Sangoma Technologies Q4 2023 Earnings Call Transcript

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September 27, 2023

There are 9 speakers on the call.

Operator

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. Seaburn.

Speaker 1

Thank you, operator. Hello, everyone, and welcome Sangoma's Q4 fiscal 2023 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 Norm Worthington, Chairman of Sangoma's Board of Directors Charles Salome, Chief Executive Officer Jeremy Wug, Chief Operating Officer Jamie Minner, Chief Revenue Officer and Larry Stott, Chief Financial Officer, to take you through the results for the Q4 fiscal year 2023, which ended on June 30, 2023. We will discuss the press release that was distributed this afternoon, together with the company's financial statements and MD and A, which are available on SEDAR, EDGAR and our website.

Speaker 1

As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS. And during the call, we may refer to terms such as adjusted EBITDA and adjusted cash flow that are not IFRS measures, but which 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 forward looking statements regarding the company or management's intentions, estimates, plans, expectations and strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results might 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, EDGAR and our website.

Speaker 1

With that, I'll hand the call over to Norm.

Speaker 2

Thank you, Sam, and good afternoon, everyone. Thanks for joining us. During today's call, we will provide you an overview of our 4th quarter developments as well as details on our financial performance during fiscal 2023. But first, there are a couple of important introductions I'd like to share with you. Over the past month, as you may have seen, we announced 2 new members of our leadership team, both of which I'm very pleased to tell you more about.

Speaker 2

On September 1, Charles Salome officially became Sangoma's Chief Executive Officer. Charles is a seasoned technology executive with an extensive background in transforming businesses through revenue reinvigoration and a laser focus on customer satisfaction and engagement, 2 weeks ago, we also announced the appointment of Jeremy Wells as Sangoma's Chief Operating Officer. Jeremy most recently with SVP of Product, Marketing and Professional Services at Bell Canada, Brigitte is responsible for a multibillion dollar P and L across various technology domains, including voice, collaboration, contact center, cloud computing, networking, cybersecurity and Internet of Things focused on the small, medium and enterprise segments. As COO, Jeremy is stepping into a newly created position that will play a pivotal role in driving the company's transformation, growth and success in a rapidly evolving cloud communications landscape. You'll certainly hear more from these 2 in the weeks months ahead, I would like to take a moment now and allow each of them the opportunity to introduce themselves personally.

Speaker 2

Charles?

Speaker 3

Thank you, Norm, and thanks to everyone for joining us today. Let me start by saying how thrilled I am to be here and to roll up my sleeves as Sangoma's CEO. I'd also like to take this opportunity to personally extend my gratitude to the Board for the confidence and the trust they place in my ability and vision to lead this company. When I first learned about the CEO position and began to dig into the business, what became clear very quickly was the size of the opportunity that lies ahead for Sangoma once it begins to perform to its full potential, I saw that potential during my due diligence

Speaker 2

of the firm. It it was one

Speaker 3

of the most significant factors in making my decision to join the company. Sangoma's strong foundation developed over the years combined with the changing requirements of the FMB markets presents an extraordinary opportunity. In the past 5 years, we've witnessed an unprecedented increase an understanding and recognition of the crucial role technology plays in enabling businesses to stay relevant to their customers. The SMB sector, in particular, has rapidly grasped this concept and is generating substantial demand for user friendly, easy to consume products and cloud based services that assist them in navigating the consistently evolving market dynamics. Sangoma possesses all of the essential elements to meet this demand effectively.

Speaker 3

Our value proposition uniquely positions us to cater to this growing need. That's an exciting and huge opportunity for the company, for the management team around this table. I want to take a moment to acknowledge the hundreds of Sangoma employees and partners around the globe, thank you for your commitment and focus during this period of transition. We have an incredible team of committed people at Sangoma, and I look forward we're building the company to be a world leader in technology and communication services. Lastly, to the investment community, look forward to the opportunity to meet with all of you soon.

Speaker 3

For the next few weeks, I would appreciate your patience as I settle in and deepen my understanding of key priorities that will frame my agenda for the remainder of this fiscal year. However, as you will see in the weeks months ahead, I do plan to increase our engagement with this community and strengthen the partnerships between Sangoma leadership and its very important stakeholder group. I'm excited to be here leading the employees of Sangoma. And while it's only been a few short weeks, our transition plans are already underway as we build our agenda within 1st 100 days of my role being here. A key proponent of this transition is our new COO, Jeremy Watts.

Speaker 3

With that, I'm going to hand it over to Jeremy to help explain the situation. Jeremy?

Speaker 4

Thanks, Charles, and thank you, Norm, for the opportunity. When Charles touched on his excitement for the opportunity that lies ahead For Sangoma, I very much share that same excitement. When I think about the ingenuity, the breadth of our products and services and frankly, the value proposition we represent against the size of the market we address, it's a great place to be. There's absolutely no question we have some work that needs to be done, But that's our opportunity and I can already see pretty clearly what's on the other side of that work. We're already diving in and building the work plan and programs required to lead the I'll leave it there for now, but I very much look forward to getting to know all of you in the weeks months ahead.

Speaker 4

I'll now

Speaker 2

hand it back to them. Thank you, gentlemen. In the short time Charles and Jeremy have been on the job, I've been able to witness firsthand their drive, their deep industry expertise, results oriented leadership styles and a contagious optimism for Sangoma's future. On behalf of the Board, I'd like to extend a sincere welcome to both of you. On a personal note, I was pleased to hand the CEO reins over to Charles earlier this month and resume my role as Chairman of the Board.

Speaker 2

Our search for the right CEO to lead Sangoma into the future was exhaustive and focused on driving value for our shareholders as well as our extended Sangoma family, even with all that effort though, it was difficult to know with any certainty that the right choice was made until we got to work. Having now had the opportunity to work with Charles, especially with regard to his plans and vision for the critical first 100 days, I can tell you all without hesitation that we've made the exact right choice in Charles. I'm confident and excited by this next step in the evolution of Sangoma. Before I can do that, though, I do have one final deliverable. While I'm pleased that our Q4 revenue of $63,700,000 propelled us to a fiscal 2023 record revenue of 252,500,000 the slight decrease in services revenue largely coming from pricing pressures in the wholesale trucking service was disappointing.

Speaker 2

This slight decrease was offset by a stronger than anticipated revenue quarter for our product portfolio. However, the revenue mix did lead to lower gross profit margin than we expected. Yet, I remain confident in the long term strategy and transformational initiatives that Charles will be bringing in the months ahead. So let's take a look now at how our Q4 and fiscal year came together. And for that, I'll hand the call over to our CFO, Larry Stock.

Speaker 5

Thank you, Norm. Before I get into our financials, I'd like to extend my own appreciation and gratitude to the Sangoma family. Transitions are challenging for all organizations and the past few months have served as a key reminder to me the dedication and focus of our team members. I'd also like to echo Norm's welcome to Charles and Jeremy. I've been impressed by their expertise and vision in the short time that they've been on board, I'm excited and invigorated by the leadership team we now have in place.

Speaker 5

Now let's turn to the results. Total revenue for the Q4 of fiscal 2023 was $63,700,000 down 4% compared to the same period a year ago and up about 1.5% sequentially. Full year total revenue was $252,500,000 surpassing the $250,000,000 mark for the first time in the company's history and grew at a healthy 13% year over year. Services revenue for the quarter was $50,200,000 up 2% from the Q4 of fiscal 2022 and down less than 1% on a sequential basis. This is the 3rd quarter in a row in which we exceeded $50,000,000 in services revenue in the quarter.

Speaker 5

While services as a percentage of total revenue dipped 2 percentage points sequentially to 79%, it remains nicely above our historical range. Going forward, we remain committed to driving towards the 10% annualized organic growth in services as we have discussed over the last several quarters. For the full year, services revenue totaled $198,500,000 up 25% on a year over year basis. Product revenue for the quarter was up 11% sequentially to $13,500,000 but slowed from $17,200,000 a year ago a return to more historical pre pandemic levels. In addition, ongoing sensitivity to capital expenditures, macroeconomic uncertainty and unfavorable U.

Speaker 5

S. Dollar exchange rates can serve as headwinds on some international order flow. On a full year basis, product revenue came in at $54,000,000 versus $65,700,000 in the prior year. Cost of sales for the 3 months ended June 30 decreased by 2% to $21,400,000 compared to $21,800,000 a year earlier. Gross profit for the 3 months ended June 30 totaled $42,200,000 down 5% from $44,500,000 a year ago and $44,400,000 sequentially.

Speaker 5

Gross margin for the Q4 of fiscal 'twenty three was approximately 66% of revenue. Our 4th quarter gross margin is down to a greater mix of lower margin offerings, particularly product sales, on a full year basis, gross profit increased 10% year over year to 172,800,000 4th quarter operating expenses consisting of sales and marketing, research and development, general and administration and foreign exchange we're $43,700,000 versus $45,700,000 during the equivalent period a year ago, representing a 4.4% year over year decline due to the realization of cost savings driven by various cost initiatives, the primary driver of the decrease was the decline in general and administrative expenses due to lower non cash expenses, including share based compensation, as well as amortization and depreciation, the engineering expenses incurred the development costs amortized during the Q4 of fiscal 'twenty three were $9,300,000 This was lower than the $9,800,000 incurred in the same quarter last year, mostly as a result of higher capitalization of labor costs on development projects, but no change as a percentage of revenue at approximately 15%. The engineering expenses incurred and the development costs amortized during the fiscal year ended June 30, 'twenty three, were 37,500,000 Compared to $34,200,000 in the same period last year, the increase year over year was a result of the additional development staff from NetFortress being included for the full year as well as the company's ongoing investment in innovation.

Speaker 5

On a full year basis, operating expenses totaled $175,700,000 up 8% year over year, well below the full year top line growth rate of 12.6%, demonstrating our focus on expense discipline and the meaningful operating leverage in our business. This improvement translated to a 300 basis expansion in our operating margin on a year over year basis to 30.4%. Adjusted EBITDA during the 3 12 month periods ended June 30 totaled $10,860,000 $44,400,000 respectively. While down slightly year over year on a quarterly basis, full year adjusted EBITDA grew just over 5%. The primary drivers of our year over year adjusted EBITDA growth are top line growth and operational expense discipline.

Speaker 5

We continue to remain committed to our core tenant of delivering growth with profitability. Net loss for the Q4 was $23,600,000 and for the year was $29,000,000 both significantly affected by a onetime non cash goodwill impairment charge of $22,500,000 This goodwill impairment resulted primarily from, among other factors, a significant increase in the discount rate as a result of macroeconomic factors, which other companies in our industry sector have also experienced during the latter months of fiscal 2023. And now let's discuss a few balance sheet items as well as our cash flow. Inventory at quarterend totaled 18,000,000 flat on a year over year basis, but down meaningfully from $20,000,000 at the end of the 3rd quarter. This reduction in inventory reflects our ongoing focus we will continue to focus on balance sheet management to drive our inventory to appropriate levels, prudent inventory purchases, appropriate build schedules and advanced planning.

Speaker 5

Trade receivables totaled $16,100,000 at quarter end, slightly below the $17,000,000 at the end of the 3rd quarter as we continue to focus on accounts receivable collections and overall cash conversion, the company closed the 4th quarter with $11,200,000 in cash compared $8,000,000 at the end of the 3rd quarter, a significant increase in our cash balances. The company also used a portion of its cash to continue paying down debt associated with its most recent acquisitions and investment in capitalized development costs. We finished the quarter and the fiscal year with net cash provided by operating activities of $10,900,000 $26,500,000 respectively on June 30, 'twenty three, reflecting a strong quarterly progression of cash flow throughout fiscal 'twenty three. These significant increases in operating cash flow illustrate the strides we've made in our focus on balance sheet management and prudent spending. Before we open the call to questions, I want to touch on our current approach to financial guidance.

Speaker 5

As you're all aware, forward guidance this has been a mainstay of our quarterly earnings release for quite a while, but it was not included in our disclosures this quarter. The company will be suspending the issuance of forward looking earnings guidance for fiscal 'twenty four. This decision comes as part of a strategic transformation led by the company's new CEO, Charles Salome to position Sangoma for long term success and sustainable growth. Sangoma remains fully committed to providing transparency to our investors and will continue to disclose our financial performance through regular quarterly and annual financial reports as well as conference calls and other investor communications. You will also hear updates on the progress of our transformation journey in future quarterly earnings calls directly from Charles and the executive team is appropriate.

Speaker 5

We fully intend to resume our pre existing guidance practices for fiscal 'twenty five. Furthermore, as our fiscal Q1 nears its close, I'd like to hand the call to Jamie Minner, our Chief Revenue Officer, for a few words on how Q1 is shaping up. James?

Speaker 2

Thank you, Larry, and hello, everyone. As you've heard today, we saw some services headwinds in terms of pricing pressure in Q4 with our wholesale trucking service, which as many of you know is a traffic based lease cost routing construct, we're seeing that business stabilize and rebound nicely, and I'm pleased to share that our revenue and gross margin trends have, by and large, all in line with our internal projections for Q1 to date. Thank you, everyone, for your time and attention. Operator, we are now ready to take some questions.

Operator

We will now begin the question and answer session. If you're using the speakerphone, please pick up your handset before pressing any keys. The first question comes from Mike Lylemore with Northland Capital Markets. Please go ahead.

Speaker 6

Hey, thanks very much. Yes, and congratulations Charles and Jeremy on the new positions here.

Speaker 3

Thank you. Thank you.

Speaker 6

I know it's early in the kind of strategic analysis phase of the year here, but when you talk about a transformative journey, should we think about Kind of cloud communications and UCaaS still being central to that or are you envisioning evolving into something broader?

Speaker 3

The company, when I came into the company, there are several significant asset pieces here, both the communication platform, there Managed services applications that are best suited towards the small, medium enterprise client. I think the idea of this transformation is to better assemble the components of the assets that we have that are best suited towards capitalizing on what we're seeing is a dynamic shift in the way the small, medium market is buying. And the idea when you think about transformation and think about it as more assembling the company for scale To the composition of bringing some of these solutions together to drive higher value. Got it.

Speaker 6

And then on the in terms of just bookings trajectory, how have bookings played out kind of over the summer and through the Q1 Maybe new MRR in particular.

Speaker 2

Yes. Thanks for the question. We are starting to see bookings continue to grow, more so on the new logo side than expansions. And for us, the land and expand is our key Kind of go to market, go a little bit wide, go a little bit deeper with that base of customers. And we're starting to see that trend continue as we did from Q3.

Speaker 7

Okay, great.

Speaker 6

Thanks very much and best of luck.

Speaker 3

Thank you.

Speaker 7

Thanks, Mike.

Operator

The next question comes from David Kwan with TD Securities. Please go ahead.

Speaker 5

Good afternoon.

Speaker 7

Hi, Travis.

Speaker 8

Hey, guys. I guess Maybe a question for Charles. You kind of talked about obviously the company not performing to its potential at this point. How long do you think do you think it will take to get the company, Shanae, where it is achieving its potential that you see in it? And maybe at that Time, like what kind of like the growth and margin profile look like?

Speaker 3

I wish I could give you all that information right now, my friend. It's been 3 weeks So I've been here, I mean, I'm in a deep state of dissecting and understanding all elements of the business as well as getting to know the management team. We've just positioned Jeremy and the team already. Give me some time to really get into understand the company dynamics, I can answer that question far more clearly in a few more months.

Speaker 8

That's fair. That's fair. On the margin side, they came back this quarter, which was a surprise, and I think it was in part driven by the services revenue mix. Hi. How should we look at it?

Speaker 8

Obviously, absent of the guidance you've talked about on the services revenue side, trying to get to that kind of 10% -ish Annual growth. From a margin standpoint, kind of you look at the last couple of years, it's been around the 15% level and even last quarter, it was over that. It was 17.5% for the year. Like should we expect that your margins Should pick up, this year.

Speaker 5

Yes. This is Larry. The decrease in gross margin tracks closely to the mix of services revenue and product revenue. Cloud service is typically higher margin, right? So as we see changes to that split, you see a change To the margin with that as well as sort of the growth in the MSP services, Which have a different margin profile, right, can have some impact on that.

Speaker 5

But what I can tell you is that as we continue to see Our margins, we've seen stability in what they are other than the mix issue.

Speaker 8

That's helpful, Larry. Last question. I think, Charles, you were just kind of talking of the kind of strategy and as it relates to kind of better assembling Your suite of solutions to address the needs of SMBs. Is that I guess that's historically where the company is focused. I know more recently kind of looking to target more of the enterprise segment.

Speaker 8

Is the strategy now to kind of go back Targeting kind of these small to midsized companies versus trying to compete in the enterprise?

Speaker 3

No. Well, first of all, I don't know, Because I think the breadth of portfolio that I've seen in the company thus far, which is what I said in my remarks, there is an exciting opportunity for us to assemble these pieces. I think the range now can be opened in terms of what markets we can go to with the portfolio that we had. The SMB continues to make up the majority of the market that we focus on for our services revenue, and I think the opportunity in the coming months and quarters ahead of us is, can we open up new buying channels, new markets, up or down market with the portfolio that exists here, which I think is the exciting opportunity for the company.

Speaker 4

Great. Thanks. You're welcome.

Operator

The next question comes from Gavin Fairweather with Cormark. Please go ahead.

Speaker 7

Okay, good afternoon and welcome to the call everyone. Maybe just To start out, it sounds like you're still aiming for 10% services organic growth, which is good to hear. I know product is a bit more volatile and more macro So you're kind of seeing that revenue line decline alongside the macro a little bit. You're curious if you think you can kind of hold the line on On product sales given what's going on in the back half? Gavin, I think there's a

Speaker 5

couple of things to that. What we have said is that we've seen that be close to historical pre pandemic levels as we move forward. And That's kind of our visibility right now to that. As it relates to that, I think the dip relative to the wholesale trunking What you saw in the Q4 and as Jamie mentioned, when he spoke how that has Stabilize. So it's probably the best I can give you right now, but that's kind of how we see it.

Operator

Okay. And then my quick scan

Speaker 7

at the MD and A, it like supply chain maybe on product was also a bit of a headwind. Are you seeing some more challenges there that's impacting the

Speaker 2

profit gross margin as well?

Speaker 5

I wouldn't say more headwinds. I think some things are individually specific as it relates to that. We've done Really good job inventory wise as well. I think that for product in particular in that portfolio time of year and the Hypes of sales all impact how you can go to supply chain on that, but nothing new in terms of that, no.

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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Sangoma Technologies Q4 2023
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