CXDO — Q2 2026 Financial Report Analysis

Overview

Crexendo sells cloud phone and video service to businesses (its Cloud Telecommunications segment) and licenses the NetSapiens calling-platform software that other telecom providers run their own services on (its Software Solutions segment). In the second quarter of 2026 (three months to June 30), total revenue rose 49% to $24.6 million. The cause was ESI (Estech Systems), a business-phone provider Crexendo bought on March 1, 2026 for $34.7 million. ESI added $6.96 million of the $8.09 million revenue increase. Without ESI, revenue grew $1.13 million, or 6.8%. GAAP net income fell 15% to $1.05 million ($0.03 per share, down from $0.04). The acquisition brought higher amortization (a non-cash charge that spreads the cost of purchased customer contracts and technology over several years) and more shares outstanding.

At a glance

• $24.6 million revenue, +49%; about 6.8% without the acquisition. ESI accounts for 43 points of the 49% growth, so the headline figure overstates how fast the existing business is growing.
• $1.05 million GAAP net income, down 15%. Intangible amortization more than doubled to $1.83 million and the basic share count was up 11%, so profit per share fell while revenue jumped.
• $4.8 million operating cash flow in the first half, 2.9 times net income. The business brings in much more cash than its accounting profit shows. That matters because the ESI deal used $26.2 million of cash.

Key figures

*Gross margin here is revenue minus the three "cost of revenue" lines (service, software and product), divided by revenue. We calculated it from the income statement; the company doesn't state it as a single figure.

AERR is Crexendo's own figure: the monthly value of all recurring customer charges at quarter-end, multiplied by 12. It shows the size of the subscription base heading into the next quarter. Net dollar retention shows how much recurring revenue existing customers kept paying after cancellations, downgrades and upgrades. 99% means the existing base shrank slightly before counting new customers.

What drove the quarter

The acquisition explains most of the growth. The 10-Q breaks the $8.09 million revenue increase into four parts: $6.96 million from ESI, $579k of organic service growth, $352k from software solutions and $200k of organic product revenue. On the cost side, the filing attributes $7.38 million of the $8.14 million rise in operating expenses to ESI. That is more than the revenue ESI added. On the company's own breakdown, ESI was about $0.4 million loss-making at the operating line this quarter, after purchase-related costs. Without it, operating income would have been roughly $1.47 million, up about a third from $1.10 million. The parts of the business Crexendo already owned became more profitable. The newly acquired part reduced reported profit.

Cloud Telecommunications (now 70% of revenue). Segment revenue rose 81% to $17.3 million and segment operating income rose from $180k to $509k. Leaving out ESI, service revenue grew through $503k of higher telecom service fees and $156k of other recurring fees, partly offset by $103k fewer one-time fees. ESI roughly doubled the segment's selling and marketing spend: $3.40 million of the $3.56 million increase came from ESI. Remaining performance obligations (signed contract value not yet recognized as revenue) almost doubled to $111.0 million. ESI contributed $49.8 million of that, so the rest of the backlog grew roughly 9%.

Software Solutions: steady revenue, more of it recurring, lower profit. Revenue grew 5% to $7.33 million, with a shift in mix underneath. Recurring license and maintenance subscriptions rose $1.04 million, while one-time perpetual license sales fell $703k. A perpetual license is paid once up front; a subscription brings in revenue every month. This shift lowers revenue in the short term but makes it more predictable. Segment operating income still fell 41% to $546k: third-party hosting costs rose $272k and staff costs rose $213k in cost of revenue alone. Software net dollar retention slipped to 99% from 101%. Management highlighted 11 new platform customers ("logos") signed in the first half, compared with 2 a year earlier. New platform customers usually start small and add licenses as they move their subscribers onto the platform. That supports the recurring-revenue increase, but those customers are not yet large enough to show up in segment profit.

What the headline numbers hide

• The two profit figures tell opposite stories. Non-GAAP net income was $4.06 million ($0.12 per share), up 42%. GAAP net income was $1.05 million, down 15%. The $3.0 million gap comes from three items management excludes: $1.83 million of intangible amortization (up from $801k, almost all from acquisitions), $994k of share-based pay and related taxes, and $180k of ESI deal costs. The deal costs are a one-time item, and H1 total was $1.02 million. Share-based pay is a recurring cost of paying staff. Amortization is non-cash, but it reflects real cash spent on acquisitions.
• Dilution reduced EPS. Weighted basic shares rose 11.4% to 32.8 million. That came from 1.16 million shares issued to ESI's seller and stock-option exercises that brought in $4.0 million in the half. Even if net income had stayed flat, EPS would have fallen by about a tenth.
• Cash conversion is strong. H1 operating cash flow was $4.79 million against $1.63 million of net income, up 89% year on year. The difference comes mainly from $3.07 million of depreciation and amortization and $1.64 million of share-based pay added back. Offsetting that, Crexendo put cash into receivables (+$894k) and capitalized contract costs (+$583k, sales commissions paid up front and expensed over the contract term). Both are normal for a company adding subscription contracts. They are worth watching if they keep growing faster than revenue.
• The balance sheet changed. Cash fell from $31.4 million at December 31 to $18.3 million. Crexendo paid $27.3 million in cash for ESI ($26.2 million net of ESI's own cash) and took a $5.0 million Wells Fargo term loan in May. It had no bank debt a year earlier. Goodwill and intangibles now total $52.5 million, about half of total assets. The purchase-price allocation is still preliminary, and the company expects the valuation to be completed in Q3 2026. Amortization could therefore change next quarter.
• Tax isn't flattering the result. The tax charge was only $25k, as it was a year ago ($48k), because the company is using past losses to offset taxable income. Nothing about the tax line changed this quarter.

Forward look

Management gave no numerical revenue or earnings guidance. CEO Jeff Korn said ESI sales "are exceeding our initial expectations", and that the company's AI products are "not yet meaningful contributors to revenue" but "can become meaningful in 2027". He also said the cash generation gives room for more acquisitions "while seeking to minimize dilution". The company's unaudited pro forma figures, which treat ESI as owned since January 2025, give a cleaner growth comparison: H1 revenue of $49.8 million versus $44.9 million, up 10.7%.

Our read: the combined company is growing around 7-11% a year, not 49%. For Q3 (likely filed in early November, based on last year's November 4 date), three things will show whether the deal is working. First, whether ESI moves from an operating loss to a profit as accounting, legal and engineering are combined, which management says has started. Second, whether the 11 new platform customers lift software net dollar retention back above 100%. Third, whether the final purchase-price allocation changes the amortization charge. ESI is consolidated for a full quarter this time, so the Q3 acquisition effect will look similar to Q2's. The year-on-year inorganic boost only falls away from March 2027.

Takeaway: Crexendo's 49% revenue growth is almost entirely the ESI acquisition. The existing business grew about 7% and became more profitable, while ESI reduced reported profit after purchase-related costs. Whether this deal pays off depends on ESI turning profitable within Crexendo and on the 11 new platform customers lifting retention back above 100%.