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Edited Transcript of CXDO earnings conference call or presentation 3-May-17 9:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Crexendo Inc Earnings Call

TEMPE May 11, 2017 (Thomson StreetEvents) -- Edited Transcript of Crexendo Inc earnings conference call or presentation Wednesday, May 3, 2017 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas Walter Gaylor

Crexendo, Inc. - President and COO

* Jeffrey G. Korn

Crexendo, Inc. - General Counsel

* Ronald Vincent

Crexendo, Inc. - CFO

* Steven G. Mihaylo

Crexendo, Inc. - Chairman and CEO

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Conference Call Participants

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* Kevin Darryl Dede

Rodman & Renshaw Research - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Crexendo First Quarter 2017 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chief Executive Officer, Steve Mihaylo. Please go ahead.

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Steven G. Mihaylo, Crexendo, Inc. - Chairman and CEO [2]

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Thank you, Kevin. I'm Steven Mihaylo, Chairman and CEO Crexendo. I want to welcome all of you to the Crexendo First Quarter 2017 Conference Call. With me today are Doug Gaylor, our President and COO; Ron Vincent, our CFO; and Jeff Korn, our General Counsel. I'm going to ask Jeff to read our Safe Harbor statement. After that, I will give some brief general comments relative to the quarter and year end. Ron will then provide some granularity to the numbers. Doug will provide a business and sales update, and then we will open the call up to questions. Jeff, would you please provide the Safe Harbor statement?

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Jeffrey G. Korn, Crexendo, Inc. - General Counsel [3]

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Thank you, Steve. 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 1985 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, such as 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, 2016, and the forms 10-Q for 2017 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 would now like to turn the call back over to Steve. Steve?

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Steven G. Mihaylo, Crexendo, Inc. - Chairman and CEO [4]

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Thank you, Jeff. Our sales for the first quarter were good. Our Cloud Telecommunications Segment revenue for the first quarter of 2017 increased 16% to $2.1 million compared to $1.8 million for the first quarter of 2016. That increase is encouraging. Also encouraging is that we have our cost and processes under control. Non-GAAP net loss was $188,000 for the first quarter of 2017, or $0.01 loss per diluted common share, compared to a net GAAP -- or a non-GAAP net loss of $556,000 or $0.04 loss per diluted common share for the first quarter of 2016. That is about a 67% improvement from last year. This shows me that we are on track to reach cash flow breakeven and GAAP income this year.

Our GAAP numbers also improved and would have been even better except for a onetime options charge, which affected GAAP results. While these numbers are good, I know they will be even better in the future quarters.

As I discussed before, I have spent considerable time working with Doug Gaylor to see where we can improve our sales process. We became convinced that we could, and should, have better results in our direct sales team, enterprise sales and in attracting dealer partners that are better qualified and have better qualified leads. We made and have completed changes in our sales management structure, which I fully expect to improve those metrics. We have added a new VP of Sales and a new Director of Sales to head up our dealer partners and direct sales groups. Doug and I are working closely with the new sales team and I am convinced they will drive sales improvement, which will be realized over the next several quarters. In addition to the management changes, I have increased -- we have increased our partner channel by over 20%, and increased our direct sales group by over 30%. Our backlog grew in Q1 which is -- I believe is, also encouraging. Backlog is a metric that allows us to internally forecast future sales growth.

I'm watching backlog carefully and fully expect, that the changes discussed will start to show improvements to backlog and subscription revenue over the next few quarters and coming years. I'm very proud of the Crexendo team. As I've discussed many times we are very careful with spending and everyone understands that we will not waste a penny of shareholders' money. However, more important is that the Crexendo team realizes that our products and services must be second to none and that is also taken to heart every day by our team members. I have said this before, if people give Crexendo's Ride The Cloud services and products a try, they will be convinced there is no better solution on the market, and in most cases, they will save a substantial amount of money. Customers tell me that Crexendo's award-winning solutions are perfect for a company that wants to increase productivity and save money but does not want to scrimp on quality, service or value. Our telephones and mobile apps are amongst the best in the industry, at highly competitive prices. We have all the pieces in place to really appreciate -- to really accelerate growth and reach profitability. I know our sales will continue to increase, we will continue to reduce our costs and we will run the business with a high degree of efficiency. I continue to be convinced, we will reach cash flow breakeven and GAAP net income in 2017. I continue to believe in our company and we will continue to grow the business through our sales force and our partner channel. We are always reviewing appropriate accretive opportunities and believe if the right opportunity comes along, they will be a way to further accelerate growth. I continue to be a strong believer in the future of Crexendo. With that, I will turn the call over to Ron. Ron?

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Ronald Vincent, Crexendo, Inc. - CFO [5]

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Thanks, Steve. Consolidated revenue for the first quarter 2017 increased 8% to $2.3 million compared to $2.2 million for the first quarter of the prior year. Approximately 88% of the revenue for the fourth quarter was contributed by our Cloud Telecommunications segment, which contributed $2.1 million for the quarter, an increase of 16% compared to $1.8 million contributed in the first quarter of the prior year. Our Web Services Segment revenue for the quarter decreased by 29% to $283,000 compared to $396,000 for the first quarter of the prior year.

Our consolidated operating expenses for the first quarter decreased 6% to $2.9 million compared to $3 million reported for the first quarter of the prior year. The company had a net loss of $543,000 for the quarter, or a $0.04 loss per diluted common share. That's compared to a net loss of $868,000, or a $0.07 loss per diluted common share reported for the first quarter of the prior year. As Steve mentioned, on a non-GAAP basis, we had a net loss of $188,000 for the quarter or that so -- a loss of $0.01 per diluted common share. So we're getting that number closer to 0.

EBITDA for the quarter was a loss of $482,000 compared to a net loss of $830,000 for the first quarter of the prior year. And our adjusted EBITDA for the quarter was a loss of $184,000 and that's compared to a loss of $580,000 reported for the first quarter of the prior year. Cash and cash equivalents, excluding our restricted cash at March 31, was $968,000 and that's compared to $619,000 we reported at December 31, 2016. We used $52,000 of cash for operating activities for the 3 months ended March 31, compared to $261,000 we used during the same period of the prior year. Our cash provided by investing activities for the quarter was $252,000 compared to $12,000 for the same period of the prior year.

During the quarter, we sold a $252,000 certificate of deposit and proceeds were moved to our cash and cash equivalents. Cash provided by financing activities for the 3 month ended March 31, was $149,000, that's compared to financing activities used for -- $97,000 for the same period of the prior year. During this first quarter, we received proceeds from stock option exercises to the tune of $166,000 which resulted in net -- the provided cash of $149,000.

With that I will turn it over to Doug Gaylor our President and COO for additional comments.

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Douglas Walter Gaylor, Crexendo, Inc. - President and COO [6]

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Thanks, Ron. Although we had a flat quarter from a revenue perspective, there were positive metrics as well as a lot of excitement at Crexendo during Q1. As Steve discussed, we did a complete review of the sales team and process and we hired a new sales management staff consisting of a new VP of Sales and a new Director of Sales. We also have hired 5 new industry experienced sales reps and had a very strong first quarter of sales bookings that will lay the groundwork of strong future growth. In addition, we continue to manage our cost and improve our bottom line as we get closer to cash flow breakeven and GAAP profitably.

Since we manufacture our own phones, system software and platform, we are able to effectively manage our expenses as we continue to grow our Telecom revenues. This, combined with our diligent focus on cost, has helped us increase our gross margins from 59% in Q4 to 63% in Q1. Our improved margins and reduced costs helped us to reduce our cash burn by 80% compared to Q1 last year and by 87% compared to Q4 2016 and has us getting very close to cash flow breakeven. We expect these nice trends to continue going forward.

We had great excitement in our partner channel program during the quarter, adding 16 new partners for the quarter and that momentum has continued into Q2 with very strong partner additions including some very significant partners on-boarded, that have large sales forces on The Street. Our focus on larger, more established partners, paid off with a nice increase in partner sales during Q1 and some larger multi-location sales opportunities, including: a 350 Phone; a 150 Phone; and multiple 75 Phone Plus opportunities were sold through the dealer partner channel during the quarter. Our engineering team continues to deliver great new enhancements and capabilities to our platform. Recent enhancements, such as collaboration, chat, customer screen pops and ACD call back in queue have helped us further distance our affordable offerings compared to our competition. We are excited to be releasing additional new features this quarter, that include SMS text messaging, and proactive dialing capabilities, that will be greatly received by our customers and prospects. Our new partners, combined with our new sales management team and new industry experienced sales representatives, helped increase sales bookings significantly over the previous quarter. We expect this trend to continue as we have a lot of momentum and backlog heading into Q2. The increased sales helped to increase our backlog by 6% quarter-over-quarter, positioning us well to meet our goal of cash flow breakeven and GAAP profitably. We are encouraged with the continued quarter-over-quarter improvements that we have seen. We're confident that the revenue growth will start to accelerate, our products and our solutions are the strongest in the industry and we're focused on getting the message out to end-users via our direct and our partner sales channels. With the changes and additions to our sales channel in 2017, I'm very excited and confident that we are in great position to take the organization to new levels of success. As we continue to successfully execute our plans to increase revenues and decrease our cost, we're well-positioned to get to cash flow breakeven and profitably. I know we are on the right track and I'm very excited to continue to execute on our growth plans now and into the future. I will now turn it back over to Steve for any additional comments.

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Steven G. Mihaylo, Crexendo, Inc. - Chairman and CEO [7]

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Thanks, Doug. At this time, I would like to open it up to questions. Kevin?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Kevin Dede from Rodman.

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Kevin Darryl Dede, Rodman & Renshaw Research - Research Analyst [2]

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I was just wondering if you could talk a little bit to the backlog at the end of the quarter versus the end of the year? I understand some of the things that you've discussed regarding new sales talent in place, but I just want to get a feeling if therefore your confidence and acceleration in sales, I guess for the balance of the year versus the cost in hiring and team growth?

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Steven G. Mihaylo, Crexendo, Inc. - Chairman and CEO [3]

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Okay. You had several questions in there but if we look at quarter-to-quarter bookings, we had a very nice increase between the bookings in Q4 and in the bookings in Q1. So much so that we can project quite accurately what our revenue will be in Q2 as opposed to Q1. The bookings actually increased a little over 30% from Q1 -- from Q4 to Q1. I think I've covered just about all your questions there.

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Douglas Walter Gaylor, Crexendo, Inc. - President and COO [4]

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Backlog is something that we track because when we sign an agreement, if we sign an agreement for a 36 month term, we only take a portion of that revenue on a monthly basis. And so backlog is contracted obligated revenue that is not recognized yet. So when we talk about increasing our backlog by a substantial amount quarter-over-quarter, that's a very positive sign because that backlog is unrecognized revenue that is contractually obligated at this point.

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Kevin Darryl Dede, Rodman & Renshaw Research - Research Analyst [5]

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Yes. So Steve, Doug, will you get to a point do you think that you'll feel comfortable discussing that backlog and the booking numbers?

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Steven G. Mihaylo, Crexendo, Inc. - Chairman and CEO [6]

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Yes, I think we will. Obviously, if something we have to talk to our auditors about, but we may be in a position to do it next quarter and in the third quarter. At the size we are right now Kevin, it's going to fluctuate quite a bit because the folks that make the decisions to go with our service sometimes they're slowing in making the decisions, others of them are fast in making the decisions. So sometimes stuff gets pushed from one quarter to the other. As we get bigger it's going to be less evident. But I believe we can talk about that, for sure in the third quarter, and possibly next quarter.

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Kevin Darryl Dede, Rodman & Renshaw Research - Research Analyst [7]

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Have you realized any seasonality in sales?

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Steven G. Mihaylo, Crexendo, Inc. - Chairman and CEO [8]

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Yes, it's a little bit like -- it's actually a little slower than our previous company. It is slower in the fourth quarter and starts picking up in the first quarter, the second quarter, the third quarter, and then because of the holidays that are so prevalent in the fourth quarter, it levels off just a little. But still don't have any seasonal data to backup any of what I've said. It's just my gut feeling. But as we get bigger we will be able to predict that a lot easier.

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Kevin Darryl Dede, Rodman & Renshaw Research - Research Analyst [9]

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Okay, to your point though, Steve, have you seen some acceleration in April and May versus, say January, February, March?

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Steven G. Mihaylo, Crexendo, Inc. - Chairman and CEO [10]

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Well, we actually saw a good acceleration in January, February and March as compared to October, November and December. And to answer your question, some of the salespeople we just put on have actually produced some deals which is very, very unusual for rookies. But most of them do have experience and they bring good leads with them. So we're encouraged by that.

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Kevin Darryl Dede, Rodman & Renshaw Research - Research Analyst [11]

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Okay, Doug, you've talked to some of the new features that you're adding to your phones. Could you just review the new phone introduction cycle? Isn't that something that sort of happens on an annual basis or could you just speak to that a little bit?

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Douglas Walter Gaylor, Crexendo, Inc. - President and COO [12]

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Yes, great question. So we are very different from our competition in that we work on an agile software release program, which means that we're coming out with new software enhancements to our platform about every 6 to 8 weeks. That means we're continually enhancing our offering every 6 to 8 weeks for all of our existing and future customers. Our phones themselves basically do what the platform tells it to do, so we don't necessarily release new phones, we release new capabilities for the phones. So our phone models that we have today have been out now for roughly about a year and are extremely well-received out in the field. But those phones only do what the applications and software of the platform tell it to do. And we continue to enhance those capabilities by adding new features and new capabilities. As I mentioned on some of the feature releases that we've got coming with in the current quarter and the previous quarter, features like text messaging to the desktop. Those are features that we don't have today but will be released within this quarter. So any of our existing customers that are with us today will have the capability to easily add those capabilities to their platform.

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Kevin Darryl Dede, Rodman & Renshaw Research - Research Analyst [13]

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Okay, can you, Doug, just speak a little bit to the business model associated with that? Are these features that you will require additional charges for or something that will just be bundled in a service package that your customers already have?

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Douglas Walter Gaylor, Crexendo, Inc. - President and COO [14]

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Yes. Good question, Kevin. The high majority of the features that we come out with when we come out with our software enhancements and releases are made available at no additional cost to our end-user customers. There are, on occasions, certain features that we release that do have a cost associated with them. For example, last quarter we released ACD call back into queue. You may run into this when you call into a call center and they say "Hey, we're real busy right now. You're the fifth caller in line. If you like we can call you back when your place comes up and you won't lose your place in line". That's a great feature. It's a very expensive feature with our competitor platforms out there, if they have it at all. Many of our competitor platforms don't even offer that capability. We engineered and designed that capability into our solution and we offer that as a very minor cost upgrade to a customer that has an existing call center. Other features like just standard enhancements are made available at no cost. But I would say the high majority are no-cost additions. And every now and then we come out with features that are very specific in use and do have a cost associated with them. But the costs are always very minimal.

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Kevin Darryl Dede, Rodman & Renshaw Research - Research Analyst [15]

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Steve just a couple more quick questions if you'll let me.

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Steven G. Mihaylo, Crexendo, Inc. - Chairman and CEO [16]

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Absolutely.

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Kevin Darryl Dede, Rodman & Renshaw Research - Research Analyst [17]

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Could you talk to the web services side of things just a little bit? How are you managing that? I know it's not getting much of your management emphasis, but I'm just kind of wondering what your philosophy is and how you think we should look at that going forward this year and next?

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Steven G. Mihaylo, Crexendo, Inc. - Chairman and CEO [18]

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Well we've looked at actually selling the business and we concluded that we can get more for it by just milking the cow if you will. It's going to be to the point where it will be totally irrelevant, as far as materiality is concerned, here in another few quarters. But right now, it runs about -- what about 275 a quarter?

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Douglas Walter Gaylor, Crexendo, Inc. - President and COO [19]

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283.

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Steven G. Mihaylo, Crexendo, Inc. - Chairman and CEO [20]

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Yes, and it's pretty well leveling off. It was decreasing as you can see. First quarter versus the first quarter last year, it declined by 29%. But going forward it will probably decline by 10% or 15% and that's going to be immaterial. One other thing I would like to add about what Doug said is most of our improvements, and features, and functions and benefits, that sort of thing, are done to our system, our platform. So the phones are practically never obsolete. We do have features that are added from time to time in the phone, but it's all done with firmware. So that's a huge advantage that we have versus some of our competition. And when I say I'm proud of our people, I really am proud of the way they architected the system the way they're able to push out improvements every 6 to 8 weeks, so we're pretty excited about that. And some of the things that Doug talked about are things that actually help us win deals. Our competition is pretty static when it comes to doing these sorts of things for their prospects and customers. If we tell a customer we can have it done in 6, 8, 10 weeks, we get it done in 6, 8, 10 weeks and we get the deal. So we're seeing more of that as we go forward.

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Kevin Darryl Dede, Rodman & Renshaw Research - Research Analyst [21]

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Okay, last one is really for Ron. Could you speak a little bit to the $252,000 in sales and the long-term investments that you show in the cash flow statement?

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Ronald Vincent, Crexendo, Inc. - CFO [22]

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Sure. Yes, we had a requirement from our Merchant services with Wells Fargo to have a CD as security for the Merchant account. That was due from the legacy business, stores online that resulted in write-offs, higher than the thresholds they like. It's been 8 to 10 years, since we had the high write-offs so we approached the bank to relieve those restrictions and we were granted that release. So we were able to sell that CD.

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Kevin Darryl Dede, Rodman & Renshaw Research - Research Analyst [23]

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Right, right. And that helped go to the cash position. What are your plans on maintaining your cash balance as you -- as the Telecom business continues to burn it a little bit?

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Ronald Vincent, Crexendo, Inc. - CFO [24]

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We continue to focus on the cash balance on a daily basis as in the past quarter, because it was always going down so we put a lot of emphasis on managing that cash balance on a daily basis. Whereas we start to see it grow this quarter, and in future quarters, we plan to have the same diligence in managing every dollar we spent to ensure that we're spending the right money at the right time, to ensure that we have a very positive balance sheet.

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Steven G. Mihaylo, Crexendo, Inc. - Chairman and CEO [25]

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You know, Kevin. Just to emphasize that everyone on the management team and all of the employees are very, very focused. Just a few additional comments by moving that $252,000 from long-term assets up to current assets, it improved our current ratio substantially. Even though we're small, we have -- everything has been done to really position us for rapid growth in the future. And I'm just really excited about where we're going and I'm excited about our people and I want to thank all of our long-term investors for hanging in there with us. Thank you.

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Operator [26]

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(Operator Instructions)

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Steven G. Mihaylo, Crexendo, Inc. - Chairman and CEO [27]

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Well, Kevin it looks like there are no more questions and thank you, Kevin Dede for asking some pretty good questions and it allowed us to get more of our story out. With that, I'm going to conclude our first quarter 2017 earnings call and we look forward to reporting the second quarter in about 3 months from now. Thank you, everyone.

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Operator [28]

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This does conclude today's conference. Thank you for your participation.