Crexendo: Taking Market Share from the Two Biggest UCaaS Platforms

$CXDO Analyst Report

I’ll note that this is a little more formal (aka dry) and to the point than my usual writeups. It’s because I’m using this writeup for some applications. Hope you enjoy anyway!

Executive Summary

Crexendo ($CXDO) has a dominant position in UCaaS with a long growth runway, high quality revenue, expanding margins, heavily invested management, a simple capital structure, a stellar balance sheet and an M&A flywheel. I envision the share price more than tripling within three years, based on a forward PE multiple of 25x. The downside appears minimal due to business quality and industry dynamics, with risks largely limiting upside rather than risking capital.

Business Overview

Crexendo provides enterprises with Unified Communications as a Service (UCaaS), a cloud-based delivery model that integrates various communication and collaboration tools (e.g., voice and video calling, messaging, email, etc.) into a single platform accessible from any internet-enabled device. It sells its UCaaS platform directly to enterprises and licenses it to other service providers.

Competitors Leaving the Market

Crexendo is the third largest UCaaS platform provider, behind Microsoft and Cisco who have 3-4 times the licensee count each. To enter the space, Cisco acquired BroadSoft in 2018, and Microsoft followed suit with MetaSwitch in 2020.

Revenues from these businesses are negligible for their parent companies, and the products are no longer viewed as ‘strategic.’ Microsoft is sunsetting MetaSwitch, providing only partial support until 2030. Cisco is focusing on Webex, raising concerns among BroadSoft licensees about potential channel conflicts and reduced support.

Crexendo has gained a dozen Cisco and Microsoft licensees in the past year, and this trend is likely to accelerate. A recent webinar for MetaSwitch licensees attracted 180 potential customers, many of whom were dissatisfied with their current service and discussed switching providers to NetSapiens (CXDO’s licensee-facing platform) .

Clear Competitive Edge is Strengthening

User Satisfaction: Crexendo’s platform is ranked #1 in 18 categories on G2.com, scoring 4.9 stars overall. Qualitative feedback such as the following further highlights NetSapiens' superiority:

Whenever we would lose a deal, there was a good chance that there was a NetSapiens under the hood of the winner. We got tired of losing those deals.

Retention: NetSapiens' monthly churn for licensees is 0.2%. I consider 3% reasonable; Zoom Workplace is at 2.9%.

Pricing: Adopting the NetSapiens platform can save licensees a substantial 40% in costs through a unique pricing model that charges users per session instead of per seat, as is the industry standard practice.

Growth: Frost & Sullivan have named Crexendo the fastest-growing UCaaS platform for the past few years. Crexendo has tripled its user base since the NetSapiens acquisition in March 2021, reaching 5 million users this August.

Growth Runway and International Expansion

Conservative UCaaS growth rates are at ~10% CAGR for the U.S. and 15-20% internationally over the next 10 years. This strong international growth is fuelled by lower penetration, at around 40% compared to 60% in the US.

Crexendo’s international growth is at 74% YoY; they recently announced new clients in Europe, MENA and APAC.

Expanding Margins

Gross margins for the licensee business have reached 72%, up from ~50% in Q2 2021; margins should expand further.

Management anticipates several substantial operational savings over the next couple of years: $1m/year from retiring their legacy platform (they currently support two platforms) during 1Q2025; $1m/year from transferring data centre workloads to Oracle’s cloud (OCI), expected to occur in 2026; and real estate savings of $120k annually should begin from this quarter.

Simple M&A Opportunities

Crexendo aims to acquire up to two companies annually, focusing on its 230 licensees, typically with ~$10m revenues.

Acquisitions should be accretive within 1-2 quarters, with first-year FCF margins around 10%. Assuming 10% growth and removing duplicate operating costs, FCF margins could exceed 20% in four years, offering a four-year payback period.

Stellar Balance Sheet & Simple Capital Structure

Crexendo could make its next acquisition in cash. It has $15.5m in cash, negligible debt, and a current ratio of over two.

Crexendo has over $45 million in net operating losses (NOLs) that can offset federal and state taxes. While this asset isn't reflected on the balance sheet, I expect it will be utilised as the company becomes more profitable.

26.7m shares outstanding; no preferred stock or warrants. Crexendo reinvests for growth rather than paying a dividend.

Strong Management

Management is conservative, aiming for profitable growth. They have reliably delivered on goals since I first knew the team a year ago.

Insider ownership is 56%, with ten directors or board members owning shares worth over $500k. The largest shareholder is Steve Mihaylo, former CEO between 2008 and 2023, who owns 42% of the company and is now retired.

Key Risks (low likelihood but substantial consequences)

Microsoft and Cisco could decide not to leave the market and begin heavily investing to win back customers.

A cybersecurity failure or extended product malfunction could damage the company's reputation.

M&A risk, including overpaying for assets, poor integration, etc, could derail the stability and growth of the company.

Valuation & Model Commentary

Stock covered by four analysts, all with buy recommendations; an average price target of $6.50, implying a 25x forward P/E multiple. Analysts underestimate operating leverage and earnings growth, estimating 8%, whereas I expect 30%+.

The DCF model indicates an implied share price of $7.42, suggesting a 27% undervaluation. The stock has been volatile in the past year, giving a beta of 1.15, inflating WACC and reducing intrinsic value. I expect the beta to decrease with improved performance. The model also conservatively excludes M&A, which could significantly boost cash inflows.

Non-GAAP EPS could reach $0.90 by 2028; a 25x forward PE ratio implies a $22.50 share price by 2027 (300% return). Given its market dominance, recurring revenues and M&A opportunities, I expect a forward PE ratio between 20-30x.

In October 2023, Crexendo’s competitor OOMA acquired 2600HZ for 5x revenue. 2600HZ had only 500k users and falling revenues. Applying a 5x multiple gives a fair value for Crexendo shares of $11.

Author’s Disclosure: I have a beneficial long position in the shares of CXDO either through stock ownership, options, or other derivatives. I wrote this post myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. I am not a licensed securities dealer, broker or US investment adviser or investment bank.

Breakout Investors’ Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Breakout Investors as a whole. Breakout Investors is not a licensed securities dealer, broker or US investment adviser or investment bank.