Crexendo Inc

NASDAQ:CXDO

Earnings Call Analysis

Crexendo Posts 13% Revenue Growth and Expands User Base

Crexendo reported a strong third quarter for 2024, achieving a 13% year-over-year revenue increase to $15.6 million, driven by 25% growth in its Software Solutions segment. The company maintained GAAP profitability for the fifth consecutive quarter, with a GAAP net income of $148,000. With over 5 million users on its platform, growth is fueled by migrations from competitors like Microsoft. Looking ahead, Crexendo anticipates continued double-digit organic growth, and its backlog has risen 22% from the prior year to $77.4 million, indicating robust future revenue potential.

Strong Growth Despite Challenges

Crexendo reported a robust performance for Q3 2024, showcasing a consolidated revenue increase of 13% year-over-year, reaching $15.6 million. This growth was notably powered by a remarkable 25% uptick in their software division, which confirms the company's strong foothold in the cloud communication market. The year-to-date numbers also indicate a positive trend, far exceeding both internal and external expectations.

Profitability and Cash Flow

The company has successfully maintained its GAAP profitability for the fifth consecutive quarter, with a reported net income of $148,000, translating to a breakeven performance on a diluted basis. Their non-GAAP net income stood at $1.7 million. Importantly, cash flow from operating activities for the first nine months rose to $4.1 million, a significant increase from $887,000 for the same period last year. This demonstrates Crexendo's ability to generate cash, which is crucial for future investments and growth.

Focus on Software Solutions and Expansion

Crexendo is continuing its trajectory toward growth in the software solutions segment, achieving a year-to-date organic growth rate of 28%. The customer base has surpassed 5 million users, with over 100,000 new users being added monthly. This ongoing success is attributed in part to competitive dynamics, as they are actively attracting customers migrating from larger competitors like Cisco and Microsoft. This strategic positioning presents a solid opportunity for future customer acquisition.

Investment in Future Growth

The management emphasized a commitment to reinvest in the business to drive future growth. This includes enhancements in customer support and engineering, as well as substantial investments in infrastructure, particularly through Oracle Cloud Infrastructure (OCI). The executives noted that the capability to deploy cloud solutions rapidly enhances their competitive edge, especially in international markets like Europe and Africa.

Continued Strong Backlog and Future Expectations

Crexendo's telecom backlog grew by 22% year-over-year, now totaling $77.4 million, signifying strong future revenues. The backlog for 2025 is already over $29 million, indicating significant demand for their services. The leadership expressed confidence in achieving double-digit organic growth moving forward, underscoring a positive outlook for the upcoming quarters.

Addressing Margin Pressures

Despite the positive overall performance, Crexendo acknowledged challenges in maintaining margins, particularly within their product revenue segment, which saw a decrease in gross margins from 45% to 40%. The focus remains on improving operational efficiencies and managing costs effectively to sustain profitability.

Enhancements and Innovations

The recent user group meeting sparked enthusiasm around new software updates and the integration of AI solutions. With over 50 vendors participating in the meeting, Crexendo signaled its commitment to innovation and expanding its platform's capabilities, further strengthening its value proposition to customers.

Conclusion: A Bright Future Ahead

Crexendo's leadership team is optimistic about the future, citing their ability to generate strong cash flow, maintain profitability, and ongoing investments in the technology stack as crucial elements for driving growth. With a clear strategy for addressing competitive pressures and an expanding market presence, the company is well-positioned to sustain its upward trajectory as it moves into 2025.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to the Crexendo Third Quarter 2024 Earnings Call. [Operator Instructions] I would now like to turn the floor over to CEO and Chairman, Jeff Korn. The floor is yours.

[Jeffrey Korn, executive]

Thank you, Kelly, and good afternoon, everyone. Welcome to the Crexendo Q3 2024 Conference Call. I am, as Kelly just told you, 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; Jon Britton, our CRO; and Anand Buch, our CSO. In a moment, Jon will read our safe harbor statement. After that, I will give some brief comments on our performance for Q3. Ron will then provide more detail on the numbers before handing over the call to Doug to provide a business and sales update. After that, we will open the call up to questions. Jon, would you please read the safe harbor?

[Jon Brinton, executive]

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 these 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, 2023, 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?

[Jeffrey Korn, executive]

Thank you, Jon. I am pleased and excited to report that Crexendo again delivered exceptionally strong financial results for the third quarter of 2024. This reflects our commitment to providing premier cloud communication software and services and continuing our organic growth trajectory.



Consolidated revenue grew 13% year-over-year, driven by a remarkable 25% growth in our software division. Our year-to-date numbers are equally strong, well ahead of internal and external expectations, and I'm excited about the momentum we are seeing. This performance reflects the dedication of our entire team to deliver the best cloud communication software and customer service in the industry. Our scalable software platform and relentless focus on meeting the rising demand for comprehensive cloud solutions continues to drive our growth.



I am also proud to mention that we maintained our streak of GAAP profitability now for the 5th consecutive quarter and non-GAAP net income for the 24th consecutive quarter. G2 continues to rank us #1 in 18 customer satisfaction categories in G2 Spring 2024 reports, marking the 5th consecutive quarter that Crexendo has led in multiple satisfaction categories. This is a very competitive advantage to us as we tend to rank much higher than our competitors. And our customers know that support is exceptionally important to us, and they are putting our resources behind the support so we are there when our customers need us. Our focus on customer service should be a strong growth driver now and into the future.



This quarter's financial results include revenues of $15.6 million, up 13% year-over-year. GAAP profitability of $1.2 million and non-GAAP net income of $5.7 million for the 9 months ended September 30, 2024, or $0.22 basic common share reflects our focus on regularly delivering profitable growth and creating value for our shareholders.



As we look ahead, we continue to reinvest in Crexendo to drive our future growth and efficiency. We've increased our headcount in engineering, service and support. We've made substantial investments in Oracle Cloud Infrastructure, OCI, which is already providing us with a significant competitive advantage, particularly in Europe where we are seeing robust growth. Thanks to our partnership with OCI, we have the flexibility to launch instances in days, not months, and can deploy servers in any country as needed and ensure that our security protocols are current and in full compliance with local standards. This capability allows us to be highly responsive to customer demand and enhances our competitive edge around the world where we -- and in Europe, where we anticipate substantial growth in the near future.



We are continuing to work on completing the migration of Crexendo Classic customers to our cutting-edge VIP system, while at the same time migrating all of our hosted customers to OCI. When completed, we expect to close our 6 data centers, which will result in substantial cost savings. We will also be able to redeploy employees whose job function is to maintain our classic system and the data centers and move them into other parts of our business, which will mean additional savings and less required new hires. To support this progress, we're implementing an advanced accounting system to streamline our financial closings and provide real-time insights, allowing for agile, data-driven business decisions.



We are now in the position to make the necessary investments in our future, but it is my intention to continue to do that while remaining profitable. While I am excited of our continued streak of GAAP profitability, once we start making new acquisitions, that may change as intangible costs associated with acquisitions will make continued GAAP profitability difficult. With that said, however, I believe we can and will find acquisitions that are accretive within a quarter or 2, and they will add to EBITDA, even if there are intangible costs which need to be written down.



Now with all of the positive momentum I discussed, there are things we are still working on. Our margins need to be -- to remain higher, and we are working on that. We always work on increasing sales, and that is an ongoing process. And we regularly tweak responsibilities and direction to make sure we are getting the most operational efficiencies and the best use of our tremendous talent. We recently hosted our most successful user group meeting, or what we call our UGM, where we presented the latest applications from our second Codefest, many of which leverage AI. These applications will soon be available to our licensees through our platform, opening additional revenue-sharing opportunities to us and enterprise-level applications that will be available to all our licensees.



It always amazes me the combined energy of our team and our licensees. Together, the energy is unstoppable and an unbeatable combination. The excitement of our licensees as to the progress we have made and the support of our future initiatives was off the charts at the UGM. Last year, my first time as CEO at the UGM was marked by people telling me what we should do better, asking for improvements and investments. This year, it was just thanks and congratulations. And I know this change in attitude is due to the hard work and the dedication of the entire Crexendo team, many of whom are here with me and many more who report to the people who are in the room with me. I'm very, very proud of the work our team has done and how they've pulled together over the past 1.5 years since I've become CEO.



In that time, we've gone from burning $100,000 a month in cash to being substantially cash flow positive, GAAP positive and substantially increased our EBITDA. We've made necessary investments to keep us on the cutting edge, and now we are in a much stronger financial position and we are starting to fire on all cylinders. The team did the work, but I couldn't be more proud and pleased.



In the software telecom sector, we continue to benefit from the instability amongst our main competitors. Our strategic efforts to attract Cisco and Microsoft customers have been fruitful, highlighted by a recent webinar for concerned Microsoft users, which drew an impressive 180 attendees. Former Microsoft clients who have since transitioned to Crexendo shared their substantially positive experiences, underscoring the benefits of our solutions and positioning us well for continued growth.



The ongoing industry shift presents a substantial growth driver for us. Being the #3 platform provider puts us in a competitive landscape to -- working to our advantage as we continue to stay focused on delivering top tier telecom software and services. While other companies may be leveraging multi lines of business, Crexendo is laser focused on telecom solutions, and we excel in that space. Our team comes to work every day with a singular goal of making our platform the best in the industry, and we are confident that this focused dedication gives us a distinct edge.



In conclusion, I want to reiterate our expectation for double digit organic growth. I am confident in our ability to deliver outstanding results through the end of 2024 and into 2025. The future looks bright, and we could not be more excited. With that, I'll turn the call over to Ron, who will provide additional details and commentary on the numbers. Ron?

[Ron Vincent, executive]

Thank you, Jeff. Good afternoon, everyone. I'll go over our financial results for the third quarter.



Total revenue for the quarter increased 13% to $15.6 million compared to $13.9 million for the third quarter of the prior year. Service revenue for the quarter increased 6% to $8 million compared to $7.5 million for the third quarter of the prior year. Our Software Solutions revenue for the quarter increased 25% to $5.9 million compared to $4.7 million for the third quarter of the prior year. Product revenues for the quarter increased 9% to $1.8 million compared to $1.7 million.



Consolidated gross margins for the quarter were 61%, consistent with 61% for the third quarter of the prior year. Software Solutions gross margins for the quarter were 71%, consistent with 71% for the third quarter of the prior year. Our Telecom Services segment gross margins of 55% were consistent with 55% for the third quarter of the prior year. Service revenue margins were 58%, consistent with 58% for the third quarter of the prior year. And our Product margins decreased to 40% compared to 45% in the third quarter of the prior year.



Operating expenses for the quarter increased 15% to $15.5 million compared to $13.5 million for the third quarter of the prior year. And that's due to the investment in our employees, added headcount, additional investment in Oracle Cloud Infrastructure and our investment in our accounting system implementation.



Net income of $148,000 for the quarter, or $0.01 per basic common share and breakeven per diluted common share, that's compared to net income of $1.7 million, or $0.07 per basic common share and $0.06 per diluted common share for the third quarter of the prior year. And I'll highlight that during the third quarter of the prior year, we recognized a gain on the sale of our corporate office building of approximately $1.5 million. Excluding the gain, net income is only down $97,000, primarily related to the additional investment in headcount that I mentioned earlier.



Non-GAAP net income of $1.7 million for the quarter, or $0.06 per basic and diluted common share compared to a non-GAAP net income of $3.3 million, or $0.13 per basic common share and $0.12 per diluted common share for the third quarter of the prior year.



EBITDA for the quarter was $1 million as compared to $1.2 million for the third quarter of the prior year. And adjusted EBITDA came in at $1.7 million as compared to $2.1 million for the third quarter of the prior year.



Our cash and cash equivalents at September 30 was $15.5 million. That's compared to $10.3 million at December 31, 2023. Cash provided by operating activities for the 9-month period of $4.1 million. That's compared to $887,000 for the same period of the prior year. Cash provided by investing activities was nill for the 9-month period. That's compared to $3.8 million for the same period of the prior year. Cash provided by financing activities for the 9-month period of $1 million compared to cash used for investing activities of $2.3 million for the same period of the prior year. Now that's primarily related to $1.4 million in net cash received from stock option exercises, offset by $340,000 in note payable repayments.



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

[Doug Gaylor, executive]

Thanks, Ron. Q3 was another strong quarter for Crexendo, and I'm very pleased with our results for the quarter and for the first 9 months of 2024. Our organic growth of 13% year-over-year in Q3 and 14% organic growth for the first 9 months of the year, along with our 5 consecutive GAAP profitable quarters are the direct result of our focus on growing the top line organically and managing the fundamentals of the business.



Our GAAP net income of $148,000 for the quarter, or $0.01 a share, and our non-GAAP net income of $1.7 million for the quarter, or $0.06 per share, highlight that we are executing on our business plans extremely well. We are reinvesting back into the business with recent hires and customer support, engineering and sales during the quarter so we can continue enhancing our product development and support, but do so profitably.



This was our 24th consecutive quarter with non-GAAP net income, and our results for the quarter continue to highlight our improvements in processes, procedures and sales as well as our success in managing costs and maximizing synergies from all of our business segments. These strong results also contributed to our strong positive cash flow for the quarter, which saw our cash position increase to $15.5 million, which is up 200% year-over-year and 13% from the prior quarter.



We continue to see strong organic growth in both segments of our business. What's particularly exciting is that our Software Solutions segment had another great quarter with 25% organic growth, and we have seen a 28% organic growth so far this year, year-to-date, in the Software Solutions segment. The 25% organic growth in our Software Solutions segment for the quarter helped propel us past the 5 million user mark on our platform that we announced during Q3, and we are averaging over 100,000 new users added to our platform monthly.



The rapid growth we are experiencing on our platform is a combination of our existing licensees continuing their strong growth using our platform for the foundation for their business, together with our success in adding new logos coming on board. Many of these new logos are leaving our 2 largest competitors, Cisco and Microsoft. We sold 8 new logos on our platform during the quarter and have seen a tremendous amount of interest from Microsoft Metaswitch licensees, as Jeff had mentioned, after Microsoft recently announced end of life of their Metaswitch MaX UC platform and has signaled a retreat from their platform business with recent cuts in their Metaswitch division. These moves by Microsoft have fueled many opportunities for Crexendo. And in fact, we have secured 4 Microsoft Metaswitch wins in the last 4 months and had an overwhelming turnout for a recent webinar highlighting the benefits of Metaswitch licensees moving to Crexendo.



Our Software Solutions segment also continues to see great success internationally as well. We recently had 2 press releases on major wins in Australia and just had our first win in Africa. The international opportunities where cloud communications currently has a much lower adoption rate than here in the U.S. have us very excited about our continued growth in that part of the business.



Our Crexendo licensees as well as our reseller agents continue to benefit from the rapid migration by small and midsized and enterprise-level businesses to the cloud. And in addition, affordable technology enhancements, many of them utilizing artificial intelligence, are generating more demand from the SMB market as our technology can help these new businesses do a lot more with a lot less.



Our Telecom Services segment, including product revenue, grew at 6% organically for the quarter. We continue to see strong demand for our offerings from our channel partners and saw an 8% growth rate in sales for the quarter over the prior year from our channel reseller partners. Our channel partners sell our services to their prospects and customers on a revenue share basis, and like the full service offering, they really truly like the full service offering we provide their customers. We continue to differentiate our telecom services offerings from our competitors by highlighting our #1 service rankings in 18 separate voice over IP service categories on the leading business software review website, G2.com.



Our telecom backlog continues to grow nicely, and it's now at $77.4 million, an increase of 22% from Q3 of 2023 and up 9% from last quarter. And as a reminder, our backlog number is the sum of the remaining contract values of our telecom services and software solutions customers that will be recognized on a sliding scale over the next 60 months. And this number is a strong indicator of our future success. And in fact, the number for 2025 is now sitting at north of $29 million in backlog already queued up for next year.



Gross margins remained strong in our Software Solutions segment at 71%, and our Telecom Services gross margin was consistent at 58% year-over-year. Telecom Services gross margins continue to be affected by lower margins from our Allegiant acquisition that has lower margins on some of their MSP services.



We also continue to enhance our offerings with software updates and additions to our platform, and that helps us expand our product offerings. We announced our version 44.2 software release at our annual user group meeting in Nashville last month and had tremendous excitement and energy from our record attendance over the new features and capabilities being released on the platform. Our user group meeting also featured new AI offerings being developed by many of our licensees and vendors that will make AI solutions readily available to any size business at affordable prices. And that's because of our open API 2.0 integration that allows for hundreds of third-party developers to build solutions that easily integrate onto our platform.



Our numbers for the quarter and for the first 9 months of 2024 have been really strong, and we continue to see a lot of momentum and demand for products -- for our products and our services. We continue to execute well on our business plan for organic growth, increasing our margins, positive cash flow and managing expenses. Eclipsing 5 million end users on our platform and expecting to reach 6 million users in early 2025 highlights that there is still great opportunity for growth, and I couldn't be more excited about our direction and our ability to continue to deliver the best solutions for our customers and the best returns for our shareholders.



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

[Jeffrey Korn, executive]

Thank you, Doug. I actually don't have any comments at this time. So Kelly, I'd like to open the call to questions.

[Operator]

[Operator Instructions] Your first question is coming from Mike Latimore with Northland Capital Markets.

[Mike Latimore, analyst]

So the quarter was great. Backlog growth looked really, really nice. Interesting on the new logo. You said 8 new logos, I believe. That was double sequentially, I believe. How did the -- how are expansions? How many number of expansions did you have in the quarter?

[Jeffrey Korn, executive]

Great question, Mike. So 8 new logos for the quarter was significant for us. We, on top of that, had 5 expansions from our existing licensees. So overall on the software solutions side, again, just another stellar quarter. Nice to see all the new logos coming on board, but also nice that we had 5 strong upgrades from our existing partners as well.

[Mike Latimore, analyst]

All right. Great. And then I know you've been working on some tools to help managed service providers accelerate their migration off of Microsoft and BroadSoft to you guys. Can you kind of give a status on those tools and the benefits that you see?

[Jeffrey Korn, executive]

Mike, I'm going to let Anand give you some details on that. Go ahead.

[Anand Buch, executive]

Sure. Mike, I think the progress continues. We've actually added a partner who actually does significant kind of work in terms of automating those migrations. It's two-fold, right, for folks that are moving over, some that are doing cap and grows and some that want to accelerate even further. And then there's probably a pipeline of a couple more partners as well that are in that space that are helping facilitate the migration off of some of these other platforms. So overall, it's going quite well.

[Mike Latimore, analyst]

Excellent. Excellent. And then just last on the kind of the application ecosystem. It was interesting to see all the companies at your users conference. Lots of interesting new applications there. Can you just elaborate a little bit on the progress over the last year and sort of building up that portfolio? And then how do you think about the potential financial impact here in terms of win rates and upsells and revenue share?

[Anand Buch, executive]

Sure, sure, sure. I think a couple of things. Obviously, I won't touch on the revenue because I don't think we go with guidance on stuff like that because some of the stuff is seeds that we're planting. The applications that you see across the board are anywhere from automation applications to customer experience-related chatbots that are being built on the platform. AI usage of customized prompts for unified communications, and then also verticalized applications that are going into the different vertical markets that our service providers go after.



In terms of the ecosystem itself, we probably had 50-plus vendors at our user group meeting. We look to probably continue to grow that. We have 10 to 15 that are being onboarded at the moment with respect to revenue shares and things of that nature that will add to the revenue line as we go forward. But the applications are across the board. And step one is just the retention that we get and the stickiness and the differentiation that our providers get when they're competing against the biggest players in the marketplace, and we're seeing a lot of success there.

[Mike Latimore, analyst]

Best of luck for rest of year.

[Operator]

Your next question is coming from Eric Martinuzzi with Lake Street.

[Eric Martinuzzi, analyst]

Congrats on the solid quarter there. Had a question regarding the -- just kind of the macro environment here. The UCaaS revenue, the services revenue was up positive. It was up 6%. But I saw that it was essentially flat sequentially. I'm just wondering, is there a macro issue at play here? Or was there some unique circumstances on that services revenue sequentially in Q3?

[Ron Vincent, executive]

Not a macro issue. We had a little bit of an escalation in churn during the quarter from one national account, but that impacted revenue a little bit. And then overall, the makeup between service versus product, and in the prior quarter, we had strong product. And so just from quarter-to-quarter, the top line on telecom services, whether or not it's coming from our service line item or our product line item, that mix changes from quarter-to-quarter. So we're still seeing strong sales channel, big funnel, and everything is moving in the right direction.

[Eric Martinuzzi, analyst]

Okay. And I'm not looking for a specific number in Q4, but would we expect the services revenue to be up sequentially in Q4?

[Ron Vincent, executive]

We don't give guidance, but yes, it's similar to current quarter or sequential growth.

[Eric Martinuzzi, analyst]

Okay. All right. And then you talked about some of the investments that you've made in headcount. I did see the operating expenses there at around $15.5 million. The GAAP operating expenses at $15.5 million. That includes the cost of service and cost of software solutions revenue as well as the cost of product. But as far as the expectation, are we at kind of a run rate maybe? Let's just talk kind of SG&A and R&D. Are those at kind of a run rate, or is there a ramp that we should kind of bump that up?

[Jeffrey Korn, executive]

Eric, on a macro basis, there will be the continued expense on both OCI and the Oracle accounting system. There will be some additional headcount. I'm trying to defer additional headcount as much as we can, considering the fact I discussed that once we're on OCI, we will have a number of employees whose functions we can move. And so we can -- we're trying to defer hiring as long as we can to move those people into the open positions we have, but we will make the necessary investments.

[Eric Martinuzzi, analyst]

Got it. And then lastly, you touched on the competitive landscape. And I was just curious, from the NetSapiens user group meeting, just the key takeaways. Do you feel like versus a year ago that that -- I guess the pipeline of people interested, or maybe even just showing up at the user group meeting, were there new faces there? Or was it kind of more enthusiastic response from people who've come in the past years?

[Jeffrey Korn, executive]

Eric, it was both. We had the largest UGM we ever had. We had new faces, we had new logos, and we had more people coming from people who'd been there before. And as I said, the difference between last year's UGM and this year's UGM was just amazing.

[Jon Brinton, executive]

And I'll just add a little bit to it, Eric. About over 30% of our attendees were first-time attendees. One thing about that conference, that you must be a licensee to attend. So it's not a prospect event. But from a community and enthusiasm level, like Jeff said, we had records across the board on every metric, tons of good first-time attendees and just excellent feedback overall.



And I think what we get the most out of that user group meeting, Eric, is that the excitement in the room is because everybody else is seeing that same level of excitement in their business and seeing increases in sales and opportunities. And so it really is an area for us to share best practices. And so when they get with the other members of the community and they talk about what's working in Florida or what's working in Idaho or what's working in Texas, they can share best practices with all the other vendors and all the other licensees and then they go back and implement that. And when their sales pick up, our sales pick up. And we did have attendees from 8 countries and 4 continents this year. So it is becoming more of an international event as well.

[Jeffrey Korn, executive]

Eric, last year, I felt like I had to hide. This year, I was thrilled to go talk to anybody who wanted to talk to me.

[Eric Martinuzzi, analyst]

Understand. It's nice to see that reversal.

[Operator]

Your next question is coming from Ryan Koontz with Needham & Company.

[Ryan Koontz, analyst]

Great quarter. With regards to the expense of the migration and kind of double paying for private cloud and public cloud migration, can you quantify the gross margin headwind on COGS that you're feeling this year or this quarter?

[Jeffrey Korn, executive]

Ron, do you want to take a shot at that?

[Ron Vincent, executive]

Yes. So right now, we're in the process of continuing to migrate our legacy customer base to the VIP platform, powered by NetSapiens. Once we get that completed, which we expect to be completed at the end of Q1 of next year, then we'll be able to shut down data centers and start to see that cost savings, which we expect to be 1%, 1.5% of those costs of -- sorry. As far as quantifying that as a percent of revenue, I think we got about 1%, 1.5% savings.

[Ryan Koontz, analyst]

Okay. Great. So about 100, 150 bps. That's great. And with regards to the great results on the Software Solutions business, can you speak a little bit about where you're seeing the most near-term traction there? And remind me of your go-to-market approach. I assume that's mostly U.S. rural you're seeing the most traction. Or where would that be coming from in terms of markets?

[Jon Brinton, executive]

Yes. We did have -- no, we've had good international growth. We had 3 new licensees internationally. And -- but we are seeing very -- we always have a community of vendors that we take partners from. Nobody starts their first UCaaS offer with our platform. But we did see excellent growth in partners converting from the Metaswitch partner community last quarter, and we're continuing to see that. So of that new logo growth, the single largest chunk of them were customers that have a Metaswitch platform and they're looking for a new home and a new long-term strategy for their business. But overall, we have several that we have share donation from. We have good geographic coverage in that also in our international business. Doug mentioned we had our first licensee actually in Continental Africa last quarter. So we're continuing to see good growth and expansion.

[Ryan Koontz, analyst]

Got it. Great. And remind me, these are private label partners that are bringing solutions to market to go after Metaswitch instances?

[Jon Brinton, executive]

These are people that are licensing our software and either having us host it for them or hosting it in their own infrastructure. So in many cases, they're telecommunications carriers, MSPs or others. But they take the software. Think of the NVIDIA inside in a computer stack. They take our software, deploy it in their infrastructure, put their own branding on it, have a billing engine behind it or have us host it for them. So we're kind of the inside technology that's operating their UCaaS offering.

[Ryan Koontz, analyst]

Sure. And these customers are your channel to the end users themselves, the business.

[Jon Brinton, executive]

Yes. They own the relationships with the end users.

[Ryan Koontz, analyst]

Perfect. Got it. Like a traditional operator. Great. And then on the service revenue side, any changes in the competitive landscape there? I mean we've seen -- it feels like we've seen the U.S. market slow a bit here, and team's certainly strong at the high end. Can you kind of touch on the competitive landscape? And it sounds like you're making some inroads internationally. Maybe touch on it from that perspective, both U.S. and international.

[Doug Gaylor, executive]

Yes. On the telecom services, we only do telecom services on the U.S. side. So we don't do direct retail offerings internationally. So just on the wholesale side is the international offering. So on the direct side, very competitive out there. We continue to see competition from RingCentral and 8x8 and Vonage and then all of the licensees that are using BroadSoft and Metaswitch and even sometimes the Crexendo platform. But overall, I mean our biggest competitors out there, we win way more often than we lose to them because of our offering and our customer service and support. We highlighted the #1 rankings in 18 different categories on G2.com. That's significant. And most of our bigger competitors really are way down the list on the rankings on that.



So a lot of -- 2 years ago, Ryan, 85%, 90% of our customers were coming from legacy. Today, it's probably maybe about 60% coming from legacy and 40% coming from other cloud providers. So as other cloud providers continue to struggle with good service and support, that creates opportunity for us. So the competitive landscape right now on both the wholesale and retail side are very favorable for us because we've got a lot of unhappy customers on both sides of the equation that are looking for alternatives. And when they're looking for alternatives, Crexendo is the best solution for them.

[Operator]

Your next question is coming from [ Matthew Mass ] with B. Riley.

[Unknown Analyst]

This is Matthew filling in for Josh Nichols. So yes, I just had one quick question. So how does the company think about balancing direct sales versus leveraging the reseller channel?

[Jeffrey Korn, executive]

I'll let Jon answer that.

[Jon Brinton, executive]

Yes, Matthew. We think of what we do through our direct sales, and the Crexendo VIP brand is kind of the company store where we really interact with end customers and are able to sell them directly, get great customer feedback. But we're looking -- we -- our plan is to have balanced growth across both businesses and obviously take advantage of driving our Software Solutions business wherever possible because of its high margin profile, our ability to deploy that to service providers. This opportunity we've had in the Metaswitch community specifically is just we're investing in that significantly. It's an area where we can grow at a higher rate than the market. So from that perspective, I would say we have a balanced approach. We measure results tightly across every one of the go-to-markets within our business. But we're investing heavily in growing our Software Solutions sales because it does have ultimately the best margin profile and the highest software value for us overall.

[Operator]

Your next question is coming from [ John McCulligan ] with Breakout Investments.

[Sam McColgan, analyst]

It's actually Sam here, Sam McColgan from Breakout Investors. Yes, I had a lot of my questions answered already, but perhaps just one last one is I was wondering, you had a webinar that was aimed at Metaswitch customers who are kind of going through their own transitions. I wondered if you can kind of provide any qualitative feedback you got through that session or after that session or any outcomes or things that happened thereafter.

[Jeffrey Korn, executive]

As I mentioned, we had 180 people on the webinar. A number of customers who've migrated over to us who told everybody what a great job we have done and what impressive service we provide. There was a lot of excitement there. We have some of those in our queue to try and sell, and we have almost all of them we're working with. A lot of these are enterprise-level solutions, and those sales take a long time as do platform sales. But we are highly excited about the possibility and the probability, I would say, of getting a number of them onto the NetSapiens platform. But I'll let Jon give you a little more detail.

[Jon Brinton, executive]

Yes. And I will just fill in that on that webinar, 3 of the panelists that we had are actually Metaswitch partners who have deployed the NetSapiens platform now as the direction of the future for their platform. And we continue to add more. We've added more partners from that community in this quarter. And our SQL webinar coming up is the Metaswitch migration playbook on November 19 where we'll have a couple more partners who have legacy Metaswitch experience and a couple -- Anand mentioned our ecosystem, a couple vendors in our ecosystem that help those folks to migrate to our technology. So we're going to continue to drive that. You'll see more releases and information about partners who have come over to us from that specific community. So this is -- we're going to drive this theme hard, like I said before, because it's an underserved community that are looking for alternatives, and we're having great success in becoming the alternative that they choose for the future.

[Sam McColgan, analyst]

Congratulations again on a great quarter.

[Operator]

Your next question is from John Roy with Water Tower Research.

[John Roy, analyst]

Doing quite good, actually. So there's been a lot of discussion about the uncertainty that Microsoft has created on the platform side. If you could take a step back and maybe give us an idea of how big do you think this opportunity could work out to be for you guys?

[Jeffrey Korn, executive]

Well, there's a number of ways to answer it. So let me say, I think the possibility is as large as Microsoft. Now obviously, we're not the only -- as long as Microsoft's platform. Obviously, we're not the only platform provider who is trying to get people to move, but I think we're the most advanced and in the best position to do so. Now understand, just because Microsoft end of life something doesn't mean it's end of service, so people don't immediately have to move from that date. But I am very, very excited by the number of people who are looking at us and considering us. Some are going to move and move all of their people immediately. Some are going to move under a cap and grow circumstance where they will continue to put new people on and slowly migrate the people onto the platform. And we will lose some of them. But the possibility and the probability of getting a large proportion of those I think is very high, and we all here are very excited about that. But I can have Jon give you some more detail.

[Jon Brinton, executive]

Yes. I would just say that opportunity is -- the audience that we're selling to, in many cases, are local exchange carriers or service providers that that market can have a very long sales cycle. But we're excited about the funnel we have, the opportunities. Another anecdote I would give you is one of the Metaswitch partners that recently came to us had actually been in our sales funnel from becoming a marketing qualified lead for 5 years when they actually ended up purchasing. Others have purchased in 3 to 6 months. So this is a very long-tail opportunity. There's components of the solution that go end of life in April of 2026. There's other components that go end of life in 2029. And we're just going to continue to work this and grow our share of that market.

[John Roy, analyst]

Great. Now kind of switching maybe directions a little bit. I really do appreciate that you eliminated the dividend so you can invest more in the company, and there's been a lot of talk of investments. Maybe if you could just wrap it all up for us. What are your biggest investments that you're going to be making over the next year, do you think?

[Jeffrey Korn, executive]

Well, thank you, John. Our biggest investments and I think the best use of our proceeds are three-fold. Obviously, we are spending money on OCI, which is going to be a huge driver for us going forward. As I mentioned before, I mean, especially as we're trying to migrate Cisco and Microsoft customers on to us, we can turn up an instance in a couple of days. So we can move as quickly as somebody wants to move. So that's a huge competitive advantage to us. So we will continue to invest in that. We're continuing to invest in the Oracle accounting system, which will funnel and enable us to grow as fast as we need to and have accounting keep up with what we're doing.



Third, we continue to look at acquisitions. As you probably are aware, when I first took over as CEO, I stopped looking at acquisitions because we needed to do a good job of completing the transformation of the company into one company and getting all of the efficiencies out of the organizations. Now while that's always an ongoing process because there's always more efficiencies you can get, we've gotten to the point where I think we're ready to begin in earnest to look at substantial acquisitions next year. So having the amount of cash we have is very valuable for doing that. I mean we used to look at certain opportunities, and we couldn't even get a seat at the table because they wanted to know how we were going to pay for it other than perhaps issuing cash. We now have sufficient cash that we can get a seat at any table to discuss an acquisition. So that's a very important thing for us to have and to continue to have.

[John Roy, analyst]

Great. Congrats on the quarter.

[Operator]

[Operator Instructions] We have a question coming from Lori Vasquez with Crexendo.

[Unknown Executive]

No, I didn't have one. I'm sorry.

[Jeffrey Korn, executive]

That's okay. I wasn't going to let you ask it anyway, so it didn't really matter. But thank you.

[Operator]

There are no questions in queue at this time. I would now like to turn the floor back over to Jeff Korn for any closing remarks.

[Jeffrey Korn, executive]

Thank you, Kelly, and thank everybody for their attention and for listening to the call. I know many of you were up late last night watching financial results, so I appreciate you manage -- election results, excuse me, and I appreciate you taking the time to join us. We're very excited about this quarter, and we're very excited about Q4. We look forward to sharing that with you in March of next year and putting out press releases as is necessary. So thank you for your time and attention, and we will see you soon.

[Jon Brinton, executive]

Thank you, everybody. Bye.

[Operator]

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.