Shift To Oracle Cloud And AI Integration Will Improve Offerings And Attract New Customers

Key Takeaways

• Crexendo's repositioning in a competitive market and shift to a recurring revenue model enhances its potential for revenue and earnings growth.
  
• Strategic cost-saving measures and expanded offerings, including AI and partnerships, are expected to boost margins and attract new customers.
  
• Strategic focus on differentiation and growth in a competitive UCaaS market could face challenges from execution risks in AI, acquisition costs, and shifting customer strategies.

Catalysts

Provides cloud communication platform and services, video collaboration, and managed IT services for businesses in the United States and internationally.

• Crexendo's competitive advantage in a highly competitive UCaaS market, coupled with the disruption caused by Microsoft's sale of the Metaswitch division, positions Crexendo to capture significant market share. This is expected to boost revenue growth.
  
• The company's strategic shift towards an MRC-heavy model strengthens the recurring revenue base, ensuring a steady increase in earnings over the upcoming years.
  
• Crexendo's ongoing migration to Oracle Cloud Infrastructure and closing of data centers are expected to generate substantial cost savings and improve net margins as they reinvest savings into profitable growth.
  
• The development and integration of AI features, such as AI-powered contact center solutions, are anticipated to enhance product offerings, attract new customers, and increase revenue and possibly improve net margins given the value-added nature of these services.
  
• Expansion of the ecosystem vendor Partner Program (EVP) is creating new revenue streams through third-party developed solutions, likely contributing significantly to both revenue growth and gross margins due to the shared revenue model.

Crexendo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Crexendo's revenue will grow by 12.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 10.4% in 3 years time.
• Analysts expect earnings to reach $8.9 million (and earnings per share of $0.3) by about March 2028, up from $1.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $12.6 million in earnings, and the most bearish expecting $5.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.8x on those 2028 earnings, down from 96.5x today. This future PE is lower than the current PE for the US IT industry at 43.2x.
• Analysts expect the number of shares outstanding to grow by 4.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.73%, as per the Simply Wall St company report.

Crexendo Future Earnings Per Share Growth

Risks

• The competitive nature of the UCaaS market, where Crexendo continues to grow rapidly, might exert pressure on revenue if market dynamics shift or if competitors enhance their offerings to regain lost market share.
  
• Although Crexendo's strategic focus on value and service differentiation aids growth, the company's decision not to engage in price wars may limit its ability to capture market share quickly, possibly affecting revenue and net margins.
  
• The reliance on and integration of AI-driven solutions could expose the company to execution risks, especially in rapidly evolving tech markets where continuous innovation is crucial for maintaining growth and profitability.
  
• Varying acquisition costs and the balance between reinvesting in the business versus returning capital to shareholders may result in misalignment with investor expectations, impacting investor sentiment and funding for growth through earnings.
  
• Potential changes in customer migration strategies, particularly amid disruptions caused by competitors' strategic shifts, can lead to delays or changes in customer adoption patterns, thereby affecting expected revenue growth and operational efficiency.

Valuation

• The analysts have a consensus price target of $8.2 for Crexendo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.0, and the most bearish reporting a price target of just $7.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $85.4 million, earnings will come to $8.9 million, and it would be trading on a PE ratio of 36.8x, assuming you use a discount rate of 7.7%.
• Given the current share price of $5.8, the analyst price target of $8.2 is 29.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.