Good day, everyone, and welcome to the Crexendo Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the star and one on your touch-tone phone. You may withdraw yourself from the queue by pressing star and two. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Steve Mihaylo. Please go ahead.
Thank you, Todd. Good afternoon, everyone. I'm Steve Mihaylo, Chairman and CEO of Crexendo. I wanna welcome all of you to the Q3 Crexendo 2022 conference call. On the call with me today are Doug Gaylor, our President and COO, Ron Vincent, our CFO, Anand Buch, our CSO, and Jeff Korn, our General Counsel. Jon Brinton would normally be with us, but he was in Florida, and his return travel was understandably impacted by the weather. I'm also going to ask Jeff to read our safe harbor statement. After that, I will give a brief comments. Ron will give some detail on the numbers. Doug will provide business and sales update, and then we will open the call up to questions. Jeff, would you please read the safe harbor statement?
Yes, sir. 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 1995 provides a safe harbor for such forward-looking statements. All statements made in this conference call, other than statements of historical fact, are, in fact, forward-looking statements, and they may include statements such as believe, expect, anticipate, estimate, will, or other similar statements 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, 2021, and the Form 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 any other circumstances. I'd now like to turn the call back to Steve. Steve?
Thank you, Jeff. I'm very excited about the results this quarter. For the first time, we exceeded $9 million in revenue for the quarter. That's very compelling. I am convinced it is just the beginning of many milestones. We continue our string of non-GAAP profit and exceeded expectations by achieving non-GAAP net income of $713,000 or $0.03 per basic and diluted common share. All in all, very impressive. Secondly, I'm very pleased with the acquisition of Allegiant Technology. As part of the acquisition, we received a very valuable team that does remarkable work, and I want to emphasize that we're so happy they're part of our family. This is particularly exciting acquisition as Allegiant is part of the Crexendo licensee community, which internally we call our fishing pond.
Acquiring a licensee is important as it helps us to increase efficiencies, improve margins, and Allegiant is also a managed service provider, which enables us with those additional offerings to pursue and to win business that we previously could not compete for. We are very excited to have the team join us and add to the growth of Crexendo. We were able to acquire the company at a very competitive cost. Doug will describe that in more detail. We completed the acquisition without mortgaging our future with unsustainable debt, of which we are actually acutely aware that there are players in our industry who have put their growth on a credit card and now are facing the hard reality of spiraling debt and much higher interest rates. We have carefully avoided doing that.
The only debt we incurred was a note that I am sure will be paid out of existing earnings from the acquisition. We would not have closed the transaction if we were not fully convinced that it would be highly accretive and in the best interest of Crexendo, the Allegiant customers, and most importantly, the Crexendo shareholders. We will be working on integrating the employees, but all sides work together with one overriding goal, and that is to provide the best service in our industry to our customers and shareholders. We have consistently done what we said we would do. We will continue to improve the business. We will continue to improve our margins, and we will continue to run this company lean and effectively.
I have very high expectations for our future, and I am convinced that we will impress our customers, and more importantly, our shareholders, with steady and sustained results. With that, I will turn the call over to Ron. Ron?
Thank you, Steve. As Steve mentioned, we closed the acquisition of Allegiant on November first. Today, we filed the 8-K/A with the required pro forma financial statements, and we encourage you to take a look at those pro forma financial statements. I'll go over some highlights for the quarter. We had total revenue for 2022 third quarter increased 3% to $9.1 million, compared to $8.8 million for the third quarter of the prior year. Service revenue increased 3% to $4.5 million compared to $4.3 million. Our software solutions revenue increased 2% to $3.9 million, compared to $3.8 million.
Product revenue increased 8% to $760,000, compared to $701,000 for the third quarter of the prior year. Our gross margins, telecom service margins increased to 69%. Our software solutions margin 69%, and our product gross margins are 40%, for an overall gross margin of 67% for the quarter. Consolidated operating expenses for the quarter increased 10% to $9.7 million, compared to $8.8 million for the third quarter of the prior year.
The company reported a net loss of $696 thousand for the third quarter or $0.03 loss for basic and diluted common share, compared to a net loss of $125 thousand or $0.01 for basic and diluted common share for the third quarter of the prior year. Our non-GAAP net income, as Steve mentioned, is $713 thousand for the quarter. That's $0.03 per basic and diluted common share. Compared to non-GAAP net income of $800 thousand or $0.04 per basic common share, and $0.03 per diluted common share for the third quarter of the prior year. EBITDA for the quarter, $79 thousand. That's compared to $622 thousand for the third quarter of the prior year.
Our adjusted EBITDA for the third quarter increased to $938,000, compared to $1 million for the third quarter of the prior year. For the nine-month period, total revenue came in at $26.1 million. That's a 37% increase compared to $19.1 million for the same period of the prior year. Service revenue increased 5% to $13.4 million, compared to $12.8 million. Our software solutions revenue increased 124% to $10.7 million. That's compared to $4.8 million for the same period of the prior year. For comparison purposes, the nine months ended September thirtieth, 2021 only included four months of activity from the acquisition date of June first.
Product revenue increased 29% to $1.9 million, compared to $1.5 million in the prior year. Operating expenses for the nine-month period increased 37% to $28.9 million, compared to $21.1 million. For a similar reason, only four months of operating activity for the nine months ended September 30, 2021. The company reported a net loss of $2.8 million for the nine-month period, or $0.13 loss per basic and diluted common share. Compared to a net loss of $1.8 million or $0.09 for basic and diluted common share for the same period as the prior year. Non-GAAP net income of $1.6 million for the nine-month period, or $0.07 per basic and $0.06 per diluted common share.
Compared to non-GAAP net income of $1.1 million or $0.06 per basic and $0.05 per diluted common share for the same period as the prior year. EBITDA loss of $927,000 for the 9-month period, compared to a loss of $1.1 million for the same period the prior year. Adjusted EBITDA came in at $1.9 million, compared to $1.1 million for the same period as the prior year. Our cash equivalents at September 30 was $4.8 million. That's compared to $7.5 million at December 31. Cash used for operating activities for the 9-month period of $2.7 million, compared to $473,000 for the same period as the prior year.
Cash used for investing activities for the nine-month period was $192,000 for property and equipment purchases compared to $10.5 million used for the same period of the prior year, which included the acquisition of NetSapiens. Cash used for financing activities for the nine-month period was $36,000 compared to cash provided by financing activities of $1.1 million in the same period of the prior year. With that, I'll turn it over to Doug Gaylor, our President and COO, to talk about results and operations.
Thanks, Ron. I'm very pleased with our strong quarterly performance in Q3 and extremely excited about our acquisition of Allegiant Networks, which I will provide more color on after reviewing the quarter. Our Q3 non-GAAP earnings continued to improve, increasing to $713,000 or $0.03 per share on a strong revenue number of $9.1 million. That puts our year-to-date revenue at $26.1 million, which is up 37% over Q3 of 2021. Our non-GAAP earnings year to date of $1.6 million is up 30% year-over-year.
As we have previously mentioned, the amortization of intangible assets and stock comp expenses have us managing the business based on our non-GAAP earnings, and that we generated non-GAAP earnings of $0.03 per common share in Q3 is strong proof that our combined organization continues to leverage the opportunity we have to grow and succeed. I'm very thankful to our fantastic team of Crexendo employees that have come together with a tremendous amount of hard work and effort to deliver a very strong quarter. We believe we will continue to see more efficiencies and cost synergies as we continue our growth and as we leverage the additional resources and abilities from our acquisition of Allegiant Networks. Our backlog continues to grow and is very strong at $43.4 million at the end of Q3.
Our backlog number includes the software solutions backlog amounts, as well as our telecom services direct to customers, and represents a $1.2 million increase over our backlog number from the end of the previous quarter. Gross margins continue to improve as we are now at 69% gross margins on both the telecom services and software solutions segments, and we are constantly striving to improve margins and are pleased with the quarter-over-quarter improvements. We continue to see strong sales bookings in the software solutions segment as we continue to add new UCaaS licensees. UCaaS stands for Unified Communications as a Service, and those licensees that utilize our platform to run their business. During the quarter, we announced a pretty significant new logo win that chose Crexendo, the Crexendo platform to replace their BroadSoft platform from Cisco.
This new licensee made the leap to Crexendo due to our feature-rich and scalable solutions that currently supports over 2.5 million end users and growing. This new logo determined that we were the perfect fit for them to replace their older Cisco platform. Our pipeline for new licensees continues to be strong, and we continue to see high demand for our platform as we see major challenges appearing for some of our competitors, like Avaya, Mitel, 8x8 and others. Our Crexendo licensees continue to grow, and as they grow, they add additional sessions due to the rapid migration of businesses to the cloud. Our in-house engineering team continues to develop new applications and new solutions to further monetize these additional services from Crexendo to help drive even more organic growth into the company.
We introduced our new platform analytics application and our new Crexendo Contact Center as a Service, which is also, using the acronym CCaaS, that has omni-channel customer engagement offerings. We introduced that at our user group meeting in Miami last month to rave reviews and excitement from our whole entire community. The three-day conference had a record attendance of over 350 attendees, representing 128 individual companies. Our master agent partnerships with groups like Telecom Consulting Group, TCG, which is now part of Telarus, and OTG Consulting, are starting to get traction, and we expect to produce strong sales and pipeline growth from these partnerships.
Our Crexendo VIP offering that has a 100% uptime guarantee, along with a lifetime warranty on all of our Crexendo phones, continues to grow as we onboarded a record amount of new customer logos onto the platform in Q3. We continue to add new and larger agent partners and are excited about the opportunities in the funnel that these new agent partners are bringing to the table. In addition to all of that, as you know, we finalized our acquisition of Allegiant Networks last week on November 1. I'm thrilled about this acquisition for a number of reasons. First and foremost is the fact that the acquisition will be highly accretive for Crexendo.
The pro formas that Ron mentioned that were filed this morning, today, highlight Allegiant's revenue at just north of $10 million for 2021 and $5.4 million for the first six months of 2022, and profitable. This should be a very highly accretive deal and have a very positive impact on both our top and bottom line going forward. Our total cost of acquisition for Allegiant was approximately $9.4 million, which consisted of $2 million in cash, a $1.1 million seller's note, and 2.461 million shares of Crexendo stock, which is a very aggressive multiple, and why this acquisition is a tremendous win for Crexendo.
We are honored that Allegiant determined that joining with Crexendo was a win for them and their customers and their stakeholders, and we share their enthusiasm and know that this will be a huge benefit for Crexendo and our shareholders. In addition, Allegiant is one of our software solutions platform licensees that we commonly refer to as fish in our stock fishing pond.
We have been highlighting that our acquisition strategy would focus on our fishing pond because of the tremendous synergies that we receive by acquiring these licensees that are already using our platform. Another exciting aspect of this deal was the fact that the Crexendo executive team, including myself, have had a strong working relationship with the CEO of Allegiant for over 20 years, and we have always been very impressed with their organization and the success they have achieved in building a tremendous organization that will be highly accretive to Crexendo. Finally, the fact that Allegiant will bring new and attractive service offerings to our organization that we will in turn be able to offer to our customers nationwide is a tremendous gain for us. These offerings include network services, IT and managed services, infrastructure and security services, and application and development services.
Allegiant's ability to sell numerous ancillary services on top of their leading UCaaS solutions provides them with a stickier customer that has a much higher spend with the organization. We're looking forward to working closely with Bryan Dancer and his entire Allegiant team as we integrate them into Crexendo. With this acquisition, we will be on a $45-$50 million run rate for 2023. As I mentioned on our last quarterly call, the synergies that we are recognizing from both our NetSapiens acquisition regarding personnel and processes has created an even stronger Crexendo, and I'm extremely confident that the addition of the Allegiant organization will make us much stronger and a much stronger force in the industry. I'm very excited about the future direction and the opportunity for Crexendo. We continue to execute and deliver on our commitments.
If you've been following us for a while, you know that we have a strong track record of fulfilling our commitments, and that started with getting to consistent non-GAAP profitability, followed by successfully and organically uplisting to the Nasdaq. We did a successful capital raise. We made a major acquisition of the third largest and fastest growing platform provider of NetSapiens, and now we've landed our first fish out of our fishing pond. We will continue to deliver on our promises, and our future is brighter than ever. The demand for our product offerings continues to remain high, and our solutions are strong and well-positioned for us to take our company to much greater heights. We will continue delivering the best UCaaS offering in the industry to our customers, our licensees, and our partners, and we are committed to delivering the best returns for our shareholders.
With that, I will now turn it back over to Steve for any further comments.
Thank you, Doug. I just wanted to emphasize that we have consistently met our promises to you, all of the shareholders. At this time, I would like to open it up for questions. Todd, do you have any questions for us?
Yes, sir. Once again, as a reminder, if you would like to ask a question, please press star one on your touchtone phone. We'll take our first question from Josh Nichols.
Good afternoon, Josh.
Yeah. Hey, how's it going?
Good. Good. How are you?
Good. Good to see things are going well and the news about the acquisition. It looks like, just looking at the historical data, that acquisition is growing about, like, 8% year-over-year, if you just look at how it's kinda trending for the first half of 2022. Is that a fair growth expectation going forward, or are there other potential synergies that you think could potentially accelerate the growth with that?
I'm going to give you my answer, and then I'm gonna turn it over to Doug for his answer. We had to get an audit of Allegiant, and that refocused us. I believe that's on the low end of our organic growth. Doug, do you wanna comment?
Yeah. I think you're referring to Allegiant's growth. Yeah, we think that Allegiant has got tremendous opportunity for growth. You know, they've got a great reputation in their marketplace. They're in Kansas City, Missouri, or Kansas City, Kansas, and handle the Kansas and the Missouri markets. They've got a tremendous amount of loyalty and stickiness with their customers, and they've got a lot of larger customers. Their average seat size is about 92 seats, and so when we talk about some of these larger customers, they've got a great opportunity to take those larger customers, especially with their multiple services that they offer, to get more of the spend out of those customers. Yes, I'm very confident that we'll be able to continue to grow that part of the organization.
I'm also very confident that we're gonna be able to take the services that they offer, from a network service perspective and a managed IT service perspective, and be able to take that to our direct customers and be able to get a higher average revenue per account out of our existing customers by turning those services over to our salespeople to sell to those existing customers as well.
Josh, I would like Anand Buch to explain what he's doing to increase sales over at his end of the business. We have been increasing the sales over there. As you know, from what Ron said, we only had about six months or four months of
Yeah, four months included in the prior year, numbers for comparative purposes.
Yeah, there's a lot we've been doing over there. Anand?
Thanks, Steve. Hey, Josh. Yeah, I think on the software solution side, what you will continue to see is kind of more of a subscription growth as you kind of Dig into the 10-Q that Ron has put out and his team has put out. You'll notice that the recurring revenue side continues to grow. There's a lot of growth in the base in terms of the market share awareness, and actually to Doug's point about Allegiant as well, we're doing a lot of work in the CCaaS area that we'll continue to uplift even though it's a recent launch that we've done. We continue to see kind of synergies across the board, both from a managed services perspective, both from a professional services perspective, and then also new technologies as we push them out. You'll continue to see the recurring revenue aspect and the subscription side continue to grow.
Appreciate it. Just looking out for next year, Doug, I think you mentioned you were looking at doing like a $45 million-$50 million run rate. Assuming the acquisition I pursue, I assume on that front. I guess, like, what's the primary driver of that when we look at the services revenue, but also we're seeing an acceleration in growth from the software solutions revenue over the last couple of quarters, I guess.
Yeah. Let me jump in here for just a minute, Josh. Most of our revenue is recurring, and all new revenue is both recurring and licensed. You're gonna find that we're going to inch up our recurring revenue. If we didn't sell another nickel's worth of anything, we would have $45 million-$50 million in revenue next year, and we expect to exceed that. Do you wanna add something to that, Doug?
No, I think Steve's exactly right, Josh. If you look at just the combined pro formas, you know, that's very rock solid. Obviously, you know, we expect to see organic growth from both the software solutions group, the telecom services group, and from the Allegiant group. If you add the organic layers onto there, you know, that's where we get to that much higher number. You know, we're gonna continue executing. We still see a tremendous amount of demand in our industry for our products and our services and our offerings. We don't see anything that will prohibit us from being able to reach and attain those numbers and hopefully blow those numbers out.
Yeah, thanks. I think just housekeeping. Doug, did you say the backlog was actually up as well quarter-over-quarter? Is that $43.3 million, or where'd the backlog come in at?
Yeah, it was up, so the backlog was at $43.4 million at the end of Q3, and that was up $1.2 million from the previous quarter. At the end of Q2, it was at $42.2 million.
Got it. Thank you.
Thank you. Our next question comes from Eric Martinuzzi.
Thanks. Eric Martinuzzi
Hi, Eric.
Hey, how you doing, Steve? Hey, congrats on a couple of things there. That $9 million per quarter is a big number and getting the first fish out of the pond with the Allegiant transaction. Those are both nice milestones. Wanted to
Thanks, Eric.
Just wanted to dive into, it doesn't look like you guys are being impacted by economic uncertainty or headwinds because you're hitting your numbers. Is there any, what's your take on the potential impact to your business, as far as, you know, being able to execute in Q4 on the legacy business?
I'm going to let Doug comment on that, but he and I are both in lockstep on this one.
Yeah. I'm not gonna say that our products and our offerings are recession-proof, but they're probably as close to being recession-proof as you will find out there. Because when businesses are challenged, they look at ways to save costs and manage their expenses. One of the best ways for them to do that is to look at moving their telecom from traditional premise-based versions to the cloud, because the cloud is typically gonna be 35%-50% less expensive for them and give them more productivity and more efficiency. Which again, in recessionary times, everybody's looking at how do they make their business more productive, more efficient, and save money. I think our product offering is ideally suited for tough economic times as well as good economic times.
That's why I think we are again not recession-proof, but I think that we will be able to stave off any headwinds because businesses need to communicate. If one thing is clear for us, especially with post-COVID, it is that businesses that didn't have a good infrastructure during COVID suffered tremendously. Those businesses right now are trying to figure out, hey, how do they communicate better with their customers. That's why we added features like the omnichannel contact center capabilities, because customers today don't just communicate via voice. They communicate via collaboration, via chat, via email, via social media.
We've incorporated all of those capabilities into our offering today, and that's only gonna give us more opportunities to sell more of our products and offerings because customers are looking for better ways to communicate with their customers and with their clients.
Understand. I did notice, and it was only a mild downtick, but the services revenue of $4.5 million down slightly from Q2. What's the expectation there for Q4? Is that gonna tick up, remain flat?
Before anyone answers anything, I'm just gonna point out one thing that Doug said, and I agree 110%. We're as close to recession-proof as possible, because we provide a company with productivity and mobility, and mobility is very important. You can even have a video conference on our video service off of your cell phone, off of your handheld. People don't realize just how powerful we are. Ron, would you like to comment on service revenue?
Yes. You know, we don't anticipate recurring declines in that service revenue. We expect our revenue to continue to grow quarter-over-quarter. As we've talked about in previous calls, our churn rate had spiked last year and in the beginning of this year, but by Q2, we were back down to three quarters of 1% average per month. We can confirm that that's the same for Q3. You know, churn can have an impact on your recurring revenue going forward. But we are back down to pre-COVID churn levels, and we think that the impact's gonna be minimal like it was pre-COVID.
We expect to see increases in our service revenue going forward. It was a minor increase, decrease, so.
Yeah. Yeah, I just given that you continue to build the business, so that's why it kind of caught my eye. I wanted to, you mentioned something, and I can't remember if it was in Steve's remarks from the press release or in Doug's, but you talked about marketing changes needed to pursue larger midsize and enterprise markets. What's the, you know, is this a new direction, or, you know, something that's gonna be a focus for 2023?
It's definitely not a new direction. I mean, obviously, you know, the SMB market is where we, where we excel at. But now with some of our new offerings and with our acquisition of Allegiant, you know, we've got some capabilities to go to larger accounts. We're not gonna de-focus on SMB, but we also know that there's a lot of opportunity in the small enterprise markets. Those small enterprise and enterprise markets are looking for omni-channel contact center and those capabilities. Now that we've got those offerings in our portfolio, we're obviously gonna market for larger opportunities. You know, we wanna take that average size account that we've got today at 21 stations and build on that. We look at Allegiant, that their average size account is 92 stations. We wanna build on that.
We don't have any delusions of grandeur that, you know, we want our average size customer to be 5,000 clients. We're not gonna take our eye off of the ball on what is our core competency, and that's that SMB and small enterprise market, 'cause we excel there. Now we have a product that we can go out there and compete against the big guys in the enterprise markets. I think you'll see us over the next year have some nice announcements on some big accounts.
Okay. Lastly, with the Allegiant acquisition, obviously we've got sort of a stub period here for Q4, before we're, you know, we've got the full year impact in 2023. For those of us modeling at home, what about, you know, what should we be thinking about to kind of take the $10 million revenue and divide by 12 and throw a couple of months on there for the top line impact for Q4?
Yeah. I would guide you to take a look at those pro formas and utilize those for your forecasting until we have further information on our end.
Okay. Thanks. That's my question.
Thanks, Eric.
Thank you. We'll take our next question from Chris Sakai.
Good afternoon, Chris
Good afternoon. Just wanted to ask about you're saying churn levels are back down to pre-COVID levels. Where do you see them stabilizing at?
Yeah, we hope to see them stabilize around the area that they are now, if maybe a little bit lower. I mean, again, pre-COVID we were at 0.68% on a monthly basis, so that you know, worked out to about 6%-7% annually. We'd like to see it in that range. You know, we were consistently in that range for 3-4 years pre-COVID. COVID, again, saw that spike last year to 1.28% monthly. That was obviously very high. But again, I think that the majority of that was attributed to the SMB market just being really, really challenged with the effects of COVID.
I think that now that we see it back down to where it is, you know, again, you know, apart from any other major changes in the economy, I mean, I think that, you know, obviously, our customers are feeling those same headwinds, but I don't anticipate seeing a large spike in our churn rates. You know, you could see a small fluctuation here and there, but I think COVID was a one-time anomaly, and I don't think we'll see a big spike like that again.
Okay. Thanks for that. How is customer migration progressing to the NetSapiens platform?
Yeah, it's progressing well. We're probably at 20%-25% of our classic accounts migrated over to the VIP platform now. We've got over, I think, my last count was, over 21,000 seats on our VIP platform, which is our NetSapiens platform that we're running. A lot of that is migrations, but all new customers are obviously going on our VIP platform. That migration is going along maybe a little slower than planned only due to the fact that it's not really revenue generating, so we migrate accounts as we have time. We had a record amount of new installs during Q3, as I mentioned in my comments.
When we have our implementation managers focused on implementing new logos that are generating revenue, you know, our migration strategy current platform don't have to migrate over. We try and migrate them over as we have time or if it's the NetSapiens platform offers that our current classic platform doesn't. You know, it's not a major cost burden for us. We'd like to get as many of those customers migrated over as quick as possible. At 25%, we're a little bit behind our schedule, but not much. I anticipate that we probably got another 12-15 months worth of runway before we get the majority of those customers migrated over.
Okay, thanks for that. Then on the Allegiant acquisition, what percentage of the revenue from Allegiant is recurring?
About 70% of the Allegiant revenue is on a recurring basis. Very similar to our model. I think our model is a little bit higher to about 85%, but about 70% of the Allegiant revenue is on a recurring revenue basis.
Okay, thanks for the answers.
Thank you. Our next question will come from Michael Latimore.
Hi, Mike, how are you?
Very fine. How are you?
Very good, thanks.
Yeah, congrats on the strong execution and the acquisition here.
Thank you.
Interested in some of the cross-sell opportunities that Allegiant provides. I guess, you know, in terms of new UCaaS logos, you know, what percent of the time are they also looking for some of these managed services? What percent of your base could buy them as well?
I know the answer to that, but I'm gonna let Doug answer it.
Thanks, Mike. Yeah, if we think about the Allegiant base, you know, they have quite a bit of peripheral services that they offer. The majority of their customers have more than one service with them, meaning that they have telecom service plus network service, or telecom service plus data services, or telecom service plus peripheral type services. That model works extremely well for them, and it makes a much stickier customer. They've got some customers that have three or four services from them, and that just makes for a very sticky customer. When we think about how we can roll that out to our direct customers today, all of the direct customers that we have on the Crexendo side of the house, you know, all have just UCaaS services from us.
We haven't previously offered network services or managed services or IT services or data infrastructure services. We're extremely excited about going out and offering those type services to them. That means that we can offer Office 365, we can offer Teams, we can offer firewalls and SD-WAN type services. We can offer their internet connectivity. Those are great add-ons for us to be able to go out to our customers, because every one of the customers that we have have all of those ancillary services. Right now, they just have them through 2, 3, 4, 5 different vendors. To be able to consolidate all of that into one organization is a huge selling point. That's how Allegiant has sold it up to now.
They call it, you know, Allegiant One, because they wanna be the one point of contact for all of the customer's communications and data and IT services. We are extremely excited about rolling that out. Now, when we talk about how we roll that out, you know, we'll roll it out, you know, on a smaller basis until we can support that internally on a much larger basis. But, you know, we are excited. Our salespeople are excited about being able to offer these other services because it's stuff that customers ask us all the time, you know, "Hey, can you help us out with our network? Can you help us out with our data services?" Up till now, we've been referring that to, you know, additional people. Now we can do that in-house.
Yeah, makes sense. I see Allegiant base, they're a little bit bigger on average. Seems like that's kind of potentially a fruitful ground for a CCaaS offering. Have they tried CCaaS before? Do you know what the prospects are there for CCaaS cross-sell now that you have kind of your omnichannel?
Yeah, that's actually a home run for us because something that you wouldn't have read in any of the press releases, but Allegiant actually had a relationship with Mavenir and Ozonetel on the CCaaS platform, and that's how we actually got introduced to the CCaaS platform, is that Allegiant had already had a relationship with them because they had been selling that CCaaS platform on Avaya solutions out there. They were so enamored and liked the CCaaS platform they had. They introduced it to us, and that's what we started and now have as our CCaaS offering. They're already three steps ahead of us because they've already got customers using that CCaaS platform.
Now we are extremely excited because they're gonna take charge and help us introduce that to a lot of the enterprise and small enterprise level customers that will need the omni-channel CCaaS offering. Since they've already got references and already have an extremely good working knowledge of the platform, it's gonna make it much easier for us to roll that product out.
Yeah. Okay, great. I guess the last one would be on the software side of the business, is there any kind of natural seasonality? Like, is one quarter usually stronger or weaker than average, or is that not the case?
I'm gonna let Anand answer that. He's sitting right here.
Thanks, Steve. Yeah. From a seasonality perspective, there's a couple things that I think you can keep in mind. I think as we start to migrate more and more towards subscription services, there are point-in-time revenue points where folks are upgrading and then paying maintenance and subscription fee associated with that licensing. And then more and more folks are, you know, moving to subscription-based, you know, OpEx-based models. Typically the seasonality that we see often with, you know, licensees or other service providers are, you know, with quarter end or year end, if they need to make, you know, capital purchases before year end for tax purposes or things like that.
We're slowly but surely starting to see that kind of, you know, settle out, as we get to more and more recurring revenue. Does that make sense?
Yeah, sure. Great. Thanks a lot. Best of luck.
Thank you very much.
Thank you. Our next question comes from Michael Kaufman.
Good afternoon, Michael.
Hi, Steve and Doug. I wanna congratulate the team for sticking with great financial discipline and creating this opportunity for a roll-up using your fishing pond analogy. You know, looking at the current competitors, like 8x8 and RingCentral, they just overpay for everything, and they're drowning in huge amounts of debt. I think the company has been very creative, and the key is, how are you gonna grow and stick to this strategy of limited debt and buying profitable accretive companies where you can cross-sell and build on future opportunities?
Well, obviously we're going to look at accretive opportunities. Thank you for pointing all of that out. It didn't happen by accident. We proactively made it happen. Our stock is horribly undervalued right now. As soon as one of our analysts talks, they can't because there's a Chinese firewall. As soon as their sales department gets ahead of it, or gets behind it, rather, you're gonna find that people are gonna realize that Crexendo is the real deal. Just in this room, we probably have 200 years of management experience. This isn't our first rodeo. One of two things will occur. Well, both of them are going to occur.
We're going to cash flow more, and we're going to have a higher stock price, and that's how we're going to acquire these S-companies. On top of it, if it's under about $8 million or $10 million, we're not gonna need an audit. All of that'll start speeding the process up. The bigger we get, the bigger the acquisition and the more organic growth you're gonna see.
Well, you're already at $50 million run rate, so this thing is growing like crazy. I'm sure
It is.
the value is gonna come.
You, you're correct. Thank you.
Again, I just wish you the best. The whole thing is just to keep doing this and focusing on the limited debt and accretive acquisition fundamentals.
Well, you have our promise on that one. Thanks, Michael.
Thank you.
Thank you. Our next question comes from Edward Gilmore.
You got it changed, Edward?
Hey, good afternoon, Steve and Doug and team. Thanks for taking my call. Congrats on the acquisition and also the focus this last quarter. I have two quick questions. One on the additional revenue anticipated for next year that Doug mentioned with the run rate. Do you expect that you'll be able to maintain the same gross margins that you've historically had with the additional revenue?
I'm glad you asked that question because that comes up in every one of our management meetings, is gross margin. You know, I'm tired of talking about it, but I would like to see higher gross margins. Doug, why don't you expand on that?
Yeah, we anticipate being able to grow those margins, Ed, as you look at. The larger we get, the more leverage we have, so we can manage our costs better. Just in the last couple of months, even with this acquisition, you know, we're able to leverage some better pricing. The fact that we acquired Allegiant, and they've got a lot of strong relationships with Microsoft and other providers of data infrastructure services, we can go back to those same providers that we were getting services from before and get bigger discounts, and that'll help our margins. I'm confident that we're gonna continue to be able to grow our margins. We saw a little bit of increase in our margins on both the telecom services and the software solution segment, from Q2 to Q3, and I'm confident you'll continue to see that growth in gross margins.
Okay, great. Thanks for that. On net income, Doug, do you see that this additional run rate and revenue's gonna ultimately flow through to the bottom line there in 2023?
Yeah. This is, again, a very accretive acquisition for us. If you look at the pro formas that we put out this morning, I mean, Allegiant was profitable on a standalone basis. You know, we anticipate with the synergies that we'll see out of the combination of the two organizations, that they'll be even more profitable. As we look at, you know, Crexendo, we're gonna continue executing on our game plan. Yes, it's gonna be accretive to the bottom line, and I have no doubt that you'll be impressed with what we are able to put to the bottom line going forward.
Okay. Thanks, Doug. Last question, Steve, I was gonna ask this, since you touched on the stock price. I've enjoyed kind of following your very active role in the market over the summer and spring. Just was curious if the price is right, do you kind of anticipate any additional purchases? Thank you.
You're welcome. Well, I'm gonna answer it anyway, against the advice from my counsel, who's sitting right next to me. Look, I own so much stock, which I bought on the open market. You know, everyone has said, "Let some of the other shareholders and new shareholders have a crack at it." We have about, now with the addition of 2.461 million shares, we have about 15 million shares of float out there. It's time that somebody recognized this isn't our first rodeo. We have been there and done this before, and we're gonna keep doing it. You know, based on what my counsel is telling me, nobody needs to buy any more stock around here.
Although people keep exercising their stock options, and they keep exercising everything because we know that our stock is undervalued, and it will be higher.
Just to be clear, Steve is not precluding himself from purchasing stock in an open period if he feels it's appropriate.
Well, you know, I've got a birthday coming up, and I'm getting up there in years. I'm starting to do some estate planning, because none of us are gonna be here forever.
Speak for yourself.
Thank you. By the way, we kid Jeff about being the court jester. He keeps us laughing. Anyway, Edward, I hope I answered your question.
You did. Thanks, Doug and Jeff for your answers. Steve, happy birthday when it comes up. Appreciate it.
Thank you. Thank you.
Thanks, Ed.
It's not for another few days.
Todd, any other questions, Todd?
At this time, we have no further questions.
All right. Well, thank you everyone for showing up, and we really appreciate it. I might add that tomorrow is Veterans Day. What do we call it in the U.K.?
Poppy Day.
Poppy Day. I'm wearing my poppy. I'm gonna take a line out of Bob Hope's line, if any of you remember him. Or no, it was Ronald Reagan that said he wasn't around when George Washington was president. I wasn't around when the First World War ended, but the reason we all wear poppies is because a lot of people gave their lives for the freedom that we enjoy in this country, and they did it in poppy fields. With that, I'm gonna wish you all a good winter, a good fall, and stay warm, and we'll talk to you probably in the spring when we announce fourth quarter. Beginning of the spring, right, Ron Vincent?
Okay. Thank you, everybody. Thanks for joining us all. Thanks.
Goodbye.
This does conclude today's call. We thank you for your participation. You may disconnect at any time.