CXDO - Crexendo Seeks New Opportunities With Allegiant Networks Acquisition

Summary

• Crexendo published its Q3 financial results on Nov. 10, 2022.
• The firm provides a range of unified and cloud communications software and services worldwide.
• CXDO recently acquired Allegiant Networks, but management will need to prove its ability to ignite revenue growth in a slowing macroeconomic environment.
• I'm on Hold for CXDO until we see evidence of solid and profitable growth.

A Quick Take On Crexendo

Crexendo ( CXDO ) reported its Q3 2022 financial results on Nov. 10, 2022, with quarterly revenue exceeding $9 million.

The company provides a range of unified and cloud communications software and services worldwide.

While we learn the severity of the downturn ahead, I'm on Hold for CXDO until we see proof of the acquisition's benefits.

Crexendo Overview

Crexendo is a cloud communication and unified communications provider that offers cloud telecommunications, call center, collaboration, and other cloud business services to businesses in the US, Canada, and internationally.

Its Cloud Telecommunications segment provides telecommunications services and resells broadband Internet services, and its Web Services segment provides website hosting and other professional services.

The firm is headed by Chairman and CEO Steve Mihaylo, who was appointed to the CEO position in 2008 and formerly founded Inter-Tel, which was sold in 2007 to Mitel for approximately $723 million.

Crexendo acquires customers through on-house sales, marketing, and partnerships. The company uses a combination of inbound and outbound marketing strategies to drive customer growth.

Crexendo's Market and Competition

According to a 2019 market research report by Grand View Research, the global market for unified communications is expected to reach $167 billion by 2025.

This represents a forecast CAGR of 16.8% from 2020 to 2025.

The main drivers for this expected growth are changing workforce orientation and virtualization of data and devices.

Also, the use of cloud-based solutions is expected to increase dramatically due to the lower upfront cost and increased flexibility to increase or decrease usage on an as-needed basis.

Additionally, the rising demand for smart enterprise solutions and the need for cost-effective solutions is also driving market growth.

Major competitive or other industry participants include:

• 8x8

• Five9

• RingCentral

• Vonage

• Zoom Video

• Avaya

• Cisco

• Mitel Networks

• Others

Crexendo's Recent Financial Performance

• Total revenue by quarter has grown per the following chart:

• Gross profit margin by quarter has risen in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have trended higher in recent quarters:

• Operating losses by quarter have worsened recently:

• Earnings per share (Diluted) have remained negative in recent reporting periods:

(All data in the above charts is GAAP)

In the past 12 months, Crexendo's stock price has fallen 61.6% vs. the U.S. S&P 500 Index's ( SPY ) drop of around 15%, as the comparison chart below indicates:

Valuation And Other Metrics For Crexendo

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be RingCentral ( RNG ). Shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha)

A complete comparison of the two companies' available performance metrics may be viewed here .

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

CXDO's most recent GAAP Rule of 40 calculation was 45% as of Q3 2022, so the firm has performed well in this regard, per the table below:

(Source - Seeking Alpha)

Commentary On Crexendo

In its last earnings call (Source - Seeking Alpha), covering Q3 2022's results, management highlighted the closing of its recent acquisition of Allegiant Networks, which was already a licensee.

The deal is expected to migrate Allegiant's customers to Crexendo's platform at a higher margin while expanding Crexendo's offerings into the Manager Service Provider space.

On the sales side, the firm recorded a backlog of $43.4 million at the end of the quarter.

As to its financial results, total revenue rose only 3% year-over-year, while gross profit margin grew 4 percentage points over the same period to 67%.

The company did not disclose any retention rate metrics, and its Rule of 40 results have been disappointing.

SG&A as a percentage of revenue has been trending higher, while operating losses and earnings per share remain negative.

For the balance sheet, the firm finished the quarter with $4.8 million in cash and equivalents and $1.8 million in total debt.

Over the trailing twelve months, free cash used was $3.4 million, of which capital expenditures accounted for $200,000 of cash used.

Looking ahead, management believes the Allegiant Networks acquisition will be accretive to the firm's financial results.

Regarding valuation, the market is valuing CXDO at an EV/Sales multiple of around 1.3x.

The SaaS Capital Index of publicly held SaaS software companies showed an average forward EV/revenue multiple of around 6.3x at Nov. 30, 2022, as the chart shows here:

So, by comparison, CXDO is currently valued by the market at a significant discount to the broader SaaS Capital Index, at least as of Nov. 30, 2022.

The primary risk to the company's outlook is an increasingly likely macroeconomic slowdown or recession, which may produce slower sales cycles and flatten its revenue growth trajectory.

A potential upside catalyst is its ability to cross-sell services to Allegiant's customer base, producing a bump in revenue through efficient in-house sales efforts.

While I'm hopeful about the potential for its Allegiant deal, management will need to prove it can grow revenue organically into a slowing economy.

While we learn the severity of the downturn ahead, I'm on Hold for CXDO until we see proof of the acquisition's benefits.

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