Sangoma Technologies Q1 2024 Earnings Call Transcript

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November 8, 2023

There are 8 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Investor Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. I would now like to turn the conference over to Samantha Reburn, Chief Legal Officer.

Operator

Please go ahead, Ms. Reburn.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to Sangoma's Q1 fiscal 2024 investor call. We are recording the call and will make it available on our website for anyone who is unable to join us live. I'm here today with Charles Salome, Sangoma's Chief Executive Officer Larry Stock, Chief Financial Officer and Jamie Minner, Chief Revenue Officer, to take you through the results of the Q1 of Together with the company's financial statements and MD and A, which are available on EDGAR and our website and which will be available on SEDAR Plus and submitted as it's back online. As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS.

Speaker 1

And during the call, we may refer to terms such as adjusted EBITDA and adjusted cash which are non IFRS measures, but are defined in our MD and A. Before we start, I'd like to remind you that the statements made during the course of this call that are not purely historical Because such statements deal with future events, they are subject to various risks and uncertainties and actual results may differ materially from those projected in the forward looking statements. Important factors that could cause actual results to differ materially from those in the forward looking statements are discussed in the accompanying MD and A, our annual information form and in the company's annual audited financial statements posted on SEDAR Plus, EDGAR and our website. With that, I'll hand the call over to Charles.

Speaker 2

Thanks, Sam, and good afternoon, everyone, and thank you for joining today's call. Before I share my updated thoughts on the business, I'd like to point you all to the press release we issued earlier this afternoon detailing our fiscal Q1 results. During the quarter, we generated $63,000,000 in total revenue. Revenue in our services business grew 6% on the year to 51.2% for a record high of 81 We posted our 1st quarter adjusted EBITDA of $9,900,000 representing 16% of revenue, which confirms our focus on profitability and cash flow generation. A few weeks ago, our Chairman, Norm Worthington introduced me to all of you on our Fiscal 2023 Q4 earnings call.

Speaker 2

While I shared a little bit about myself and my reasons for taking on the role, Today marks my first opportunity to speak to all of you in more detail about my excitement for being here as well as my thoughts and longer term vision for Sangoma. As of today, I've been on the job for just over 2 months and I've been able to meet scores of our dedicated employees, many of our global partners, Key customers as well as members of the investment community, some of which whom I suspect are on the call this afternoon. These discussions are so important as a new CEO because they provide me with a rare opportunity to hear with fresh ears what's working and what's not, What's been tried before and what hasn't. For all of you who have spent time and shared your experiences with me over the past couple of months, thank you. I was listening.

Speaker 2

In nearly every one of those interactions, I, in turn, conveyed my own passion for an industry where I've spent my entire career And how I view Sangoma's position in this changing and dynamic market. I spoke about the tremendous opportunity that lie ahead for Sangoma and why I felt its assets were so unique. I spoke about the dedication I see in our employees, strength of our Board and executive leadership and the untapped value of our assets, which I We'll share more with you in a few moments. However, during these same conversations, I also spoke to many of you about the value of candor and integrity and authenticity. It's a personal attribute that I commit to everyone listening to this call today and personal attributes that I expect each one of our employees to show up with at work every morning.

Speaker 2

In that vein, it's only right then to share with you those listening in very clear terms that changes upon Sangoma. The dynamic state of the SMB market, Coupled with the evolving channel model, to access them requires constant change to remain relevant and competitive. Now, I fully understand that depending on who, how or what, the idea of change can be unsettling. But I don't view it as unsettling at all. Rather a standard mode of operating in today's rapidly changing IoT space.

Speaker 2

And the reason I believe that is because I have experienced it firsthand at scale. I know full well both the hazards of resting on a business of laurels as well as the compounding benefit and value created for all constituents by self evaluation and We will be operating Sangoma at the speed of the market versus the speed of the organization. These markets are simply moving way too fast, especially in the SMB. And when you step back and look at the asset base of Sangoma, at our ingenuity, our employees, Our ability to integrate acquired technologies and the unique value proposition presented to the market when compared to our measurable results, change not only should be expected, It is welcomed and embraced. That is exactly what is underway right now.

Speaker 2

If we recall, I mentioned this last quarter as part of my first 100 day plan. So let's talk about where we are today and where we recognize the need for change. When I accepted the offer to join as Sangoma CEO, I was aware that Then the company had assembled a rich portfolio of both on premise cloud based solutions that offered a wider range of communication capabilities than anyone in the Now fast forward to today, having absorbed what I have in 2 very busy months, I see a company with a clear potential of becoming a The dominant full service managed cloud communications and technology provider for small, medium businesses, underpinned by a strong brand The SMB market is rapidly changing. Technology has become mainstream, and this segment has I'm increasingly more aware of the value technology plays in running and securing their businesses. There are more demands from this segment to have enterprise like services for all of their Wrapped in a predictable, affordable, easy to access, bundled and aligned to their specific business needs.

Speaker 2

Providing this full stack solution set from 1 provider is a sweet spot for Sangoma to capitalize on. Today, Sangoma delivers many of the solutions needed to be that predominant full service provider to the SMBs, given our industry and geographic and market diversification. Our existing clients recognize this as evidenced By the very low churn rates that are well below industry norms, both our growth and our reach are not where they need to be, but we intend to fix that. Let me describe how we will get there. First, it's important to remember that a one size fits all solution does not work in our business anymore.

Speaker 2

And so having a broad portfolio and the flexibility to deliver on prem, cloud and hybrid solutions uniquely positions Sangoma to serve clients across many verticals, Locations and customer types, including business, wholesale and the open source community. Our commitment We're making our range of offerings available through various options, a la carte, bond build or package in ways tailored specific We are actively developing industry specific solutions to tackle the unique issues and disruptions these sectors encounter. We also intend to position the portfolio as a white labeled offering to be used to tap into new large scale buying centers and partners. By tapping our existing capabilities, we will target industries with unique challenges like distributed enterprise, retail, healthcare and education, Amongst others to enhance our brand and recognition and build our reputation as a nimble end to end provider This is a meaningful competitive advantage and a value differentiator to our clients, our partners and our brand, We will examine and enhance our existing competencies and skill sets with a focus on managed cloud based communication services and technology. We will leverage our existing partner ecosystem with a focus driving a pull strategy with end clients to support the push strategy to our partners.

Speaker 2

And we will also thoroughly reinvigorate our brand to clearly convey our key tenets, which underpin this brand: innovation, service and support Discernment by a safe pair of hands, partner reach and people. Now make no mistake, that's a lot. Not only is a lot, it is a lot, but this work is both technically challenging and strategically critical. Thankfully, I'm surrounded by an extremely experienced management team who have significant transformational experience and some of the most talented technical experts I've seen in my 30 year plus career. I should note that in the weeks months ahead, when you hear me speak about innovation, which I plan to use quite a bit, it isn't about features.

Speaker 2

Innovation for me is about our processes, our partnerships, both personal and technological. To me, innovation is how we align these Processes and partnerships to the market in a way that places us on a firm footing in becoming the preeminent provider of choice. There are many areas internally where I see clear opportunities for improved innovation and the team has already begun work to address these in earnest. In addition to a thorough portfolio review, I have already initiated significant cost savings program, a go to market segmentation analysis And a prioritization of key growth investments such as AI enabled product capabilities, all designed to improve both top and bottom line efficiency. Building profitable, sustainable growth requires a relentless focus on innovation and change, and we intend to do that here in Sangoma.

Speaker 2

In the spirit of my earlier remarks on candor and integrity, these changes are overdue and the thorough transformation that's required to capture our full potential It will take us some time. I look forward to engaging with all of you and sharing our progress, which will include more relevant KPIs As we earn our rightful place as a best in class, full service, managed cloud communication and technology provider. Finally, Before I hand it over to Larry to walk through our financial results in more detail, I'd like to take a moment to touch upon a few financial considerations. I want to point out that our financial position as a company is healthy. Supported by consistent profitability and cash flow generation, our balance sheet supports Both are needed investments for growth as well as debt servicing.

Speaker 2

Further, while legacy M and A has served Sangoma well, My priority for the time being is to sustain organic profitable growth and build our cash reserves to provide growth investment optionality in the near future. I want to thank all of you for your time and interest in Sangoma. I am absolutely invigorated and excited for Sangoma's future. I look forward to engaging with you all. And with that, I'll turn it over to Larry to discuss our Q1 results.

Speaker 2

Larry?

Speaker 3

Thank you, Charles, and hello, everyone. Before we jump in, I want to share my excitement and optimism as Charles steps into the role. In the short time that he's been here, I've enjoyed our partnership, I value the depth of this industry experience and look forward to what lies ahead for all of us. Now, let's get to the Q1 results. Sangoma services revenue increased to $51,200,000 up 6% from the same quarter of the prior year And up 2% sequentially, representing 81.1 percent of total revenue.

Speaker 3

Product revenue declined from $13,500,000 in Total revenue was $63,000,000 down 2% from the same period a year ago and 1% sequentially. Cost of sales for the 3 months ended September 30 decreased 8% to $19,000,000 compared to $20,700,000 a year earlier. The 3 months ended September 30 was $44,000,000 up 2% from the $43,300,000 realized a year ago. Gross profit for the Q1 of fiscal 'twenty four was approximately 70% of revenue. This is up 2% from the same quarter Quarter to quarter, due to mix, our Q1 gross margins were at the higher end of our typical range.

Speaker 3

In the first quarter, operating Consisting of sales and marketing, research and development, general and administration and foreign exchange were 45,000,000 versus $44,400,000 during the equivalent period a year ago and $43,700,000 in the immediately preceding quarter, representing a 1.4% dollar increase over the prior year. Consistent with recent history, 1st quarter OpEx contains certain onetime annual expenses. Adjusted EBITDA during the 3 month period ended September 30 came in at 9,900,000 Down from $10,700,000 for the equivalent period of the prior year. The prior year included a $1,500,000 gain consideration payable. Net loss for the Q1 was $2,440,000 which is a $0.07 loss per fully diluted share compared with a net loss of $1,980,000 Inventories were $17,900,000 in the 1st quarter, which is down by $80,000 when compared to the 4th quarter at 18,000,000 This reduction in inventory, while modest, reflects our continuing focus on inventory management.

Speaker 3

Trade receivables of $20,400,000 in our Q1 were down from $21,900,000 in the 4th quarter, primarily as a result of the continued emphasis on accounts receivable collections. The company closed the Q1 with $11,100,000 in cash compared with $11,200,000 at the end of our Q4 of fiscal 'twenty 3. The company used a portion of its cash to continue paying down the debt associated with its most recent acquisitions and investment in capitalized development costs. We generated $7,600,000 of adjusted cash flow from operations during the Q1 of fiscal 'twenty four compared to $3,200,000 in the same quarter last year. This increase in year over year adjusted cash flow was primarily driven By our working capital management and prudent approach to cash spending, cash conversion of adjusted cash flow to adjusted EBITDA for the quarter is 77%, which Moreover, we finished the quarter with net cash provided by operating activities of $7,900,000 reflecting a strong quarterly progression of cash flow, We continue to remain comfortably within our debt covenants.

Speaker 3

Overall, while product revenue is lower than we expected, we are pleased to see our growth in services continuing, Providing another quarter of solid financial results for Sangoma. We are seeing our differentiated strategy yield success, Before we close, I'd also like to thank all the dedicated and hardworking employees of Sangoma, our partners and our investors as we continue on this transformation journey. And with that, operator, we're ready to take some questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from David Kwan of TD Securities. Please go ahead.

Speaker 4

Good afternoon. I appreciate, Charles, the color you gave on the 100 day plan, the different Changing strategies and what you're finding to do over the next coming quarters and even years. I was curious, when you look at the business right now, one of the things you kind of touched on was AI. I think you talked about looking at we're starting to work more on AI enabled product capabilities. We've seen Several announcements out of your peers on that front.

Speaker 4

Is there any more details you can provide?

Speaker 2

No. I can't provide you more details on the All the facets of the company and what was going on in the company. There's a pretty significant amount of work already underway within our engineering team. You may be probably heard me comment about the fact that I think we have exceptionally strong technical resources in the company. And what I'm trying to do is take them out of the Sort of the cloud, so to speak, and bringing them into the forefront, embedding them into the integrated portfolio package that we're now beginning to build as we Shape this company into a more of a full stack solutions provider firm and embedding the AI capabilities, mostly at the beginning into our contact center space.

Speaker 2

That will be a fairly significant, I think, for a start. And then moving into the video chat and video side of the business. So There are probably the 2 areas where we'll see it pop up. I guess what I can leave you with is I'm a little more surprised here. I was more surprised pleasantly The advancements in AI technology that have already been built here and we'll continue to look for partners.

Speaker 2

Again, the market is moving very fast in this space that might accelerate Our ability to inject that technology into our portfolio.

Speaker 4

Yes, I guess those are the 2 areas like the contact center space and the meeting space where we've seen a lot of these announcements. So do you have a timeline as to when we could start to hear kind of specific product features announcements and that type of thing?

Speaker 2

I think it's safe for me to tell you that within the next quarter, in our next quarterly briefing, Jeremy just came on board as the Chief Product Marketing Officer here at the company. He needs to get his legs underneath him as he rolls out his roadmap of all the product roadmaps and putting them into priorities. So I think you look to see Some advancements in our portfolio and announcements around the technology capabilities that we have, both in AI and other areas that we're looking at right now, Likely moving into the Q2.

Speaker 4

Great. And the changes that you've been talking about, changes in go to market, changes in kind of how you In terms of packaging, the solutions and whatnot, do you see a change though in terms of the mix Coming from direct versus indirect sales?

Speaker 2

Direct sales? We don't do much Yes,

Speaker 4

I know you don't have a big one. I just didn't know whether it was something you were looking to do more of. I know the channel is obviously the predominant The source of revenue for you and your peers. But I didn't know if you guys were maybe changing strategies and what can you build up more of a direct sales team?

Speaker 2

So we're not going to the direct sales motion. I can be pretty clear with you on that. However, what I can share with you in terms of directionally, and I said it in my statements, The opportunity in this company, I think, is quite unique, is the ability to bundle the solution set and offers in the white label model to new buying centers, New channel partners that are not traditional. So as you think about the UCaaS market and our traditional Piper players in the UCaaS market, We're looking at actually bigger and larger, more strategic players tapping into their larger ecosystems of the SMB market and we're labeling our offering there. Secondly, When I say we're going to reinvigorate the brand of the company, we are going to reinvigorate the brand, not only to our partners, but to the end customer.

Speaker 2

So that is not going to be a direct sales model, but the end customer will begin to understand the value proposition Sangoma brings to the table and then use that as a pull strategy To have them come into our partner ecosystem, whether locally or regionally in every small town and city across the Americas and be able to come in with a reference of I want Sangoma. And so this idea of adding a full strategy is an indirect way to go direct, so to speak, is that we're not selling direct, but we want the direct customer to understand who we are, What our propositions are and to come in with a notion of bringing Sangoma to their partners for them to come to us to look to fulfill that. That makes sense, David.

Speaker 4

Yes, it does. Thanks, Charles. One last question. Just on the margin front, we obviously seen the margins come off here in the last Couple of quarters here. I know you're not providing guidance, but could you at least maybe talk about how you see the trajectory of the margins Throughout the balance of this year, is Q1 expected to be the low point?

Speaker 2

David, I missed what you said there, market?

Speaker 4

Margins. Margins. Yes, the EBITDA margins.

Speaker 3

Yes. So based on where we're at, and obviously, we've not issued guidance as it relates to that, I still though I see that the increase in gross margins does track closely to our mix of services revenue and product revenue, Which is a big driver of that. Cloud services typically higher margin offerings. So as we see changes to the We could see some changes to things like gross margin, which would certainly drive to the bottom line. And then growth, of course, in MSP Services Somewhat of a lower margin as we know and have talked about in the past.

Speaker 3

But I think we have a good handle on our costs. We're looking at those as Charles gets his legs under him. And I think that's probably the most I

Speaker 4

Maybe a different way to ask the question. I understand the impact of gross margins. Let's say from an OpEx perspective, I think there was some talk about looking at cost optimization. But do you see material change in how much you're spending, at least from a cash OpEx perspective?

Speaker 3

So our goal, of course, and what we've been very good at It's cash preservation and generating positive operating cash flow, and I do see that continue.

Speaker 4

Okay. Thanks. I'll pass the queue.

Speaker 3

Thanks, David.

Operator

Our next question comes from Vivek Palani of Northland Please go ahead.

Speaker 1

Hi, guys.

Speaker 5

I'm Vivek Khan from Mike Latimore of Northland Capital. I have a couple of questions with me. And the first one is, how about the churn rates? Like, did it change from the last quarter?

Speaker 3

No, we've not seen a change in churn rate. We actually have one of the best churn rates in the industry. We continue to enjoy that, And we expect that to continue as well.

Speaker 5

All right. And my next question is, What percentage of revenue is international? And do you expect the international revenue to grow faster than the overall company?

Speaker 3

Yes. So, international is relatively small relative to all the other revenue that we have. And while we continue to look at avenues to grow that, I would

Speaker 2

A lot of more of a strategic flavor to that question. So as you heard in my remarks, Sangoma has got the asset pool to be able to do things that are a little different than what we've been doing today. We have a Fairly significant ecosystem of partners that we sell to, whether they're VARs or MSPs or installing partners TSPs, I mean, there's a whole slew of partners who are selling our services, but there are new partners New channels to market and one of those channels is international. We have international reach now. We've got an infrastructure in There are mostly product sales in that space right now, but there's an opportunity now to take this entire portfolio As we bring the portfolio together, as we consolidate our process, as we modernize our systems and tools, the ability for us to take that globally So this will be something that you should watch out for with us.

Speaker 2

It will be part of the new market expansion program that we have. And we'll continue to find New markets, whether they're new partners or new markets, whether geographic markets, it's all sort of part of our growth plan as we march through this transformation over the coming 3 or 4 quarters.

Speaker 1

All right. Thanks.

Speaker 2

You're welcome. Thank you.

Operator

Our next question comes from Robert Young of Canaccord Genuity. Please go

Speaker 2

ahead. Hi, Robert.

Speaker 6

I know that you're not giving guidance, but there was that 10% annualized organic Growth in services number that you talked about last quarter, is that something to think about? I know services is a little bit below that this quarter, but Is that not relevant as well? Or can you look at that as a guide?

Speaker 3

Yes, Rob, we were pleased to see service revenue grow in this quarter, and it remains to be an organic growth focus for us, For the company, for sure. And that's probably the most I can say about that.

Speaker 6

You talked about bundling offerings specific to industry. I know Sangoma has had, For example, maybe a healthcare solution bundle, but is this are you talking about a deeper Bundled solution that you maybe go through like through Cerner or something like that to a hospital or something like that. Maybe if you can just give a little more color around What the bundled offerings mean?

Speaker 2

So just think about it this way, Robert. We're still obviously shaping all of the various unique bundles and making them quite You're making this technology contextually meaningful to the discontinuity that a particular industry has to face. And as we deeply understand some of these initiatives, some of which we have a lot of experience, Retail distributed enterprise would be a really good example. Sangoma had some wonderful customers in this space, great partners who understand this space and The collaboration of their knowledge with our knowledge and our capabilities and assets allows us to be very unique with these bundles. What I don't envision is hard and fast bundles that are just Yes, there's a whole package for business in the box for a distributed enterprise that happens to be in retail.

Speaker 2

What I do see is the ability for Industry relevant components that are able to be assembled together and that meet the particular needs of healthcare, whether it's hospital IT, Retail, whether it's distributed retail, like some of the partners we have right now, whether it's education like school campuses, Things of that nature, they all require some basic components, all of which we have here at the company. They require communications, they'll require hardware and technology, They require a managed communication set of capabilities and applications, which again we have. They require collaboration tools and tool sets that we have. They want it as a service model The burden of capital on the balance sheet, and they want to provide it with the support infrastructure on top, which we also have. So these are all the wonderful assets I talked about in my And when you have those, the only thing you're trying to do now is create a value proposition that's contextually meaningful to a particular industry, so you're speaking their language.

Speaker 2

And that's the big transition that we're making here. And as I said earlier, there are segments in industry, the ones I mentioned, Healthcare and Retail and Education that have we have competencies in this company that are already delivering services in that area and we have partners who are highly focused in this area that We're going to double down our efforts with it. So that's the way we see the industry move. There'll be lots of things for you to see from the company over the coming quarters As we modernize our website, we're going to position our offerings in that fashion where you'll be able to see clearly what the bundle looks like for retail, what they look like for healthcare and education. And so these are some of the dynamic changes that are coming into the company.

Speaker 2

The nice thing about it is I'm not having to go build all this stuff and find it all. It is already here. It's just a matter of assembling it in a way that's contextually meaningful to the industry we want to focus in on.

Speaker 6

Okay, very interesting. One last little question. Last quarter you said that Wholesale trunking was subject to some pricing pressure. I think that might have been part of the reason why service revenue was under a bit of pressure. Maybe if you could Confirm that and is that something that's gone away or is that something that's still a factor and then I'll just pass it on.

Speaker 7

Yes. Hey, this is Jamie Leonard here. While we're not providing guidance right now, we have seen growth in our wholesale trucking business due to a variety of in flight initiatives that we have going on, Includes network optimization, improved costs and those initiatives have really kind of allowed Sangoma to be more

Speaker 2

aggressive in our positioning With our wholesale customers as well

Speaker 7

as looking for more responsive suppliers.

Speaker 6

Okay. Thanks. I'll pass the line. Thanks for taking on my questions.

Speaker 3

Thanks, Rob. Thanks, Robert.

Operator

This concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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