of the house, gross margins improved to 70% for the quarter largely attributable to cost savings recognized from decommissioning our legacy data centers at the end of Q1 as we completed our migration to Oracle Cloud Infrastructure, or OCI.

Our Telecom Services segment saw gross margins improve significantly to 67% on the strength of higher-margin sales from our ESI acquisition. In addition, ESI's product contributions also helped improve our overall product gross margins, which improved to 44%, up significantly from the prior quarter. As we successfully scale both segments of the business, we expect these gross margin improvements to continue.

At the end of January, we launched CAIRO, Crexendo's AI receptionist/orchestrator, and are seeing great early success on the offering. CAIRO allows businesses to use our artificial intelligence receptionist to answer all calls, handle them accordingly by answering frequently asked questions, processing calls to the right individuals or departments and even setting appointments.

We are extremely excited about the new offering and have seen strong customer interest and success in our initial rollout period. The average revenue increase per account during the quarter was approximately $120 per account per month, and that represents an increase of approximately 35% over the average revenue per account of $340 that we see on our average Telecom Services customer.

During the quarter, we began rolling out CAIRO to our licensees and are pleased with the initial traction we are seeing from our licensees to also resell CAIRO. Also during the quarter, we started marketing initiatives to roll CAIRO out to our existing base of retail customers. And although still very early in our rollout of the product, we are extremely excited about the successful launch of the solution and are confident we will continue to see strong growth in sales and adoption of the offering.

Our ecosystem vendor program, which we refer to as our EVP program, continues to grow and is now up to 57 vendors providing services and solutions to our licensees and customers on a revenue share basis. Of the 57 vendors, 13 of them are providing AI-related applications and solutions. Similar to CAIRO, we are in the very early stages of revenue generation from our EVP program, but we did see $400,000 in revenue contribution from the program during the quarter and are very pleased with the growth trajectory and the opportunities we are seeing.

Crexendo has had a great first half of 2026, and we continue to meet and exceed our targeted goals. We are right on track to reach our goal of $100 million revenue run rate by the end of 2026. And I'm thrilled about the future direction and opportunity for Crexendo. Our strong organic and inorganic growth, combined with our 12 consecutive quarters of GAAP profitability, our strong positive cash flow and our growing remaining performance obligation have laid a great foundation for our future success.

We're excited about the additional opportunities to drive growth and innovation that our new AI offerings will infuse into our business and are very optimistic that applications like CAIRO will continue to drive even more demand and higher revenues. As the fastest-growing platform solution in the country, supporting nearly 8 million end users, we are laser-focused on growing our business, enhancing our solutions and improving our efficiencies and continue to return very strong results.

With that, I'll now turn it back over to Jeff for any further comments.

Thank you, Doug. Thank you, Ron. Ali, I don't have any further comments at this point. So why don't you open the call to questions.

[Operator Instructions] Our first question today is coming from George Sutton with Craig-Hallum.

Nice to see the accelerating platform wins. So I'm wondering if you could just give us a picture of why is this happening now versus last year, for example? Is it kind of where an Alianza is in their process of kind of keeping everybody on hold? Or is there something broader we should be aware of? And I'm curious if you could walk through the timing of the impact of these new platforms. So as we look forward a quarter and a year from now, what kind of impact should we see?

Well, George, as I think you realize, our new logos started to accelerate in the second half of last year, and we started to gain additional wins. We think there are a variety of reasons for it, but we think the huge upgrade in logos in the first half of this year have more to do with the economy and the fact that we are offering better solutions than our competitors. The wins didn't just come from Metaswitch, they came from Cisco and other platforms. So it's across the board.

I have discussed this before, our model of "Sessions not Seats" is a compelling model. It could save you 40% to 50% for what you're paying for platform usage. And our model is particularly compelling in difficult economic times or uncertain times as to what our platform competitors may be doing as you can purchase a small license and work on a "cap and grow" strategy. And we believe that's what's been happening in the first half of the year. A number of people have purchased licenses to start the "cap and grow" strategy.

And I'm particularly excited about that because that's going to mean continued upgrades, more logo wins and more upgrades as we proceed. So of all the things we talked about today, that's perhaps the most exciting thing I see, and I see that as a great propellant for our future.

And I would just add, George, that it doesn't hurt that our competition hasn't been doing a lot from a development perspective. And so there's still uncertainty and doubt with a lot of our competitors' licensees. And when they're looking for another alternative solution out there, we're the best option for them.

But I will make clear, George, that irrespective of what our competitors are doing, we are absolutely the best solution out there. We have the best technology. We have the most open APIs. We have the ability to either use facilities-based or cloud-based. And we have the -- we have an amazing EVP program where you can pick and you can literally make the platform your own.

Our now more than 250 licensees each have the ability to develop their platform exactly the way they want, go into their metrics and their type of customer, and you wouldn't necessarily know that these aren't NetSapiens customers. So this is an amazing reason why we continue to do well irrespective of what our competitors do.

Super. Just one other question on CAIRO. So I know you've been moving to trial with a number of folks. Can you give us a sense of how quickly the trials move to deals? And Jeff, you had mentioned 2027 would be the time frame when we start to see some impact. I wondered if you could just put any metrics around that.

I'll let Doug or Ron give you some metrics. But the reason I believe 2027 will start to show some meaningful income -- some meaningful revenue is that we are starting to see strong acceptance from our licensees on the EVP program. The new customers that we have been actively trying to sell CAIRO to, seem to be excited about it. We've received initial excitement from marketing materials we sent out to the base, which we have not yet started reaching out to. And I expect it will be a slow rollout, but I do expect to start to see some substantial revenue coming in, in 2027.

But I'll let Doug or Ron give you some specific metrics.

Yes. Obviously, George, since we started out from no customers on CAIRO when we launched the product in January, we saw great success. We started rolling it out initially with new customers combining with our UCaaS offering, obviously. Then about midway through the second quarter, we started rolling it out to our licensees, saw a nice pickup with our licensees jumping on board to sell the product. And then we started rolling out marketing initiatives, as I mentioned, to our base of customers.

So we're extremely excited about where we are with CAIRO. We haven't seen any bumps in the road yet. And so we're excited about the future revenue growth opportunity. As I mentioned in my comments, the ones that we have sold, we've seen an average of about $120 revenue uptick on revenue per account. That's pretty significant, 35% increase over what a typical customer is paying us. And we've got the capability to take that number even higher.

As we continue to roll this out, one of the things about CAIRO is that it's a usage-based application. So as customers are feeling more and more comfortable having all their calls answered with an AI receptionist, we're seeing overage charges starting to tick up. And so for a customer that's choosing to answer absolutely all of their calls and answering all their frequently asked questions, they could see overage charges upwards of a couple of thousand dollars. And that's a significant savings for them over having a live body answer calls, and it's a great benefit for us from a revenue perspective.

Our next question is coming from Joshua Reilly with Needham.

If you look at the 11 new platform wins here in the first half of '26, just a couple of items on that. How much smaller would you say the initial deal sizes are versus the last couple of years? And how -- if you look at the mix, how many are choosing to host on your infrastructure versus their own infrastructure and the implications for the upfront revenue through -- from licenses versus a more ratable structure if they choose your architecture or your infrastructure?

Yes, I'll start with the average size deal. So there's still a couple of hundred thousand dollars for the initial orders. But in the prior year, we had some large transactions that spiked that 30% growth that were in the 3x that amount. So the average size deal is in that $0.25 million initial order and then the upgrade orders are in the $300,000, $350,000 -- so $350,000 type orders. So a significant increase over the initial order, but that's the average order size. Jon, would you like to comment on the mix between perpetual versus subscription?

Yes. We skewed -- this quarter, George, (sic) [ Joshua ] we skewed a little bit more to facilities-based while we have hosted opportunities also, one thing that I think is really exciting is we had a couple of new licensees that started with us on a hosted platform, so we could get it rolled out more -- sorry, Josh. So we get it rolled out for them as quickly as they could and then they may migrate to facilities-based later. And we've also had a couple of our legacy licensees that have chose to move from a facilities-based to hosted environment.

So the key being able to meet each of them individually with the type of delivery platform that they prefer. And the mix will vary a little bit from quarter-to-quarter, but we're seeing good direction across the base overall. And apologies for calling you, George there, Josh.

And Josh, I'll add one thing. No, I'll call you, Josh. Large -- very large orders are a much longer sales cycle. We have taken as long as 4 years to close very large orders. An initial smaller license is much easier to close and these people almost always, if not always, do upgrades, continue to expand, continue to put people on the platform. So I am very excited by the large number of new logos we got and the size of them does not bother me in the least because to me, that's a future annuity.

Sure. And then just following up on that, if you look at the pipeline now for the second half of the year, are we -- should we be expecting a number of high-volume smaller deals? Or you have some mega deals in the pipeline? Or just give us a sense on what you may be cooking up for the second half of the year.

I will let Jon answer that, but I will say, we obviously are always working on large deals. But as I just explained, Josh, those come in at the rate they come in. The smaller deals tend to come in faster.

Yes. And I would say, Josh, the overall pipeline is strong. We're continuing to win new logos. Obviously, this is clearly forward-looking, but we feel really good about it. And we can't predict the ultimate size that some of these licensees go, but we are talking to some pretty exciting opportunities that we believe will close in the next 6 months.

Got it. Last question for me is on the TSD bookings. You gave a metric there. I can't remember the number now off the top of my head. But what drove the strength in the TSD bookings? And is that sustainable?

I don't know, Josh. George would have remembered the number.

39% for the quarter and 42% year-to-date on the TSDs. And I think that's a combination. I think it's one, we're paying a lot of attention to our partnerships with our specific TSDs out there. And I think we just do a better job. We continue to rank #1 in G2.com for customer satisfaction, and that just is leaps and bounds ahead of our competition. So if a TSD has been selling one of our competitors and had some poor customer service experiences, then they're going to be looking for an alternative.

And when they find Crexendo and they find that their installations go smooth and our customers love us, they tend to sell more. And so I think the growth that we've seen in the TSDs is primarily associated with the fact that we're giving them a lot of love and attention, and we're doing a great job for their customers, and that tends to give us repeat business over and over again.

Jon, any additional color?

Yes, I'd just add, we have a really solid team that works at specific channel. They've built some good relationships over time. If you remember 3 years ago, this was a relatively new business for us, and they just continue with -- for all the reasons that Doug said and a few more, they just continue to grow, and we have more success with them.

Our next question is coming from Mike Latimore with Northland Capital Markets.

Congrats on the great results here. I guess you mentioned that the ESI sales were exceeding your expectations. Can you provide a little more context there? I guess, what kind of benefits has the acquisition shown? Sometimes, distractions when acquisitions occur, it sounds like maybe not here. But maybe just a little more context on why they're exceeding your expectations.

Well, as Doug pointed out, in March, they did $2.1 million, and they've averaged $2.3 million per month in quarter 2. We have been working with them and doing additional marketing. We've been expanding things over there, and they just frankly do a damn good job. So we've been very excited with the results.

And I think they've got their own reseller channel through the ESI resellers out there. I think our messaging has been great to those resellers. And I think that the reality is that they're a bigger organization now, and they can go out and tell a bigger and better story. ESI had a great story to tell and now the combination with Crexendo just adds to that story.

So I think the sales success that we've seen right out of the gates, as you highlighted, a lot of times when you have mergers and acquisitions, you see a little bit of a pause. We haven't seen that because I think the sales team, as Jeff highlighted, does a fantastic job, and they took the acquisition and raised it to a new level. And so from their end user customers and from their resellers, it's been a great message.

Doug and Jon and their management team did a very good job of talking to their channel sellers and convincing them that we were not going to destroy what they already had and they're beginning to expand it. So it's been a very symbiotic relationship, and we've done quite well with it.

Great. And then on the new software logos, is the subscriber count of the organizations to who you're selling, is it kind of average? Or are they smaller or bigger than average? Just kind of get a sense of the organizational size you're selling to there.

I'm sorry, you were asking about the 11 new logos?

And subscriber count

Correct. And the subscriber count of those licenses yes?

Yes. They're not -- they're pretty consistent, although we are continually seeing an increase in the size of the base that people have. I think part of the order sizing we're seeing is just some conservatism over general economic conditions and other things going on in the world. And then you combine that with there is a time frame that people, if they are going to migrate to our platform from another platform, there's a different work stream that's involved there. So what we've just seen is people being a little bit more conservative in the initial order.

But the size of the base that they have under management, it isn't our desire to go down market. We're going upmarket and many of these people have larger bases than we've talked to before.

I think we've explained this before, Mike, we almost never tend to be the first platform somebody uses. Almost all of our customers tend to migrate from somebody else when they've grown to the point where they need additional bells, whistles, tools and support.

Yes. Makes sense. And then lastly, EBITDA margin was outstanding. Should we think about that -- can you maintain that EBITDA margin? Or should we think about it expanding through year-end?

Yes. So that 17% is consistent with what we had all of last year. So we had a dip in Q1. And so that was just us regaining around 17% that we experienced all of last year. And so that was our commitment that we could get it back to 17%, and we got it back to 17% within the first quarter after the dip.

And then -- so that's sort of maintainable or expandable from here?

Yes. No, we should be able to maintain that.

Our next question is coming from Eric Martinuzzi with Lake Street Capital.

I was trying to get a feel for the run rate for the product revenue. This was our first full quarter with ESI. And I was just wondering that $2.5 million, is that kind of a safe place to assume -- maybe a $10 million run rate for product?

Yes, that's a good run rate with the ESI component in there. It's not too accelerated from what our historical rates were, and we think that's very maintainable.

Okay. And then I know you're not giving formal guidance, but the services line, historically, that's kind of trended higher just sequentially as you add more telco services customers to the base. Any reason why that would take a step back? Or should we assume the historic trend holds?

I would assume a historic trend holds.

Okay. And then lastly, the -- it was a good cash number that you had that you finished out the quarter at $18.3 million. I do understand we've got the $4.9 million of the term loans, but still the net cash step up there was pretty substantial over $6 million, which leads me to your appetite for M&A. I know we only closed on ESI at the beginning of March, but what are you seeing out there as far as the M&A pipeline?

We have a great pipeline. We have several we are looking at, whether they get closed this year or next year, I can't tell you. But it requires substantial diligence. As you understand, the primary integration team is sitting in this room with me. So we can't do more than one at a time, but ESI was a home run, and we've almost fully integrated it.

By the end of next quarter, it will be fully integrated other than moving their customers -- moving their employees on to our payroll, insurance and the 401(k), which can only be done at the end of the year, it will be fully integrated by that point. So I -- depending upon the size, I wouldn't be shocked if we did something in Q4, but I wouldn't be shocked if it extended to Q1 of next year, maybe Q2.

Our next question is coming from Scott Buck with Titan Partners.

I'm curious, selling and marketing expense as a percentage of revenue moved, I don't know, substantially higher, I guess, versus a year ago. I'm wondering if that's by design or just kind of a secondary effect of the integration with ESI.

So, this is Ron. So one thing you guys mentioned is ESI. So ESI contributed a portion of that number. And so that's the large increase that you speak about. We don't typically have large swings in our sales and marketing from one period to next unless it's related to commissions and the top line revenue growth. So the big increase is primarily related to the ESI contribution, and that's in the MD&A section, we called that out.

Although I will add, we are spending more on marketing because as you see, it gets us great results, particularly on the software solutions side. And I will continue to improve marketing as long as I see an ROI on it as we have continued to see.

Okay. That's helpful, Jeff. Second, I'm curious, is CAIRO margin accretive at the current pricing? Or are you really just seeding adoption at this point?

I'm not sure I understand your question, CAIRO.

Was that on CAIRO?

On CAIRO, yes, are you making money off of CAIRO today? Or are you pricing it in a way to accelerate adoption where you might be able to move pricing higher over time?

I don't believe in loss leaders, so we're not going to sell anything we can't make money at, but I'll let Doug give you a little more detail.

Yes. Obviously, we designed that product, and we've got great margins on it. So it should be a positive impact on our margins going forward as we continue to sell more revenue there.

Okay. Perfect. That's helpful. And then last question I had, just on your equipment financing receivables. I think you're up above $8 million now, up substantially from year-end '25. How do we think about the equipment financing book? Is it just growing with ESI hardware sales? And at some point, does this eventually need a separate funding facility?

Definitely doesn't need a different funding facility. It is -- we recognize revenue on a sales-type lease model when we deliver the equipment and install the service. And so we amortize that. The customers pay us over time and they're renting the devices from us over the contract term. And so it's more of a hosted offering versus a product sale upfront. So we've rolled into the pricing on the per device. And so that's what the equipment financing receivable relates to. So as we sell more customers, it's going to continue to grow and then it amortizes off over time.

[Operator Instructions] Our next question is coming from Josh Nichols with B. Riley.

This is Matthew on for Josh. So I guess to start off, you mentioned about like 15 6-figure opportunities in the telecom pipeline. I was just wondering if you can give a sense of the conversion timing and how many could land in the second half?

Yes, that wasn't in the pipeline. That was actually sold during the quarter. So that was 15 6-figure opportunities that were sold on the Telecom Services segment during the quarter. So those are sold probably in different stages of implementation. Some of them have been implemented, some of them have been just sold and in the process of being implemented. But that was a nice number for us, and now we continue to see a strong pipeline of bigger and 6-figure opportunities.

Got it. And just going to the software side. I mean, software margin improved quarter-over-quarter, but I mean it's not back to the low 70s you've historically run at. And with legacy fully off, wondering what's the remaining gap and how you expect to close out?

Yes. So on the software solutions side of the house, at the end of Q1, we completed the migration of our hosted customers to OCI. And at the end of Q1, we were able to shut down our data centers. And so we had some synergies from that migration that we were to pick up savings from the data center shutdowns as well as just overall operating efficiencies. So it's a solid margin and it's attainable.

All right. Great. Last question for me is just back on the CAIRO side. I mean, you mentioned it's still early in the retail side. So I'm wondering like as that picks up more in 2027, like how big of a role does that reseller channel play versus direct retail attach?

Yes. I think overall, if you see not just CAIRO, but in Doug mentioned the EVP program in his comments. I mean, we continue to see solid growth across that entire program, of which CAIRO or the other and other AI applications are a component of it.

So I just think as we see more licensee -- any time a licensee takes on a product like that, they have a delay in their time to market to put it through their operational systems to get it ready for sale, to get it out to their sales teams and their partners and to deploy it. So I think we are going to continue to see solid growth within that whole kind of category of what we would consider the EVP program, and there are several AI applications within that portfolio.

Thank you. Ladies and gentlemen, as we have no further questions in the queue at this time, I would like to turn the call back over to Mr. Korn for any closing remarks.

Thank you, Ali, and I want to thank everybody who dialed in to listen and everybody who pays attention to our results. As we have all said, this was a very exciting and strategic quarter for us, and I think only the beginning of continued strong results and continued strong growth.

We're very excited. We have our UGM coming up in October, and the palpability and excitement of our licensees continues to grow. I can't wait to get to talk to all of them and show them what we're doing. And I can't wait to sit with all of you and discuss our Q3 results.

So until that time, thank you for your attention, and have a good afternoon.

Thank you. Ladies and gentlemen, this concludes today's conference, and you may disconnect your lines at this time. And we thank you for your participation.

Greetings. Welcome to the Crexendo First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Jeff Korn, CEO and Chairman of the Board. You may begin.

Thank you, John, and good afternoon, everyone. Welcome to the Crexendo Q1 2026 Conference Call. I am, as John said, Jeff Korn, Chairman of the Board and CEO. On the call with me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; and Jon Brinton, our CRO.

In a moment, I'm going to ask John to read the safe harbor statement. After that, I will give some brief comments on our performance and strategy. Ron will then provide more details on the numbers before handing the call over to Doug to provide a business and sales update. After that, I will open the call up for questions.

Jon, would you please read the safe harbor?

Thank you, Jeff. 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 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 that are 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 fiscal year ended December 31, 2025, and the Forms 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?

Thanks. This really was a very special quarter for us, and I can't tell you how proud I am of the entire team and the efforts they made. And I think the results show how everybody is working together, working in unison and continuing to make this what I believe is the best UCaaS company in the industry.

When I took over as CEO just over 3 years ago, the team and I made a series of clear and deliberate commitments to our shareholders. We committed to stopping the cash burn, returning the business to positive cash flow. We committed to restoring and sustaining GAAP profitability.

We continue to -- we committed to investing in the platform in sales and marketing and in strengthening our security infrastructure. We committed to driving constant growth, and we committed to pursuing disciplined accretive acquisitions. I am very pleased and proud to say that we have delivered on all of those commitments.

More importantly, what you are seeing now is those efforts coming together. The foundation we built is translating into a business that is growing, scaling and becoming more efficient with increasing strategic flexibility. The first quarter is a clear example of that. I and the team are incredibly pleased with our first quarter results, which continue to demonstrate not only strong execution, but the increasing strength, scalability and durability of our operating model.

Revenue for the quarter was $20.7 million, up 29% year-over-year, reflecting both solid organic performance and the contributions from the Estech Systems ESI acquisition. We delivered GAAP net income of $0.6 million and non-GAAP income of $3.3 million. Importantly, this marks another quarter of GAAP profitability, extending our strength to 11 consecutive quarters.

And it's especially impressive this quarter while we absorbed all the acquisition-related expenses and the incremental amortization of intangible assets associated with the ESI transaction. The intangible expenses are fully reflected in our GAAP results.

However, they are nonoperational in nature, and our non-GAAP performance more accurately reflects the underlying earning power of the business. What that performance shows is a company that is scaling efficiently, expanding profitably and demonstrating clear operating leverage as we grow. The ESI acquisition is exceeding our expectations and is already contributing meaningfully across the income statement.

Integration is advancing ahead of plan across sales, operations, engineering, and we are only beginning to capture early synergies. More importantly, this transaction reinforces a key point. We have disciplined, repeatable M&A framework that is both strategic and financially driven. We are focused on assets that are highly complementary, operationally, actionably and accretive within a short period of time.

ESI fits squarely within that framework and strengthens our ability to execute similar opportunities going forward. Operationally, execution continues to improve across the organization. On the retail side, with VIP, we continue to make inroads on enterprise sales, demonstrating continued progress in our capabilities and our ability to compete for and win larger, more complex opportunities.

From a product standpoint, we are investing where it matters and seeing results. We've already demonstrated to our licensees and will soon be releasing a new user interface and administrative initiative that has been exceptionally well received by our community during early previews, reinforcing the competitiveness of our platform.

We also launched CAIRO, our AI-driven solution, which we believe positions us well as AI continues to become an increasingly vital component of our communication stack. We are actively reviewing and testing other AI solutions, and we will continue to roll out AI applications, which will overlay onto our platform, increase our productivity and more importantly, increase our customers' productivity and therefore, increase our sales per customer.

At the same time, our marketplace is gaining traction and beginning to validate the broader ecosystem strategy. While still early from a revenue standpoint, it is strategically important as it expands our reach, deepens customer engagement and creates incremental monetization layers that should scale over time. From a profitability standpoint, we are executing with discipline and intent and increasing recurring revenue.

We are continuing to invest in the platform, AI, security and go-to-market capabilities, but we are doing so in a way that is driving increased efficiency across the business. As a result, we are seeing early indications of margin expansion and improving EBITDA conversion, even while integrating acquisitions and continuing to invest for growth.

The trend is expected to become more evident over time. Looking ahead, we remain confident in our ability to deliver sustained double-digit organic growth. While macro conditions may continue to impact timing on larger enterprise decisions, underlying demand remains strong and our pipeline supports continued momentum. In parallel, we are actively evaluating additional acquisition opportunities.

The environment continues to present attractive opportunities, particularly among companies already operating on our platform or those that can be integrated efficiently into our ecosystem. Our approach remains disciplined, but we believe we are well positioned to selectively deploy capital in a way that enhances both growth and profitability.

We are clearly on a trajectory toward $100 million in annual revenue. More importantly, we are doing so with a business that is becoming more efficient, more scalable and more profitable as it grows. Additionally, as you may have seen or will shortly see, we just secured $5 million in term debt along with a line of credit, both of which we believe are on highly attractive terms.

This will enable us to have a seat at the table to discuss additional acquisitions and will assist in our expectation of growing the company strategically and profitably. Let me make clear, we didn't borrow the money because we need it. We borrowed the money to secure future acquisitions. We are, as I said, not raising capital out of necessity. We are doing it from a position of strength.

Our objective is to ensure that we remain aggressively positioned to pursue accretive acquisitions as opportunities arise. Based on our experience, having capital readily available and meaningfully available improves both access and negotiating leverage, allowing us to act decisively when others cannot. We do not anticipate deploying this capital in the immediate quarter or 2.

We firmly believe in the principle that you secure capital when it is available on favorable terms, not when it is required. This approach preserves optionality and ensures we maintain a leadership position when evaluating strategic opportunities. We're building not just for today, but shaping a future where we intend to be the premier cloud communication company in our sector, and this is one more step in that direction.

We continue to build the platform and company for the future. We are excited to design a business that will make our customers and shareholders proud, and we will continue to attract new customers and shareholders. We are also closely monitoring developing regulatory dynamics that could create a meaningful opportunity for the company.

The Federal Trade Commission has advanced a proposal that, if adopted, will require certain customer service and contact center operations to be located completely within the United States. At this stage, the proposal remains in the early phase. There is approximately a 1-year period for public comment and evaluation, and it is not assured this proposal will ultimately be implemented or adopted in the current form.

However, if enacted, it could have significant positive implications for the customer experience and customer-centric markets. We continue to improve our offerings in this arena, and our objective is to ensure that we are prepared and positioned to respond quickly and effectively to take advantage of what we believe could be a significant incremental sales opportunities if these changes are required.

In summary, this was a very, very strong quarter and reflects the company executing at a high level, integrating acquisitions successfully, expanding its platform capabilities and positioning itself to drive both growth and margin expansion over time. I remain highly confident in our strategy, our execution, our team and our ability to continue delivering meaningful long-term shareholder value.

The best is yet to come, and the team and I work every day to make the best telecom platform support engineering software provider and platform in the industry. I started with discussing commitments we made.

Let me now add to that. I want you all to understand we will work tirelessly every day to grow the company profitably, both organically and inorganically, while continuing to build the best software telecom in the industry and provide the best service in the industry. As I said before, the best is yet to come. This is a very, very exciting time for us.

And with that, I will turn the call over to Ron, who will provide more details on the finances.

Thank you, Jeff. Good afternoon, everyone. As Jeff mentioned in his comments, we had another very strong quarter with consolidated revenue growth of 29%. Organic growth for that quarter was 15.9% over the prior year quarter. So excluding $2.1 million in revenue contributed from the ESI acquisition that we completed on March 1 of this year.

On March 1, we -- of this year, we closed the acquisition of Estech Systems or as we refer to ESI. The consolidated results of operations of ESI for 1 month are included in our operating results for the 3 months ended March 31, 2026. Since our last call, ESI completed their historical audit for the year ended December 31, 2025, and we filed pro forma financial disclosures as required with the SEC on Form 8-K/A on May 4 of this month.

I encourage you to review the Form 8-K filing if you would like to see what the operating results of the combined company would have looked like on a pro forma basis if we had closed the transaction on January 1, 2025. Now let's talk about details for the quarter. For the quarter, we had service revenue that increased 29% to $10.6 million, and our gross margin was 63% for the quarter.

Software Solutions revenue increased 12% to $7.7 million, and our gross margin was 68% for the quarter. During the quarter, we booked 5 new logos and had 9 upgrade orders from existing customers. Product revenue increased 141% to $2.4 million, and our gross margin was 31% for the quarter. During the quarter, our service revenue gross margin improved by 300 basis points and our software solutions revenue gross margin improved by 500 basis points compared to the fourth quarter of last year.

Product revenue gross margins decreased by 1,100 basis points compared to the fourth quarter. Although product revenue increased significantly during the quarter, the additional network equipment product sales were with very low margins. Operating expenses increased approximately $3.2 million excluding the ESI operations.

The increases are attributed to $1 million directly related to the increase in product revenue, $800,000 in acquisition-related expenses related to the ESI acquisition and $500,000 related to the OCI expenses for our hosting arrangement. In the first quarter of the prior year, we had no operating expenses related to OCI. So it's a big increase.

Our operating margin for the quarter came in at 2%. That's a decrease in operating margin from the prior period. But without the acquisition-related expenses of $800,000, our operating margins will return to 6% or 7% as they have been in the historical years. Earnings for the first quarter, we reported net income of $0.6 million for the quarter, that's $0.02 per basic and diluted common share.

On a non-GAAP basis, we reported non-GAAP net income of $3.3 million. That's $0.10 per basic and diluted common share. We reported EBITDA for the quarter of $1.6 million and adjusted EBITDA of $3.2 million. Our cash and cash equivalents at the end of the quarter was $7.2 million compared to $31.4 million at the end of December 31, 2025.

As we've been discussing the acquisition, we paid for a large majority of that acquisition in cash on hand that we generated from operations. So investing activities for the quarter utilized $26.2 million in cash. Operating activities for the quarter provided $2 million in cash and financing activities provided about $100,000 in cash.

As Doug -- as Jeff mentioned, we completed our debt financing credit facility with Wells Fargo Bank for a $5 million term loan and a $5 million revolving credit facility. Additional information, our remaining performance obligations at the end of the first quarter was $135.6 million as compared to $89.1 million at December 31, 2025. The addition of ESI's remaining performance obligations contributed $49.6 million of the increase.

With that, I'll turn it over to Doug Gaylor, our President and COO, for additional comments on sales and operations.

Thanks, Ron. I'm extremely pleased with our strong results to start the year. Strong demand for both our retail telecom services solutions, combined with our wholesale software solutions propelled us to our 11th consecutive GAAP profitable quarter and our 30th consecutive quarter of non-GAAP net income.

The 29% increase in revenue for the quarter was a combination of strong organic growth in both segments of the business, combined with 1 month of revenue from our ESI acquisition. Our Telecom Services segment saw an 18% organic growth year-over-year, combined with 12% organic growth from our Software Solutions segment. When you layer in the 1 month of revenue from our ESI acquisition, our Telecom Services segment increased 41% year-over-year.

The stronger demand for all of our offerings continues, and we are seeing strong traction with our new AI applications, including our recently released Crexendo AI receptionist orchestrator that we refer to as CAIRO. Our GAAP profitability continues to be positively affected by controlling costs while making necessary investments and driving synergies within the business.

We were able to post GAAP profits of $578,000 despite having over $800,000 of acquisition-related costs as well as over $400,000 of intangible amortization costs associated with the ESI acquisition. Our strong GAAP income, combined with strong cash flow -- free cash flow allows us to continually reinvest in our people and our products and to continue delivering the best solutions and the best customer satisfaction in the industry.

We continue to see strong organic growth from our Software Solutions segment of the business that saw 12% organic growth in the quarter and benefited from 5 new logos -- new logo orders, along with 9 upgrade orders from our existing licensees. This is a dramatic improvement from Q1 of 2025, which had no new logos for the quarter. Two of the 5 new logos in Q1 are migrating from Metaswitch, and we continue to see opportunities created by uncertainties created by the competition.

The new logos that we are winning love our proven platform. They love our open along with our solid suite of AI applications and solutions, combined with our unique pricing and support model, and that makes our software solution platform the best in the industry. Our Telecom Services Retail segment grew at 18% organically for the quarter and was positively impacted by some very large impactful wins that were sold and delivered during the quarter.

I'm extremely pleased that we are seeing double-digit organic growth in such a strong fashion from this segment of the business. The heavy retail demand for our offerings was led by a 51% year-over-year increase in sales bookings from master agent technology service distributors, combined with strong traction on our new AI receptionist and a nice increase in SMB retail orders.

Our remaining performance obligation, also referred to as our backlog continues to grow and is now at $135.5 million, an increase of 56% from just the end of last year, December 31. A large portion of that increase in the remaining performance obligation is attributable to the acquisition of ESI. The majority of ESI's retail customers are on long-term agreements, typically 5-year terms, thus giving us a very sticky customer base from this acquisition.

The remaining performance obligation for the rest of 2026 is currently at $46 million. And as a reminder, our remaining performance obligation number is the sum of the remaining contract values for our telecom services and our software solutions customers that will be recognized on a sliding scale over the next 60 months, and it's a very strong indicator of our future revenue stream.

Consolidated gross margin for Q1 was 61%, which was up slightly from Q4 of last year. Our gross margin for the quarter was impacted by higher cost for the quarter for our Oracle Cloud Infrastructure, or OCI hosting as we completed migrations from our legacy hosting to OCI on the Software Solutions segment of the business. The migrations for the quarter significantly increased our OCI utilization and spend while we were still incurring legacy hosting costs as well.

With our migration now complete and our legacy hosted environment fully decommissioned, we will see cost savings going forward with improved margins. For the quarter, the Software Solutions margins were 68%, down 10% year-over-year due to the OCI cost that I just mentioned, but up 5% from Q4, which included our UGM conference expenses. Our Telecom Services segment gross margin was 57% for the quarter, which was up from 56% in Q1 of 2025.

And our Telecom Services gross margins were positively affected in Q1 by the revenue contribution from ESI, and we would anticipate the margins for this sector to improve with a full quarter's contribution from ESI. We are confident that we should continue to see gross margin improvements in both segments of the business in the future.

As Jeff mentioned, the ESI acquisition is exceeding our expectations, and we're seeing historically strong sales bookings from the ESI team in our first 2 months together. ESI has a strong and loyal reseller base, along with a talented direct sales team, and we are very pleased with the first 2 months sales performance from each sector.

As I previously stated, we believe that artificial intelligence will be the biggest game changer in the communications sector since the move to the cloud began over 20 years ago. Crexendo is leading the AI charge with many new releases that allow small and midsized businesses to be more efficient and more productive. Our AI solutions are targeted at making small and midsized businesses more successful and more profitable by giving them affordable efficiency tools to help them run their business.

In January of this year, we released CAIRO, Crexendo's AI receptionist orchestrator, and Cairo allows new and existing customers to leverage the power of an AI receptionist to answer all incoming calls, answer frequently asked questions, schedule, reschedule or cancel appointments, access customer records and talk to a live person when needed.

The initial sales success of the product has been strong over the first 2 months, and we're excited to see the momentum continue. For the typical SMB customer, this technology will allow their business to be more effective and productive for a minimal cost. Crexendo's average retail revenue per account is roughly $350 per month per account.

And by adding the CAIRO solution, that customer's monthly could increase by over 25% Crexendo's ecosystem vendor partner program or as we refer to our EVP program that was introduced last year, continues to gain great traction and now has 48 official partners in the program. These partners provide products, software and application solutions to our platform that allow Crexendo and our partners to benefit from selling solutions that end users will make their businesses more efficient, productive and profitable.

Of the 48 EVP partners that we have, 11 of them are focused on AI solutions and applications. The EVP program is currently generating new and increasing revenue streams, and we're extremely encouraged by the growth potential. Crexendo has had a great start for 2026, and I fully expect that trend to continue as we continue to meet and exceed our targeted goals.

We had previously set a goal of getting to $100 million revenue run rate by the end of 2026. And with our strong organic growth, combined with our exciting acquisition of ESI, we are well on our way to meeting that goal. We have continually highlighted how a strong M&A strategy could positively impact our company, and we continue to prove that with the ESI acquisition, becoming our third meaningful acquisition and game-changing acquisition in the last 5 years.

I'm thrilled about the future direction and opportunity for Crexendo. Our strong double-digit organic growth, combined with our ESI acquisition and our GAAP profitability and our strong positive cash flow, combined with our growing remaining performance obligation have laid a great foundation for our future success. We're positioned perfectly with the combination of great products, strong demand and great solutions with a disruptive pricing model.

And combine that with the best and most talented workforce in the industry, we're a force to be reckoned with. We're excited about the additional opportunities to drive growth and innovation that our new AI offerings will infuse into our business and are very optimistic that applications like our AI receptionist will drive even more demand and higher revenues.

As the fastest-growing platform solution in the country, now supporting well over 7 million end users, we are laser-focused on growing our business, enhancing our solutions, improving our efficiencies and continuing to return strong results. With that, I'll turn it back over to Jeff for any further comments.

Thank you, Doug. Actually, I don't have any further comments at this time. So John, let's open the call to questions.

[Operator Instructions] First question comes from Mike Latimore with Northland Capital Markets.

Fabulous quarter there.

And before you start, Mike, I want to make clear to everybody listening, the static you heard on the line was not from us. It was from our operator, and we're going to be talking to them about getting a Crexendo system after the call is over. Sorry to interrupt you, but go ahead, Mike.

Yes. So again, fabulous quarter. I guess one number that jumps out is the 18% organic telecom service growth. I guess, can you elaborate a little bit on kind of what you're seeing there? It sounds like there were some big deals. How big were those? Just a little bit more color on that would be great.

We're not going to detail exactly how large the deals are because we think that's anticompetitive. But as you know, Mike, as well as anybody, enterprise deals take a long time, and we've been working on this one for over a year.

And we have several other in the hoppers that we've been working on for some time. It's hard to tell you when they're going to come through because enterprise deals tend to work at their own schedule. But we're very, very excited about this deal.

We believe we're going to get others, and we think this is going to continue to see growth in the telecom -- retail telecom sector. And I'll let Doug add something if he wishes to.

Yes, Mike, and I think that, combined with the nice increase that we saw from the technology service distributors of 51% really just added to a great quarter. So we just executed extremely well on all aspects of the business on the retail side this quarter.

Okay. Great. And then the service gross margin looks really good. I think it's the best in 3 -- maybe over 3 years. I know ESI helped there some. I guess where -- but that was only 1 month of ESI. Like what should we think about -- what would be a good range for service gross margin kind of as we get into a full quarter of ESI?

Yes. So Mike, Ron here. So I think we're going to see continued improvement. I would expect in the next quarter that we could see improvement of 1% or 2% in the next quarter.

Got it. Okay. Great. And then on CAIRO, it sounds like a lot of opportunity there. I guess -- with the initial work you've done, is the interest from companies that have receptionists and they want to kind of lower the cost?

Or is it they don't have any real professional kind of receptionist, they want to add a capability and automate it through technology? Or do they want to replace legacy IVRs or something? Like what are you seeing in terms of where is the interest for CAIRO? What's the use case?

It's kind of both. We see some people who don't have a receptionist who sees this as a way to not have the expense.

And we see some of the larger customers who have a receptionist or have multiple receptionists and they can then use this, keep the receptionist for questions that CAIRO may not want to answer or don't answer as well and at the same time, defer these people to other parts of the business. So it's all across the board. And Jon, who sells them more than the rest of us combined.

Yes, Jeff's comments are correct. So one of the key areas is staff augmentation. So many companies today that the person in that role is not necessarily full time. They've got 3 other jobs. So does it deflect calls so that they can focus on other things and only take the escalated calls.

In others, we're seeing like health care applications where -- there in office environments where you are putting them in front of somebody that would normally take those calls in order to help with the call diversion. And the great thing about Cairo is, obviously, we're having our retail success, but quite a few of our licensees are now enrolled to offer it as well. So we're excited to see what they bring to the use cases that are out there.

The next question comes from George Sutton with Craig-Hallum.

Nice to see the 5 new logos, particularly after last year and consistent with Q4. Can you just give us a sense of the pipeline that you see for the next few quarters coming from the opportunities you have there?

I'll let Jon answer that. We're not going to give very specific numbers as obviously, there's a lot of competition out there. But we have a strong pipeline, but I can let Jon give a little more detail.

Yes. George, we do have a strong pipeline. We've commented in the past that some of the deal sizes have been slightly smaller initially because of some of what we think are the macro geopolitical things. But the number of opportunities that are in the pipeline is very strong, both here and in EMEA, and we're just looking to continue to harvest those.

As you know, sometimes the larger ones take a little longer, and we're just working them through. But that continues to be very positive, and we don't foresee having a quarter like we did in Q1 and Q2 of last year. It's actually -- there's a lot of strength, a lot of strength now from multiple competitors in a more pronounced way than we've had before. So we're looking forward to getting these people into our community and having them participate in what we're doing globally.

You mentioned 11 partners that are working with you on AI opportunities. Can you give us a sense of how broad the AI product opportunity set might be? And when might we see additional products?

Yes. Those 11 partners out of the EBP program are all working on different aspects of AI, including our CAIRO solution. Our CAIRO solution was developed by one of our partners there. We obviously sell that as a Crexendo labeled product, but it was developed for us as one of our AI EVP partners.

So those AI applications range anywhere from the CAIRO application to call sentiment analysis and call recording summation AI solutions. We've got AI solutions that use Agentic AI for call center, contact center applications. So the list is endless from the amount of opportunities that these guys can continue to develop. We're really trying to focus on what's going to be the most impactful for us and for our customers out there.

Again, when you talk about the SMB market, these customers are chomping at the bit for applications that will help improve their efficiency and productivity. And that's what a lot of these AI solutions bring to the table. If you think about just AI call summation and AI capabilities when it comes to call recording, call recording has been around for 25 years.

But when you report a conversation and you've got 100 call recordings at the end of the day, it's playing whack-a-mole to try and find what you're looking for. Now with AI summation, we can actually go in there and tell the system, hey, only send me the recording for somebody mentioned this word or use profanity or got upset at my customer service representative.

And now you skinny that down to getting exactly what you're looking for. So those AI applications are only going to continue to improve and get better, and that's going to bring more sales to us.

George, I think Jon can add a little color to that.

Yes. So Doug gave you a great outline there. Just a couple of other things besides the conversational analytics and some of the areas just George, to let you see how deep this goes.

If you're familiar with our industry, some of these applications actually help our licensees operate their platform more efficiently with even things down to applications that help with the 10DLC registration, which has kind of become the bane of existence of when you add a customer and move them to our services when they're going to use texting or SMS marketing in our industry.

So I think the great thing is the partners that we're working with tend to understand our business well and they're finding their own use cases to help end customers and our licensees.

The next question comes from Eric Martinuzzi with Lake Street.

Jeff, you talked about the double-digit organic growth expectation for 2026. I was wondering, does that include the acquired the ESI business as well?

No. By organic, I meant excluding ESI. I am guiding toward double-digit organic growth of the business outside of ESI.

Okay. Then I guess it's more modeling question. The $2.1 million that was recorded in the quarter, so the month of March, just kind of -- is that a good run rate to run with there? Maybe it's a question for Ron.

I would say that's as good a run rate at this point as ever. We're all on the same boat. We have to see if it will sustain that high, it may be lower, it may be higher.

But it's hard it's hard for us with 1 month of experience to give you a strong idea of what we expect on a monthly basis. Ron, do you have any further thoughts on that?

Eric, I'd point you to those pro formas that we just filed yesterday. So those have been filed with the SEC. So those are available for you to look at '25 and what that was. And then you can use that for loan growth trajectory into '26, and we can talk about it further when you get to your model.

Got you. Okay. And then kind of a housekeeping item here. There were some puts and takes with the acquisition with the equity issuance and then there was the debt, the term loan. Just curious kind of as of month end April 30, what's our cash debt and shares outstanding?

So we obviously just closed on the debt financing that funded yesterday. So we haven't drawn on that debt other than.

Nor do we have any short-term intention to draw on.

And the cash, obviously, the cash increased from operating activities in the first quarter. I don't have that the cash balance at the end of April, but we're not declining a decreasing cash balance.

I was assuming the term loan -- you had drawn the term loans. That's not the case.

No.

It's a term loan that we can draw on when we choose to.

We have a credit facility. So we have a $5 million term loan and a $5 million line of credit.

Congrats on the quarter and the continued double-digit outlook.

The next question comes from Scott Buck with Titan Partners.

Jeff, you mentioned in the prepared remarks that the ESI is delivering above expectations. I was wondering if you could give us a little bit more color on what you're seeing there.

Are we talking top line? Are we talking profitability? Or are we just talking about the way the integration is going?

We're actually talking all of the above. The sales were higher than, to be honest, I expected, which is why answering the previous question was a little difficult because it's hard to model where the whole year will be. The profitability was great, especially if you take out the intangible costs, which they're not responsible for.

And more importantly, the spirit of the team there, they have all rolled up their sleeves. They are coming to us and going, what can we help with? They are now -- we are combining purchasing. We've just substantial amount of phones for the combined organization is substantial savings. We are moving other things over to savings. We are going to be moving -- they have hosted data centers.

We're going to be moving those to ESI. There's savings. We have a whole list -- excuse me to OCI. We have a whole list of things that we intend to be doing as the year goes on to reduce costs, improve efficiency, but the manner in which the ESI team has worked to join with us to ask what they could do to help us, not with us even having to ask is amazing.

The sales teams are working closely together. Marketing teams are working closely together. Engineering teams are working closely together. I have a great relationship with their President. Doug is working with their SVP of Operations on a close basis. Ron is in contact every day and managing the accounting systems. It has just moved faster and more efficiently than I anticipated, and I am very pleasantly surprised.

Great. That's great to hear. And then my second one, I want to ask about CAIRO. Maybe you could remind us how you guys price the product. Is that flat fee on a monthly basis? Or is that based on usage?

Yes. So it's different with the retail and our licensees, but I'll just give you an outline. CAIRO, we have packages that have a bundled number of minutes. And then in excess of that bundle, customers pay for overage on it. With our licensee, it's slightly different, but it's more tied to an overall minute cost after a monthly minimum.

So -- but it is to help customers understand it, there is a small, medium, large, and then we can expand the large pricing methodology that then we bill for additional minutes used in excess of the bundle.

Great. And I know it's early, but how often are you seeing folks move to -- move over their limits as they get more comfortable with the product?

Yes. The customer acceptance and partner acceptance has been excellent. So...

I knew he was talking about usage. How often we...

I'm sorry, I missed that word. Actually, we are seeing quite a few customers exceed the usage bundle in the minimums for their package. Apologies for misunderstanding the question.

[Operator Instructions] The next question comes from Matthew Maus with B. Riley Securities.

This is Matthew. Great quarter. I guess just following up on that CAIRO question. I'm pretty sure previously, you guys mentioned a range of ARPU uplift between like 25% to 40%.

And then this call, you mentioned 25%. And you also just mentioned how customers are kind of using it more than expected. I guess like what would get you closer towards that 40% uplift end of the range?

Yes. I'm not sure we mentioned the percentage uptake. Again, we've only been selling the product for 2 months now, so we really don't have a percentage of sales where we're actually attaching CAIRO to that we reported. So I'm not sure where you got that 25% to 40%.

But the 25% to 40% increase in price would be the average revenue contribution per account. So if you think about our average account paying us $350 per month, the $350 per month payment when they add CAIRO could go upwards of 25% to 40% increase in their monthly payment to us. So that $350 a month account that's just using Pure UCaaS, they decide to add CAIRO to their solution.

Now all of a sudden, they're paying us $500 a month, and then they pay usage on top of that if they exceed their usage targets. That's a pretty nice significant increase on a revenue per account basis. So we see that as a great, great pull-through item for our existing revenue per account numbers. And then again, we'll have -- as we get another quarter or 2 into it, we'll have better metrics to report...

[Audio Gap]

Greetings. Welcome to the Crexendo Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Jeff Korn, CEO and Chairman of the Board. You may begin.

Thank you, John, and good afternoon, everyone. Welcome to Crexendo's Q4 Year-end 2025 Earnings Conference Call. As John just said, I'm Jeff Korn, Chairman of the Board and Chief Executive Officer. Joining me today are Doug Gaylor, our President and COO; Ron Vincent, our Chief Financial Officer; and Jon Brinton, our Chief Revenue Officer.

In a moment, Jon will read our safe harbor statement. After that, I'll provide an overview of our performance and strategy. Ron will then dive into the financials, and Doug will close with an operational and business update before we open it up for questions.

Jon, would you please read the safe harbor?

Thank you, Jeff. 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 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 that are 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 fiscal year December 31, 2025, and the Forms 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. I am extremely pleased with our 2025 performance and very proud of the team that delivered on our commitments of profitable double-digit organic growth. This month marks my third anniversary as CEO. It has been an impactful and impressive period for both the team and the company. When I assumed leadership in 2023, Crexendo was not GAAP profitable and was burning approximately $100,000 per month. Revenue was roughly $53 million, and following those results, the stock had fallen to nearly $1.40. Over the last three years, we constantly delivered positive cash flows from operations. We have grown annual revenue by more than $15 million. We have expanded profitability and EBITDA while adding staff, enhancing products and investing in AI, security and infrastructure. Our software platform has scaled meaningfully. We have grown from just over 4 million users three years ago to more than 7 million users today, approximately 75% growth in under three years.

We made clear commitments. We committed to disciplined execution. We committed to double-digit organic growth. We committed to achieving GAAP profitability. We committed to improving our services, products and operational efficiency. We committed to integrating and optimizing prior acquisitions, and we committed to finding an accretive significant acquisition. We have kept every one of those commitments and it is reflected in the increase in our stock price over the last three years. And I particularly want to thank all of our shareholders for their confidence in me and the team.

In 2025, we generated full year net income of $5.1 million and non-GAAP income of $11.4 million on revenue of $68.2 million, which represents 12% year-over-year organic growth. Fourth quarter revenue increased 11% to $18.1 million with net income of $1.2 million and non-GAAP net income of $2.8 million. This marked our 10th consecutive GAAP profitable quarter.

With the acquisition of one of our NetSapiens licensees, Estech Systems, or ESI, which we announced yesterday, we are now well on our way to reaching $100 million in annual revenues. Importantly, we committed to driving profitable organic growth while pursuing accretive acquisitions. Having successfully delivered on the organic component, our announced acquisition of ESI demonstrates how we will now use accretive -- now have accretive growth through disciplined M&A strategy. My guiding principle on acquisitions is simple. Management must believe the transaction will be accretive with -- in no more than two quarters. ESI meets that standard and will be a great acquisition for Crexendo.

We acquired ESI for $35 million, consisting of $27.3 million in cash and $7.7 million in common stock, representing approximately 1.35x unaudited 2025 revenue. ESI generated approximately $26 million in 2025. And please note again, as I said, those are unaudited numbers. And if those numbers and results are confirmed by the audit would mean approximately $2.23 million in income with roughly 80% recurring UCaaS revenue. Gross margins on UCaaS averaged approximately 86%, with the majority of their customers on five-year contracts.

Following the completion of their audit, we will provide you with audited financial statements for the year ended December 31, 2025, along with pro forma financial information that will be filed on Form 8-K/A prior to or in connection with our Q1 2026 Form 10-Q filing. Please understand, due to SEC regulations, we are somewhat limited on what numbers we can discuss in light of the fact that the audit is not completed.

The acquisition is expected to increase Crexendo's revenue, earnings and cash flow following the March 1, 2026, closing. It is a great acquisition for us. It is strategic, it is complementary, and I am confident it will make us a better and stronger company.

As I said, ESI is a highly complementary business. Founded in 1987 and headquartered in Plano, Texas, it is a well-managed organization with approximately 85 employees. Through facilities consolidation, licensing optimization, cross utilization of employees, operational efficiencies, network expense improvements and Oracle Cloud infrastructure migration, we see meaningful cost synergies. We will coordinate certain functions, which will also save money and both organizations stronger and more efficient. We will work working on coordinating legal, marketing and support quickly. There are strong revenue synergies through cross-selling through the expanded channel reach and platform expansion. I see ESI employees working across the entire organization and their deep bench strength may enable us to use ESI employees to fill some open positions within the Crexendo organization. ESI shares a passion for customer service and customer service remains a core differentiator for us. We continue to lead the industry in G2 customer satisfaction rankings, and these are based on verified customer reviews.

Our AI strategy is advancing aggressively. Early feedback on CAIRO, our AI receptionist AI assistant has been highly encouraging as has the potential to -- and it has the potential to transform the SMB market by providing affordable access to enterprise-type technologies to the SMB market. We were recently recognized for the second consecutive year with the Generative AI Product of the Year Award, and we received 42 additional G2 Winter 2026 awards. Further, our newly launched marketplace will accelerate partner deployment, expand monetization and create incremental revenue share opportunities.

Three years ago, when I took over, we committed to transforming this company. We moved from cash burn to sustained profitability. We restored financial discipline. We scaled the platform. We strengthened governance. We added leadership and engineering talent. We grew revenue, improved margins and increased shareholder value. And now with ESI, we are adding accretive acquisitions to help accelerate that trajectory.

In conclusion, I think it's important to point out that starting last year and continuing through this year, we have and are making deliberate and meaningful investments in our platform, in engineering talent, AI optimization and strengthening our security infrastructure. These were not optional improvements. They were strategic decisions to ensure that we protect our business, safeguard our customers and continue to lead in a rapidly evolving cloud communication market. We are building not just for today, but for the next generation of our platform, scalable, secure, resilient and innovation-driven. These investments position us to stay ahead of emerging threats, accelerate product development and deliver differentiated value to our partners and customers. In addition, we added resources to sales and marketing to strengthen our competitive position.

While these investments require discipline and capital today, we fully expect them to generate substantial dividends in the future through stronger growth, expanded margins and long-term shareholder value. Based on our track record, we are confident we will continue to deliver, and I firmly believe our most significant opportunities remain ahead of us.

With that, I will turn the call over to Ron for more detail on the financials and then Doug to discuss operations and some of our AI initiatives. Ron, would you walk us through the financials?

Thank you, Jeff. Good afternoon, everyone. Our financial results for the quarter are as follows. As Jeff mentioned, our consolidated revenue for the quarter increased 11% to $18.1 million compared to $16.2 million for the fourth quarter of the prior year. Our service revenue for that quarter increased 8% to $8.6 million. Our software solutions revenue for the quarter increased 18% to $8.3 million and product revenue for the quarter decreased 6% to $1.1 million. Our service revenue gross margin for the quarter increased by 300 basis points year-over-year to 60%. Software solutions revenue gross margin for the quarter decreased by 500 basis points year-over-year to 63%. Product revenue gross margins for the quarter had no change over the prior year. Consolidated revenue gross margins for the quarter decreased by 100 basis points year-over-year to 60%. Our remaining performance obligations increased to $89.1 million as compared to $87.9 million at September 30, 2025, and $85.6 million at December 31, 2024. Operating expenses for the quarter increased 8% to $16.9 million compared to $15.6 million for the fourth quarter of the prior year. The operating margin for the quarter was 6% as compared to 4% for the same period of the prior year, a 200 basis point increase.

Net income of $1.2 million for the quarter or $0.04 per basic and diluted common share. That's compared to net income of $500,000 or $0.02 per basic and diluted common share for the fourth quarter of the prior year. Non-GAAP net income of $2.8 million for the quarter, $0.09 per basic and diluted common share. That's compared to non-GAAP net income of $2 million or $0.07 per basic and $0.06 per diluted common share for the fourth quarter of the prior year.

EBITDA for the quarter was $2 million. That's compared to $1.5 million for the fourth quarter of the prior year. And adjusted EBITDA for the quarter was $2.8 million or 15.3% of total revenue. That's compared to $2.2 million or 13.3% of total revenue for the fourth quarter of the prior year.

Our financial results for the full year are as follows: Total revenue for the year increased 12% to $68.2 million. Service revenue for the year increased 6% to $33.8 million. Our software solutions revenue increased 27% to $29.7 million. Our product revenue for the year decreased 16% to $4.7 million. Service revenue gross margins decreased by 1% year-over-year to 58%. Software solutions revenue gross margin increased by 1% year-over-year to 72%. Product revenue gross margins decreased by 3% to 40% and consolidated revenue gross margins increased by 1% year-over-year to 63%. Operating expenses for the year increased 8% to $63.5 million as compared to $59 million for the prior year. Net income of $5.1 million and $0.17 per basic common share and $0.16 per diluted common share. That's compared to net income of $1.7 million or $0.06 per basic and diluted common share for the prior year. Non-GAAP net income of $11.4 million for the year, that's $0.38 per basic and $0.36 per diluted common share. EBITDA for the year was $8 million compared to $5.2 million for the prior year. And adjusted EBITDA for the year was $11.2 million or 17% of total revenue as compared to $8.2 million or 13.5% of total revenue for the prior year.

Our cash and cash equivalents at December 31, 2025, was $31.4 million as compared to $18.2 million at the end of the prior year. Cash provided by operating activities for the year of $9.3 million compared to $6.3 million for the prior year. With our cash provided by operating activities of $9.3 million and our $18,000 in capitalized expenditures, we generated non-GAAP free cash flow of $9.3 million for the year. That's 14% free cash flow margin. Cash used for investing activities for the year was $18,000 and cash provided by financing activities for the year was $3.9 million.

With that, I'll turn it over to Doug Gaylor, our President and COO, for additional comments on sales and business operations.

Thanks, Ron. I'm extremely pleased with our record Q4 and year-end numbers that exceeded our expectations. 2025 was a great year for Crexendo, a year in which we surpassed both the 6 million and 7 million end-user milestones on our best-in-class software platform. In addition, we were honored to be included into the Russell 2000 Index in 2025, along with being awarded top honors in 42 different categories for cloud communication providers by the leading business software review website g2.com.

Our successful year culminated in a strong fourth quarter that was our 10th consecutive quarter of GAAP profitability and our 29th consecutive quarter of non-GAAP net income. Our GAAP profitability continues to be positively affected by managing our costs and driving synergies within the business while attaining double-digit organic growth levels of 11% for the quarter and 12% for the year. Our strong GAAP income, combined with strong free cash flow allows us to continually reinvest in our people and our products to continue delivering the best solutions and best customer satisfaction in the industry.

As we have previously discussed, our large project of migrating all of our legacy hosted infrastructure to Oracle Cloud Infrastructure, OCI, was targeted for completion early this year. And I am pleased to announce that we have successfully completed the full migration of all of our hosted infrastructure licensees to OCI and we will have the last of our legacy NetSapiens data centers decommissioned later this month, which should help improve our margins going forward.

We continue to see tremendous organic growth from our software solutions segment of the business, which grew at 18% for the quarter and saw 28% organic growth for 2025. Our software solutions segment had a very strong quarter with 14 upgrade orders from our existing licensees, combined with five new logos that we won that chose Crexendo for their platform of choice moving forward. For the year, we had over 40 upgrade orders from our existing licensees, combined with winning 14 new logos. Of those 14 new logos, we continue to win new licensees moving to Crexendo from Metaswitch and BroadSoft, amongst others, and we continue to see opportunities created by uncertainties created by the competition. We are winning these customers as our unique pricing and support model for our software solutions platform, combined with our robust feature set, our open APIs and our deliverable AI applications and integrations allow us to differentiate ourselves from the rest of our competition at a much stronger price point than they might currently be paying.

You may have also seen a press release during Q4 where we announced a significant win of landing a long-standing telecom provider, Altigen to the Crexendo family of licensees on our platform. Altigen has been a force in the telecom industry for over 30 years, and their decision to deploy the Crexendo platform for their future growth is a true validation of the power of our platform.

Our telecom services retail segment grew at 5% organically for the quarter, and our telecom services revenue was up 8% organically, offset by a small reduction in product revenue to reach the blended 5% increase. As we have previously mentioned, the reduction in product revenue was anticipated as we have proactively reduced selling some lower-margin product opportunities on the managed services front to help improve margins. We continue to see strong demand for our offerings from our channel partners and our master agent technology service distributors and expect retail segment revenue to grow at a faster pace. The master agent technology service distributors saw a 46% increase in sales bookings year-over-year, and we expect that momentum to continue, especially with our announcement last month of adding a leading technology service distributor, AppDirect, to our partner lineup. We have already seen a strong pipeline of opportunities being generated from AppDirect and are excited about the future prospects of this partnership. We had our strongest sales bookings quarter ever for this segment of the business in Q4 and are encouraged by the trends we are seeing.

Our remaining performance obligation, also referred to as our backlog continues to grow and is now at $89.1 million, an increase of 4% from Q4 of 2024. Our remaining performance obligation number is the sum of the remaining contract values for our telecom services and our software solutions customers that will be recognized on a sliding scale over the next 60 months, and it's a very strong indicator of our future revenue stream.

Consolidated gross margin for Q4 was 60%, which was anticipated as we have our annual user group meeting in Q4 that has an impact on margins for the quarter. But for the year, consolidated gross margin was 63%, which was up from 62% in 2024. And we continue to see strong gross margins in our software solutions segment, where gross margins were 72% for the year compared to 71% in 2024. Our telecom services segment gross margin was 58% for the quarter, which was up from 54% in Q4 of 2024. And for the year, the telecom services segment gross margin was 56%, which was on par with 2024. Our telecom services gross margins were positively affected in Q4 by our focus on higher-margin UCaaS sales and less on low-margin product sales. We're confident that we should continue to see gross margin improvements in both segments of the business in the future as we start to recognize cost savings from our completed consolidation of our data centers to Oracle Cloud Infrastructure as well as our near completion of our legacy retail classic migration.

Jeff mentioned artificial intelligence before, and artificial intelligence will be the biggest game changer in communications since the move to the cloud began over 20 years ago. Crexendo is leading the AI charge with many new releases that allow small and midsized businesses to be more efficient and productive. Crexendo's AI solutions are focused on helping businesses make more money as opposed to saving money. Our AI solutions are targeted at making small and midsized businesses more successful and more profitable by giving them affordable efficiency tools to help them run their business.

Our current roster of AI solutions includes our AI call recording with sentiment analysis, our contact center AI powered by ChatGPT, and our most exciting release yet, Crexendo's AI receptionist orchestrator or CAIRO that was released in January. CAIRO allows new and existing customers to leverage the power of an AI receptionist to answer all incoming calls, answer frequently asked questions, schedule, reschedule or cancel appointments, access customer records and talk to a live person when needed. For the typical SMB customer, this technology will allow their business to be more effective and productive for a minimal cost, while at the same time allowing Crexendo to significantly increase its average revenue per account. Crexendo's average retail revenue per account is roughly about $350 per month and early adoption numbers for our CAIRO solution could increase that average by over 25%.

Crexendo's Ecosystem Vendor Partner Program or our EVP program, as we call it, that was introduced last year continues to gain traction and is now has officially 41 partners involved in the program. These partners provide products, software and solutions to our platform that allow Crexendo and our partners to benefit from selling these solutions to end users that will make their businesses more efficient, productive and profitable. The EVP program is generating new revenue streams, and we are very encouraged by the growth potential.

Crexendo had a great year in 2025, and we continue to meet and exceed our targeted goals. The goal I am most excited about is getting to the $100 million revenue run rate, hopefully by the end of 2026. With our recently announced acquisition of ESI, I believe we are well on our way to meeting that target. The acquisition will be transformative to Crexendo, and I am confident that the time between our last acquisition and this one will be worth the wait. We have always stated that we will be acquisitive, but that we will be patient to wait for the right opportunity to present itself. That patience will be rewarded with our acquisition of ESI for all the reasons that Jeff previously highlighted. I couldn't be more excited about the future direction and opportunity for Crexendo. Our strong double-digit organic growth, combined with our ESI acquisition and our GAAP profitability and strong positive cash flow have laid a great foundation for our future success.

We are positioned perfectly with the combination of strong demand for our product offerings along with great solutions, a disruptive pricing model and the best and most talented workforce in the industry to continue our strong growth. We're excited about the additional opportunities to drive growth and innovation that our new AI offerings will infuse into our business, and we're very optimistic that applications like our AI receptionist will continue to drive even more demand and higher revenues.

We're committed to delivering the best UCaaS, CCaaS and CPaaS offerings in the sector to our customers and our partners and the best returns for our shareholders. As the fastest-growing platform solution in the country, now supporting over 7 million end users, we're laser-focused on growing our business, enhancing our solutions, improving our efficiencies and continue to return strong results.

With that, I'll turn it back over to Jeff for any further comments.

Thank you, Doug. Actually, I do not have any further comments. So, John, you may open the call up to questions.

Absolutely. [Operator Instructions] The first question comes from Joshua Reilly with Needham.

How should we think about the impact of the ESI acquisition, the scale and subsequent customer acquisition cost for your retail business and the benefit over the next few years of adding this scale? And maybe any more color on the magnitude of the EBITDA margin benefit from the acquisition?

Well, let me start backwards. We're really not in a position to discuss EBITDA margins until the audit is completed under SEC guidelines. So I wish I could answer that for you, but I can't, Josh. In regard to customer acquisition costs, I will let Ron answer that.

Yes. So, as far as acquisition goes, the acquisition of a large customer base and a business combination, it generates in the multiples that we pay, similar customer acquisition costs or a little lower than our actual organic customer acquisition cost from that standpoint.

On a go-forward basis, I don't think there's a material impact. We should have similar customer acquisition costs because there's not really an economies of scale on the acquisition cost other than marketing. And so we're going to continue to our existing marketing spend, and we'll benefit from additional customers from additional marketing we may provide for the acquisition target. But that would be minimal at this point based on my estimate.

Got it. That's helpful. And then...

There is third question, sorry.

Well, I have some other questions, but that kind of wrapped up that first piece, I think. As we think about the free cash flow for the year, the last couple of years, you've done a really good job of converting 50% plus of your EBITDA to free cash flow. Is there any significant onetime items in 2026 that investors should be considering from the acquisition that would impact this ratio of conversion of EBITDA to free cash flow in 2026?

Yes. So we don't have any anticipated large capital improvements that would impact our free cash flow. So we should generate similar type of free cash flow from our adjusted EBITDA.

Got it. And then last question for me is, if you look at some of my recent channel checks at industry conferences, it seems like you have a pretty strong pipeline of potential new licensees. I guess what are you hearing in terms of the demand environment there? And what key points are you hearing from them in terms of their consideration of converting from a legacy platform maybe to NetSapiens in 2026?

I'm going to let Jon answer that, Josh.

Josh, this is Jon. Yes, we continue to have a high degree of partner interest. We continue to have many new opportunities looking at the platform. As you know from your conversations, some of them are coming from legacy platforms that don't have the investment level today that the NetSapiens platform does. Many of them like our sessions, not seats model across when you look at commercially our advantages. And then as Doug had mentioned, what we're doing with AI applications in our ecosystem.

So I think what many of those partners see is that we do have a definitive road map to help them to modernize their solutions and stay competitive in the market. And because of that, we continue to have strong demand for new licensees for the platform.

The next question comes from Mike Latimore with Northland Capital.

Congrats on the great year and the ESI looks like it's a very high quality here. You highlighted the strong services bookings in the quarter. Was that mainly driven by the master agents? Or was there some broader factors there?

Yes. I think we had a pretty good contribution across the board. We had great direct sales. We had a couple of very large opportunities on our direct sales side. The TSDs, technology service distributors actually had a great quarter for us. So we had -- fourth quarter was, as I said, a record retail quarter for us on the sales bookings, pretty excited. And the nicest part about some of the activity we're seeing is a lot larger type opportunities, and we won a couple of opportunities in Q4 that were upwards of 1,000 stations. So we're seeing some nice retail opportunity sizes coming from both the direct and from the master agents.

Okay. Great. And then on the service gross margin that ticked up nicely. Is that sustainable, do you think?

Yes. So that's as a result of the revenue growth that we're seeing at the current rate, I think that percentage is sustainable. At this time, I'm not projecting further increases, but let's take a look at it in a couple of quarters.

Great. And then just last one for me on your AI receptionist. Like what percent of your customer base do you think that's applicable to or would have interest in that?

Yes, it's a great question, Mike. I think that we feel like the CAIRO, which is, again, our Crexendo AI Receptionist and Orchestrator, we think that, that is applicable to almost all of our customers out there. Now when I say that, that means that customers have to evaluate it and make sure that's a good fit for their business. But we think that AI receptionist is going to have a tremendous take rate for us. We just introduced it in mid-January. The early sales and early feedback we've gotten from customers has been top notch. So we're going to continue to monitor that.

But again, if you think about the benefits it brings to a business, I can't see any many reasons why a business would decide that, that's not for them. I think it's going to be a very affordable option for businesses to consider.

Jon is going to add a little bit.

Yes. One other dimension on that, Mike, is we've also made that available for our NetSapiens platform licensees to offer to their customers, and we've had really strong interest from that community as well. So it's the type of thing that it's available on our retail offer, but we'll make it available across our whole community through our ecosystem program, and we're really excited about that part of the opportunity, too.

And Mike, as I indicated, initial reaction has been very strong, but we're not in it long enough to give you sales projections yet, but wait, we will see what kind of adoption we're getting, but we're very excited about potential adoption.

Sounds like a great start there. Congrats on the year and the acquisition.

Next question comes from Eric Martinuzzi with Lake Street.

Yes, Jeff, you entered 2025 with let's grow double digits organically and do it profitably. It wasn't guidance, but it was kind of the goal. Is that still the goal? Is 2026, can we anticipate organic growth in that double-digit range profitably?

Yes, Eric, I am still gearing for a 10% organic -- double-digit organic growth even with the expenditures we -- that I spoke about. It would be again, we are making the necessary investments we need to make in the business. This is imperative to me. I intend when I leave this job, believe it far stronger than when I came into it and with all the bells and whistles for us to be the lead company for maybe generations to come. Nonetheless, we will do the investments carefully, strategically with gearing toward double-digit organic growth at the same time.

Okay. And then the congratulations on getting the ESI transaction done. I think you mentioned that it was a $26 million revenue run rate for 2025. What was the growth in 2025?

That growth was from 2024 was about 6% to 7%. Again, we don't have the audited financials, but in that range of 6% to 7%. So good, better growth than the industry, a little bit smaller than what we saw in our Q4 retail services growth, but really strong growth.

[Operator Instructions] The next question comes from George Sutton with Craig-Hallum.

Jeff, you ran through this real quick. I wondered if we could just spend a second on when you acquire a licensee like you have done with ESI, can you just walk through all the things you can do operationally to improve that business? Because I don't think that's clear people assume you're just buying a licensee and there isn't that much you can do. I think there's quite a bit you can do. You did walk through a few things. Just wondered if you could detail that a little bit.

Sure. There is a lot we can do. Fortunately, the acquisition we acquired here was already well run. And frankly, in anticipation of sale, they had reduced their staff to a sustainable number that makes sense. So, automatically, when you get an acquisition, you go, I can cut 20% of the staff. I'm not in a position to do that there because they're so well run. But nonetheless, there are a number of coordinated things we can do. I mentioned that they have four or five employees that can actually help us with Crexendo. We have a number of employees who can help them. And as we get to know each other better, it will enable us to do less hires on both side of the equation that we were thinking about. So there's some efficiencies there.

We're going to combine a lot of licensing, which will -- economy of scale will have some substantial savings for us down the road. We are going to move ESI off of their servers onto our Oracle Cloud and get the discounts from there. There's going to be substantial savings there and long-term efficiencies. Back-office functions are going to be coordinated. There's going to be efficiencies there, and there's going to be a number of cross-sell opportunities, which I expect to have large efficiencies on.

So I may have run through it, but we would not have acquired this if I did not see a potential number of efficiencies, strong growth and operational combination that makes a lot of sense to both teams.

You mentioned your patience relative to making an acquisition. I'm just curious, on the other side, you have seller patience in some cases or at least it's not the right time for the seller. What happens when you acquire a large licensee like this to the other licensees who sort of want to get teed up themselves for a similar opportunity?

Well, I fully expect that this will tee up some interest in some of our licensees, and they will reach out to us regarding a potential acquisition. This happens all the time. There are several that we're looking at, not immediately, but in a quarter or two, we may be in a position to do it.

Obviously, a press release like we put out and the community knowing that we're in acquisitive mode will open more doors for us. And it makes a lot of sense on both ends. If we acquire a licensee, there's automatic efficiencies because we don't have to migrate customers onto our platform. There's automatic efficiencies there because their customers don't have to worry about having to move to a different platform or seeing a change in their service. And there's operational efficiencies and that the employees are already used to working with the NetSapiens platform. So, this opens a lot of exciting opportunities for us, and I'm very enthused about that, George.

And the next question comes from Josh Nichols with B. Riley Securities.

This is Matthew on for Josh Nichols. Congrats on the ESI closing a strong year. I guess to start off, on the cost synergy side with ESI, can you help us frame the time line for the facilities consolidation and the OCI migration of their workloads in terms of like how quickly you expect those savings to flow through to EBITDA?

You know what, I have not discussed that with the ESI team yet, so I don't want to surprise them by doing it on the conference call, and I really need to have our teams work with their teams to figure out the timing, but I would hope it would be done sometime this year.

Got it. Great. And I guess just more generally, what -- can you help us walk through what excites you most about the setup this year for the combined company?

I am just -- the team and I went out to Dallas on Friday and talked to the ESI employees and the enthusiasm and the excitement they had for working for a bigger organization for helping us to grow really enthused me. I must have had 15 of the employees come over to me and tell me, we're going to make you proud. I don't get my son telling me that often. So this was really good news.

The people here at both Crexendo and at our platform are excited about the growth. The enthusiasm I see in our employees for our plans for our future growth and to build -- to continue to build the best platform in the industry and provide the best services in the industry just excite me every morning. I get up excited to get to work, to work with our people and to continue to do this. I think this is going to be a great year for us.

And I would just add to that, Josh, or Matt, if you think about that meeting that we had with their team out there, they've got a tremendously tenured group of people there. And a lot of their people have known a lot of our people for a long time, including the executive management team. We've known their executive management team for quite some time. A lot of our support people have been working with their support people, some of them for longer than 10 years.

So this is really one of the true benefits we have in fishing in our stock fishing pond is that they know us, we know them. There's not a lot of surprises. And they welcome the announcement, as Jeff highlighted, because when they were thinking about a potential change in their business strategy and doing an acquisition, they could have sold to anybody. And to sell to somebody that was a known entity and a friendly, that's a whole lot better than anything else that could have been accomplished. And so they're excited about the opportunity and their excitement is going to lead to us taking this to much, much higher heights.

Great. Sounds exciting. I guess just one quick one for me, last one. Where do you see the organic pace of growth going for software solutions given it grew faster for most of 2025 and sort of leveled out at 18% in Q4?

I would hope it will remain at the same level, but I'm not going to commit to that. And obviously, our -- as Doug described, our offering is compelling. It saves you a substantial amount of money, and I believe you're getting better services and better products. Nonetheless, to migrate is not an inexpensive concept. And we have some people sitting on the fence waiting looking at the macroeconomic conditions and deciding is this the right time to write a $400,000 or $500,000 jack. So I know these deals will come in, but I can't tell you what quarter.

And I would also highlight that the Q4 number was only skewed a little bit by the fact that we have our UGM, which is our user group meeting in Q4, and so that number didn't grow incrementally as much as our software solutions revenue from our licensees grew. So the fact that we had five new logos and 14 upgrades was very consistent. So we don't see that slowing down at all. We still see tremendous demand within our licensee base and new logos for the software solutions division. So I think that was skewed a little bit by the fact that our user group meeting that we have every year in Q4 didn't expand percentage-wise as much as our growth in the licensee division.

We have no further questions in the queue. I would like to turn the floor back to Jeff Korn for any closing remarks.

Well, thank you, John, and I thank everybody for their attention. I hope we did a good job of explaining just how excited we are both about this acquisition and our future. We see things continuing to improve, and it is a very, very exciting time for us. And I look forward to meeting you all again in May when we announce Q1 results. So, thank you for your attention, and have a great rest of the day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

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" Needham & Company, LLC, Research Division

" Northland Capital Markets, Research Division

" Craig-Hallum Capital Group LLC, Research Division

" Lake Street Capital Markets, LLC, Research Division

" B. Riley Securities, Inc., Research Division

Greetings. Welcome to Crexendo's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Jeff Korn, Chairman and CEO at Crexendo. You may begin.

Thank you, Paul, and good afternoon, everyone. Welcome to the Crexendo Q3 2025 Conference Call. I'm Jeff Korn, Chairman of the Board and CEO. On the call with me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; and Jon Britton, our CRO.

In a moment, Jon will read the safe harbor statement. After that, I will give some brief comments on our performance and strategy. Ron will then provide more details on the numbers before handing the call over to Doug to provide a business and sales update. After that, we'll open up the call to 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 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 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 are 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 31, 2024, and the Forms 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. I am incredibly pleased and proud of our entire team. who work tirelessly every day to make sure we have the best products, services and support in the industry. The exceptional results we announced today show that their efforts are paying off.

Crexendo delivered another blockbuster quarter, highlighted by 12% year-over-year revenue growth, $1.5 million in GAAP net income and $3 million in non-GAAP net income. Our 28% growth in software solution underscores the strength of our platform and the increasing value we provide to customers and partners. I'm also very encouraged by our 8% increase in service revenue, which I have great confidence will continue to grow. With expanding margins, robust cash generation and continued innovation, we are executing exceptionally well on our profitable growth strategy.

We are just getting started. Our investments in AI-driven capabilities, Oracle Cloud infrastructure and next-generation collaboration and contact center solutions are creating powerful momentum across our ecosystem. We see a long runway for organic growth, enhanced by strategic M&A opportunities, and we are fully committed to delivering sustained value for our shareholders. We are delivering profitable growth today while building an even stronger, smarter and more innovative Crexendo for tomorrow.

One of our large investors recently suggested to me that I take a few minutes today to tell our story, explain where we came from and why I'm so confident in the future. Our DNA is telecom. We started our telecom journey roughly 15 years ago with our own homegrown switch and deep commitment to customer support.

Growth was steady, but then about 4 years ago, the opportunity to acquire NetSapiens became available. We recognized immediately that their software was superior, their engineers were exceptionable and their potential profit was strong, but they needed a sales and marketing strategy and a plan for growth that was a perfect fit for Crexendo to provide.

The combination of our marketing and retail expertise with their engineering excellence was a perfect match. Together, we have built a company that understands both sides of the business, platform engineers who think about scale and reliability, working alongside customer-facing engineers who understand what end users truly need. The synergy has made us better, faster and more innovative than any competitor in the market.

This past month, that success was on full display at our annual user group meeting, UGM in Miami. It was our most successful UGM in our history with record attendance, over 550 registered participants and 65 sponsors and an energy unlike anything we have seen before. We gave demonstrations on innovations we are making, continued improvements in our look and feel on the platform and a significant discussion on our AI applications. The entire community was excited about our innovations and improvements.

The highlight for me personally was being able to announce that we surpassed 7 million end users on our platform. That is an incredible milestone for our company and a clear validation of the strength and scalability of our technology. The excitement in the room was electric.

The management team even got a champagne to shower, and I might add, somebody spilled an entire bottle of champagne over my head and got into my eyes. I still don't know who did it, but I'm still trying to figure out. But the closing Gayla was a tremendous opportunity for us to interact with our licensees who are every bit as excited about our milestone as we were and excited about our future as we were.

It was a moment that perfectly captured the enthusiasm, pride and sense of community we share with our licensees and partners. Our licensees are energized and growing faster than ever, driving new adoption and innovation across the platform. Their success is our success. And together, we are redefining what is possible in cloud communications.

We continue to invest in every area of the business that fuels our growth and differentiation. In engineering, we are strengthening our core platform and accelerating the rollout of AI-driven tools that improve both productivity and user experience. Through our EVP program, which is the ecosystem vendor partner program, we are expanding the applications and integrations available to our customers and licensees, creating new revenue streams and even greater value. We are also enhancing customer service and security, ensuring we maintain our industry's leading reputation for reliability and responsiveness.

We have the secret sauce in retail, and that is our customer service. G2, an independent review company that speaks only to verified customers, ranks Crexendo #1 in 18 different customer satisfaction categories. No one else in the industry comes close, and that is because our culture is built around white glove service. Especially in the SMB market, that is essential, where many of our customers do not have large IT departments. Our responsiveness and personal attention truly sets us apart and creates value for our customers.

On the wholesale side, our NetSapiens platform continues to be the fastest-growing platform in North America. Our session-based billing model remains a clear differentiator. Our partners only pay for what they use, unlike the outdated per seat model still used by many competitors. Combined with our open APIs, our partners can fully customize solution for their customers. Our new marketplace, which was introduced at the UGM, where we and our licensees can sell applications is already generating excitement and revenue. I am confident that it will continue to grow.

Our partnership with Oracle Cloud Infrastructure continues to open global opportunities. We can now deploy new instances in days rather than months. And we have expanded internationally, including onboarding our first customer in Africa. While international revenue still represents less than 10% of our total revenue, it is growing rapidly, and I see enormous potential across EMEA and beyond the world.

We remain active on the M&A front. We are currently reviewing several strategic acquisition opportunities and are optimistic we will close one by early next year. Combined with our strong organic growth, these initiatives will help us scale even faster and expand our capabilities in key growth areas.

I was recently asked why I said last quarter that I'm more excited about our future than ever before. The answer is simple. It's because of the people around me in this room and the people in our entire organization. We have the best products and the best platform and the best opportunity. The enthusiasm and energy from our UGM made it clear, Crexendo's best days are ahead. We have a world-class team, the best partners in the industry and a technology stack that delivers proven results.

I could not be prouder to lead this incredible group of people who pour their hearts and soul into building the best telecom software and customer experience in the market. Our future is bright, and we are just getting started. I continue to expect that we will have double-digit growth through next year. I remain very optimistic in our future, our people and our results.

With that, I'll turn the call over to Ron for more details on the financials, and he will then turn the call over to Doug to discuss our sales and operations and give a deeper dive into our AI initiatives. Ron?

Thank you, Jeff. Our financial results for the third quarter are as follows: Consolidated revenue for the quarter increased 12% to $17.5 million. Our service revenue for the quarter increased 8% to $8.6 million. Our software solutions revenue for the quarter increased 28% to $7.5 million. Our product revenue for the quarter decreased 25% to $1.4 million.

However, I would not let the percentage change alarm you. Historically, using our 8-quarter look back, our average product revenue is $1.3 million per quarter. Therefore, for the quarter, product revenue is slightly higher than our historical average. Product revenue for the third quarter of 2024 was unusually high for the company.

Our service revenue gross margins decreased 100 basis points to 57% year-over-year. Our software solutions revenue gross margins increased by 300 basis points year-over-year to 74%. Our product revenue gross margins decreased [indiscernible] basis points to 35% and our consolidated revenue gross margins increased by 200 basis points year-over-year to 63%. Our remaining performance obligations increased to $87.9 million as compared to $83.5 million at the end of June and $77.3 million at the end of September of '24.

Our operating expenses for the quarter increased 5% to $16.2 million. The operating margin for the quarter was 7% compared to 1% for the same period of the prior year, a 600-basis point increase. Net income of $1.5 million for the quarter or $0.05 per basic and diluted common share as compared to net income of $100,000 or $0.01 per basic and $0.00 per diluted share for the third quarter of the prior year.

Our non-GAAP net income was $3 million for the quarter. That's $0.10 per basic and diluted common share compared to non-GAAP net income of $1.7 million or $0.06 per basic and diluted common share for the third quarter of the prior year. EBITDA for the quarter was $2.1 million compared to $1 million for the third quarter of the prior year, and our adjusted EBITDA for the quarter was $2.9 million or 17% of total revenue.

Cash, cash equivalents at September 30, 2025, was $28.6 million. That's compared to $18.2 million at December 31, 2024. Cash provided by operating activities for the 9-month period of $7 million. Cash provided by financing activities for the 9-month period was $3.4 million, primarily related to $4.1 million of net cash received from stock option exercises, offset by $300,000 in taxes paid on net settlement of stock options and RSUs and $400,000 in notes payable repayments and finance lease payments.

I'll now turn it over to Doug Gaylor, our President and COO, for additional comments on sales and operations.

Thanks, Ron. We had a very strong quarter on both the top and bottom line, and we are excited about our momentum as we finish the year. This is our 9th consecutive quarter of GAAP profitability and 28th consecutive quarter of non-GAAP net income, and the results were a direct result of our focus on growing organically and profitably.

Our GAAP profitability continues to be positively affected by managing our costs and driving synergies within the business. After successfully migrating our international data centers to OCI, Oracle Cloud Infrastructure in Q2, we have been focused on completing the remaining migrations of our U.S. data centers to OCI and anticipate additional cost savings from completing that migration beginning in early 2026. In addition, we are nearly complete with our classic to VIP migration, which will add additional cost savings beginning in Q1.

We continue to see tremendous organic growth from our Software Solutions segment of the business, which grew 28% organically over Q3 of 2024 and has seen a 31% organic growth rate year-to-date. We had a very strong quarter with 12 upgrade orders from our existing licensees, combined with winning 6 new logos that chose Crexendo for their platform of choice moving forward. Of the 6 new logos, we won 1 new logo from Metaswitch, and we continue to see opportunities created by uncertainties created by our 2 largest software solutions competitors, Cisco's BroadSoft and Metaswitch.

Our unique pricing and support model for our software solutions platform, combined with our robust feature set and open APIs that fuel AI applications and integrations allow us to differentiate ourselves from the rest of our competition at a much stronger price point than they might currently be paying.

Our Telecom Services Retail segment grew at 2% organically for the quarter, and our telecom service revenue was up 8% organically, offset by a reduction in our product revenue to reach the blended 2% increase. As previously stated we proactively reduced selling some lower-margin product opportunities to maintain margins, thus [indiscernible] product revenue.

We continue to see strong demand for our offerings from our channel partners and our master agent technology service distributors and expect retail segment revenue to continue to grow at a faster pace. The master agent technology service distributors saw a 28% increase in sales bookings year-over-year, and we expect that momentum to continue. We will continue to focus on profitably growing the segment of the business and will not be pursuing low margin or unprofitable retail opportunities as we've stated in the past.

Our remaining performance obligation, also referred to as our backlog is now at $88 million, an increase of 14% from Q3 of 2024. Our remaining performance obligation number is the sum of the remaining contract values for all of our telecom services and software solutions customers that will be recognized on a sliding scale over the next 60 months, and that's a very strong indicator of our future revenue stream.

Consolidated gross margin for Q3 was 63%, up from 61% in Q3 of 2024. We continue to see strong gross margins in our Software Solutions segment, where Q3 gross margins were 74% compared to 71% for the same quarter last year. For the 9 months of the year, our Software Solutions gross margins were 76%, highlighting the scalability and operating leverage we have on the software segment of the business.

Our Telecom Services segment gross margin was 55%, which was flat with Q3 of 2024. And our telecom services gross margin are affected by our product gross margins, which declined year-over-year as a result of a decline in our product revenue as we concentrate on higher-margin UCaaS sales and less on low-margin product sales.

We are confident that we will continue to see gross margin improvements in both segments of the business in the future as we start to recognize cost savings from our ongoing consolidation of our data centers to Oracle Cloud infrastructure as well as our plans to sunset our legacy classic offering.

Crexendo's engineering team continues to enhance and improve our award-winning platform. We recently released version 45 on our platform as well as preannounced at our user group conference in Miami last week, the exciting enhancements planned for our version 46 release in 2026. The NetSapiens cloud-native platform is designed with open API integrations that allows us to enhance our offerings with both in-house and third-party developed solutions.

Right now, the biggest game changer in our industry since the onset of the Internet will be artificial intelligence. And for Crexendo, AI is leading the charge in these developments with many new and planned releases that will make small and midsized businesses more efficient and productive. Crexendo's AI solutions are focused on helping businesses make more money as opposed to saving money.

Our AI solutions are targeted at making small and midsized businesses more successful and more profitable. We currently have a variety of AI solutions already available for end users, including our Voice AI Studio, our AI call recording with sentiment analysis and our contact center AI powered by ChatGPT.

In addition, in our most exciting release shared, we introduced Crexendo's AI receptionist orchestrator or code named Kairo at our UEM last week to rave reviews. This new application will be available later this month for new and existing customers to leverage the power of an AI receptionist to answer all incoming calls, answer frequently asked questions, schedule, reschedule or cancel appointments, access customer records and other applications. For the typical SMB customer, this technology will allow their business to be more effective, more productive for a minimal cost, while at the same time allowing Crexendo to significantly increase our average revenue per account.

During the quarter, we announced multiple partnerships with our new vendors in our EVP program that Jeff mentioned earlier, which is our ecosystem vendor program, and we are now up to 41 official partners in that program. These partners provide products, software and solutions to our platform that allow Crexendo and our partners to benefit from selling solutions to end users that will make their businesses more efficient, more productive and more profitable. As this program continues to gain momentum, we will benefit from additional revenue streams.

Crexendo's performance for the quarter and year-to-date has been very strong, and I couldn't be more excited about the future direction and opportunity for Crexendo. We continue to see strong double-digit organic growth combined with increasing GAAP profitability and strong positive cash flow.

We are positioned perfectly with the combination of strong demand for our product offerings along with great solutions with a disruptive pricing model and the best and most talented workforce in the industry to continue our strong growth and success. We're excited about the additional opportunities to drive growth and innovation that AI will infuse into our business and are very optimistic that applications like our AI receptionist will drive demand and revenue.

We are committed to delivering the best UCaaS, CCaaS, which is Contact Center as a Service and CPaaS, Communication Platform as a Service offerings in the sector to our customers and partners and best returns for our shareholders. As the fastest-growing platform solution in the country and now supporting over 7 million end users, we are laser-focused on growing our business, enhancing our solutions and improving our efficiencies and continuing to return strong results.

With that, I'll turn it back to Jeff for any further comments.

Thank you, Doug. I don't have any further comments at this time. So, Paul, I'll open the call up to questions.

[Operator Instructions] And the first question today is coming from Joshua Reilly from Needham.

Nice job on the quarter here. Maybe just starting off in terms of the pipeline for new licensees. How should we be thinking about the setup for Q4 and maybe over the next few quarters? And are there any comp issues that we should be considering in terms of the number of licensees and users on the platform that you added last year in Q4 that we should be considering for the coming quarter here in Q4?

I think, Josh, you can do -- going backwards from forwards, you can do the math and see what our growth is on a monthly basis from when we went from 6 to 7. While I expect that to accelerate somewhat, that's a good rule of thumb to look at how fast we'll be growing the amount of users on the platform.

In regard to how many logos we expect -- new logos we expect or upgrades for Q4, still a little early for us to tell. As you know, Josh, we always have somewhere between 15 and 20 sandboxes out, and they take various times for people to continue testing and working and looking at the platform. So it would be hard for us to give you a number at this point.

Got it. And then on the new AI products that you've been launching and now have with Kairo, which is pretty compelling demo that we saw at the conference there. How are you going to be measuring the success of the broader launch of these products in terms of attach rates or any other metrics that investors should be considering? And how will the go-to-market work in terms of going back to your base of licensees and building awareness with them? I saw some of that at the conference recently, but just wanted to get your take on that.

Yes. I think, obviously, we'll be monitoring that on a take basis from all of our customers out there. I mean if you think about that release, that release is going to really affect small and midsized customers to allow them to be more efficient and more productive, as I mentioned.

So I think we're going to have a tremendous take rate on that, but we're going to have a very aggressive program for not only our existing base customers to easily be able to adopt that technology and add it into their infrastructure, but it will also be a key marketing point for us for all new customers when they're considering our solutions versus our competitors. So we'll be tracking that. We don't have obviously any measurements to compare it to at this moment, but I anticipate a strong uptake from our existing customers and new customers as well.

Got it. And then I think it would be helpful to discuss the progress that you've been making in migrating the customers to the OCI infrastructure that are hosted with you? And can you just remind us kind of the relative mixes of how many licensees are hosted with you versus in their own cloud and how that's kind of progressed over the last couple of years?

I don't think we have off the top of our heads the record of how many host their own and how many are on OCI. But I can answer your question regarding the migration of our old cloud onto OCI. We expect that to be completed by the end of Q1 and be off our old legacy data centers.

The next question will be from Mike Latimore from Northland Capital Markets.

Congrats on 7 million users. That's a big number. In terms of the services growth getting to 8%, nice improvement there. I guess, can you talk a little bit about what drove that improvement? And then when you say you expect the growth to continue or even be faster, I guess, is your thought that, that 8% kind of moves up even in the fourth quarter?

I'm going to let Jon answer that because he knows kind of the sales pipeline.

Yes. So yes, it's a great question. And I would just say it's continued positive acceptance of the offers in the market and execution on our retail teams specifically, and we're seeing solid bookings growth and also, I would say, a slightly faster conversion to implementation and recurring revenue from the pipeline that we're bringing in. So, the team continues to drive the revenue there. We continue to see good success. We're focused on profitable growth, but they continue executing, and we're looking forward to continuing to see the growth there.

Great. And then the suggestion that the growth continues, does that mean it sort of moves up from this 8% level over time?

That would be my expectation, Mike. As you know, UCaaS is highly commoditized. And as I discussed in my comments, we make a concerted effort to have the absolute best service in the industry, and that's a strong competitive advantage for us aside from the fact that I think our offerings are amongst the best, if not the best in the industry. So that -- the better offerings together with the top customer service by far is a strong competitive advantage for us, and I expect that to accelerate our growth.

Got it. And then in terms of the software pipeline, how would you characterize it as you look to the next couple of quarters here? Is there any shifting going on more to new versus installed or into larger deals versus higher numbers of deals? Like how would you characterize the software pipeline?

Well, Mike, as you understand, larger deals tend to take longer because the analysis by the customer takes some time. So, we've had people play with our sandbox for 4 years before making a decision. People play with the sandbox for 2 months before making a decision. So it's fairly difficult for us to tell you on a Q-to-Q basis how many new logos we're going to get. But as I said before, we have a number of sandboxes out. People are very excited. Engineers are working with them. So we expect the growth to continue.

I don't know if Doug or Jon have a little more color they want to add.

Yes. I don't see a lot of slowdown. There's a tremendous amount of pipeline of opportunities out there, and we're more optimistic now than we've been in a long time with the opportunities that are out there. So as Jeff said, a lot of these decisions take a lot of time and evaluation on the end users' part, but we know that we're the best solution for them. So the fact that we've got a number of opportunities out there in the queue, we know they're all going to come through enduring places and times, but we're confident we're going to win the high majority of those.

Yes. To be clear, not all are going to come through, but a great majority of them will.

Sounds good. Last one, just on the receptionist, AI receptionist. Can you talk a little bit about the opportunity there? Do you think like every one of your customers would have interest in that? Or is this geared more towards larger customers? Just how do you think about that opportunity a little bit?

Yes. I think it's really an opportunity for every customer to take a look at it and find out if it's good for their business. So I think that we feel that the high majority of small and midsized customers will be very open to an AI receptionist type solution just to help make their business more efficient.

If you think about our average sized customer out there being in the range of 18 or 20 stations, they can much easily deploy resources internally to help grow their business while they've got an AI receptionist that's answering frequently asked questions and doing a lot of the repetitive type functions within their business. So it allows them to redeploy assets within their organization to help them grow their business.

So we think that our take rate is going to be extremely high, and we think that's going to increase our average revenue per account upwards by 40% or 50%. So will it be the right solution for every business? Probably not, but will it be a high take rate from the majority of our customers? We're feeling pretty optimistic that we're going to get a lot of customers that are going to fall in love with this technology and be able to grow their business with it.

The next question will be from George Sutton from Craig-Hallum.

Congrats on the results. So I wondered if we can go a little bit more into version 46. And it sounded like it's a complete rethinking of the platform. And I'm just curious, I certainly heard good feedback from the licensees. But I'm curious as you begin to go to market with that, when can you start going to new potential customers with this newer version of the platform actively?

We're thinking Q1, George, obviously, I'm dealing with engineers, so I forgot to ask which year, but I'm assuming they meant Q1 of 2026.

Yes. So I'll fill in some more color on that, George. This is Jon here. And it's actually -- we called that Project Horizon at our Expand Your Horizons partner event. So it's obviously a key theme for us. More than a rethinking of the platform, it's a rethinking of the interface in the way people interact with the platform.

I think if you step back and think about it a little bit, we've talked about one application in this call, which is the Kairo, the Crexendo AI reception as an orchestrator. But at our code fest that we had at UGM, we had 10 different AI applications demonstrated, many of which the partners built on top of our platform. And what version 46 does is it really allows them to have a modern way to express how customers can view that, interact with it and deal with it.

And we did give Q1 as a time frame for, I would say, previews and first looks and things of that nature. The actual GA date will probably be a little later than that. So, we don't want to front end the expectations too much. But just think of it as same underlying technology. I mean, with many of these AI applications, our platform underneath them is the engine that's powering all the communications behind them.

So it's how customers want to look at it, interact with it, how it can be put into other vertical applications and extrapolate it externally in a way that people are more likely to use and naturally interact with the platform. So, think of it the underlying engine plumbing and all that will be the core NetSapiens platform, which has just been a great winning hand for us. This is just a better way for people to consume it.

George, we had invested most of our money up to this point in making sure that the platform was bulletproof, and we are providing the best software telecom platform in the industry. If there was one thing we weren't doing as well as the basic engineering, it would have been the look and feel. And this improves the look and feel and puts us at a complete competitive advantage to any of our competitors. I think it's now going to be the best look and feel in the industry masked with the best engineering in the industry, and that makes a hell of a combination.

So, on the other side of innovation, the Metaswitch/Alianza group meeting did not sound like it moved anything forward. It was a marketing layer message but really maintaining all their platforms. At what point does that lack of movement start to really accelerate your opportunities with those licensees?

George, I don't believe in trashing the competition. I think our best way of selling is by showing that we have the absolute best products, people and performance in the industry. Allianz is a smart company. They're going to figure out what they have to do. We're not worrying about them. We're worrying about staying competitively ahead and rolling out the best products in the industry and the best price point in the industry. All in all, I think it gives us a superior advantage to anybody.

But I will add, there is a nuance there...

Not everybody agrees with me.

[indiscernible] There is a nuance there that at our event, we focused on things that people either could walk out of the event, add to their offer and sell today or before the end of 2025. So, things that will be released here before the end of the year primarily with one exception that was the preview of the Horizon interface project. Everything else people can take and monetize in the near-term future. So, there's no architecture here where we're talking about what's going to happen way down the road. This was real exciting products that people can take and add to their platform today and grow their revenue tomorrow.

George, I pointed out at the last UGM, which I think you're at too as well as this one, I'm there to listen, not to talk. And a lot of the feedback I got last year was incorporated in the release we had this year. A lot of the feedback I got this year will be incorporated in the releases we do next year. We listen carefully to our licensees. We understand what they need, and we make sure we provide it.

[Operator Instructions] The next question is coming from Eric Martinuzzi from Lake Street.

My congratulations on the quarter as well. I wanted to ask you just along the lines of M&A, there was an acquisition yesterday by a competitor of yours, Ooma, and they went kind of outside their own technology architecture to pick up FluentStream. I just wanted to know your thoughts on -- is that something that you all might pursue if you could find something for the right price, a product running outside of the NetSapiens architecture.

Well, Eric, as you've heard Doug talk about our stock fishing pond. We have over 220 licensees on our platform who are already on our technology. That would be our preference to start with. While we're excited to see any movement in the industry, we think that's a good thing. Our preference would be to pick up our own technology in an acquisition. Nonetheless, if something compelling came wrong at the right price, will we look at it, of course. But we've got a lot right in front of us where there's no migration required because they're already on our platform, and that makes the most sense to us.

Okay. And then I think historically, you've talked about acquisitions at revenue run rates in the neighborhood of $5 million to $10 million. The opportunity that you outlined in your prepared remarks Jeff, the early next year -- hoping to close one by early next year. Does that fit into that bucket?

One of them fits in that bucket. One of them is a little larger. We're going to have to narrow down on one, but I'm quite confident we will do it. As you know, Eric, we're a small integration team here. So, if we're doing something in the $20 million range, that would probably be the only acquisition for the year. If we did something in the $5 million to $10 million range, we'd probably look for a second one.

And the next question is coming from Josh Nichols from B. Riley.

This is Matthew on for Josh. I guess to start off, it looks like the Oracle Cloud migration seems to be unlocking some good opportunity internationally with the ability to deploy in days versus weeks like you mentioned earlier. So, my question is, how quickly do you expect that international revenue mix to inflect from current levels? And what's kind of gating that pace of expansion here?

Our growth internationally [indiscernible] is larger than our growth domestically, but it's a small part of our business. So, at this point, it's still a rounding error. I had spent part of the summer at our office in London meeting with customers and potential customers, and they're all very excited. Jon does it on a regular basis. Others do it on a regular basis. I expect international to continue to grow at a faster clip than domestically. But considering world issues, it's hard for me to give a number or specific guidance on it.

Got it. And I guess switching over to, I guess, AI-related question. You're building out a comprehensive stack with Power launch this month and [indiscernible] for Agentic AI and so on. But I'm wondering what else can you layer into the platform from here? And are there additional capabilities you're evaluating or planning to roll out?

There's always additional capabilities we're analyzing, but I'll let Doug answer the AI stack question.

Yes. As I mentioned, we've got 41 vendors in our EVP program now. As Jon mentioned, 10 of those in our code fest. We're showing AI solutions. The best part about our platform today is it's an open API platform. And so that means that anybody that is writing code out there, anybody that has a technology stack that they want to bring to our platform, it's easily integrated.

So when we look at the opportunity for selling AI solutions, we highlighted 3 or 4 that we currently have, but we've got a number that are being in development as we speak. We've got applications that as we saw at our UGM last week with 65 sponsors, applications that range anywhere from texting to messaging to faxing, you name it. We've got those solutions that are developed and available for any and all of our licensees to sell to their end user customers. So there's a tremendous amount of monetization still to be had with third-party development applications.

Got it. That was helpful. And I guess just one last quick question. So regarding the product gross margin, it dipped to the high 30s in Q3, which is softer than the low to mid-40s of historical average. I'm just wondering what drove that? And how should we expect that to change going into Q4 and 2026?

Can you repeat that one more time, Matt? We're having a little bit of hard time, a little echo there.

Yes. So regarding the product gross margin, it dipped to the high 30s in Q3, which is softer than the low to mid-40s historical average. I'm wondering what's driving that and how we should expect that to change in Q4 and 2026?

Yes, we would expect that to improve and go back into the low 40s range. We had some lower margin sales in that -- in the quarter that drove down the overall gross margin that we had in the quarter.

And that does conclude today's Q&A session. I will now hand the call back to Jeff Korn for closing remarks.

Well, I want to thank everybody for their attention. I want to thank everybody in the room here with me and everybody who is listening to the call, who works with Crexendo. It was an amazing quarter, an amazing team effort, and I'm very, very excited for our future and for the next time we get to talk. So until then, thank you, and thank you for your attention.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.