Sangoma Technologies Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 9 speakers on the call.

Operator

Welcome to the Sangoma Investor Conference Call. As a reminder, all participants are in a listen only mode and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions. I would now like to turn the conference over to Samantha Reburn, Chief Legal Officer. Please go ahead, Ms.

Operator

Reburn.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to Sangoma's Q3 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 Jeremy Webb, Chief Operating and Marketing Officer and Larry Stock, Chief Financial Officer, to take you through the results of the Q3 of fiscal year 2024, which ended on March 31, 2024. We will discuss the press release that was distributed earlier today, together with the company's financial statements and MD and A, which are available on SEDAR Plus, 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, which is a non IFRS measure, but is 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 are 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 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 the company's annual audited financial statements posted on SEDAR Plus, EDGAR and our website.

Speaker 1

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

Speaker 2

Thank you, Sam, and good afternoon to everyone listening in. We really appreciate you taking the time to join us and for your support and interest in Sangoma. On the call with me today are Jeremy Wubbs, Sangoma's Chief Operating Officer and Larry Stock, our Chief Financial Officer. During the fiscal Q3, we maintained strong momentum in all major areas of our transformation efforts, consistent with the updates that I provided in our Q2 earnings call. Remain confident in our transformation strategy to unlock value through integration, strong fiscal management and pivoting the company to scalable growth, setting the stage to the next phase of our evolution.

Speaker 2

Underpinning this has been a laser focus on maintaining a robust balance sheet with effective cost management, which keeps us on track for the financial targets we've set for this fiscal year and provides optionality in how we manage our capital allocation and our growth initiatives. Our 3rd quarter financial highlights include Q3 revenues of $61,000,000 adjusted EBITDA of $11,000,000 adjusted EBITDA margins of 18% and $15,500,000 in net cash generated from operating activities. I'm incredibly proud of how the Sangoma team is driving our transformation forward, while maintaining excellent service for our core customers and bolstering our financial health. This strategic positioning allows us to capitalize on a significant opportunity. The SMB market, which accounts for about 44% of global IT spending and invests over $30,000,000,000 annually in IT communications is where I see great potential.

Speaker 2

The mid market in particular has been underserved and is in need of a single vendor solution that provides enterprise quality support at affordable prices. Sangoma is a company that simplifies essential IT communication services for both the small business and the increasingly sophisticated mid market. Our comprehensive product offerings and unique service model sets us apart, positioning us to meet these growing demands effectively. For our agenda today, I'm going to provide a high level update on the key initiatives that helped us to retain that, while Jeremy and Larry will go into much further detail on the progress of each. First, we've undertaken a major redesign of our go to market approach.

Speaker 2

This is to support our strategy to do a couple of things. First, more effectively prioritize and harness our existing channels and expand to new routes to market including new channels, new categories and new geographies. Part of our go to market transformation includes the imminent appointment of a new Chief Revenue Officer who has spent their career building and leading sales and channel management programs for this very market and has an ideal skill set to help us execute our go to market transformation. We are in the process of implementing a new sales model, something that I did discuss with all of you at the Q2 session that prioritizes more programmatic demand generation activities with our strategic partners. We've also flattened our entire organization to allow account sales executives to work with our partners much more collaboratively to close opportunities.

Speaker 2

Last quarter, we calculated development of bundles of industry relevant solutions aimed at more sophisticated clients, solutions that combine both hardware, software and managed services. Now coupled with our volumetric business, our bundled strategy provides for expansion of our business into adjacent markets. This is already yielding new opportunities in our pipeline and I'm optimistic about the next few quarters. These changes are enhancing our revenue predictability and aligning with our strategic focus on building a more secured MRR base. Secondly, we've embarked on a brand revitalization campaign starting with our web properties, aiming at strengthening our position within the partner ecosystem while creating broader awareness of Sangoma's capabilities.

Speaker 2

Increasingly, we're seeing more buying patterns changing. Clients are much more apt to purchase based on brand awareness. Promoting our brand to the end client delivered to our vast partner ecosystem is a major tenant of our go to market transformation. We've also ramped up our channel marketing team to support the more programmatic demand generation activities that I mentioned earlier. 3rd, we have made significant investments as part of our enterprise architecture plan to improve productivity, quality of our service and customer support, including the appointment of Joel Capas, our new Chief Customer Officer, focused on improving and prioritizing the customer experiences, or as we like to call it, a safe pair of hands.

Speaker 2

We continue also to modernize and automate all aspects of our business and are making progress across all the initiatives we started 6 months ago. Our anchor project, the ERP program, is well underway. This program supports a more efficient way of operating the company, but equally so establishes a modern and flexible architecture that dramatically simplifies how we support our market expansion opportunities, whether new channels, new offerings or into new geographies. Now on the product front, our innovation engine is firing on all cylinders with several new product launches in AI, UCaaS and industry specific bundles set to redefine the market standards. Introduction of AI driven services has significantly improved our own internal operation efficiencies as evidenced by the reduced wait times and support calls that we are seeing.

Speaker 2

We have launched a new Voice of the Client scoring program to better keep tabs on the pulse of our clients and our partners. As we think about the remainder of the fiscal year and going into next year, we remain focused on the foundational elements that will enable us to pivot to growth. First, we'll continue to generate cash flow from operations, which gives us the optionality in how we manage our capital structure and invest in our 3 pillars of growth: organic, inorganic and geographic expansion. We want to complete the fundamental transformation of our go to market, which sets the foundation to scale our business efficiently through account expansion and through new channels. Finally, we want to innovate and streamline our marketing offering under one single, enhancing our brand and positions us in a safe pair of hands within the industry.

Speaker 2

Now look, transformation can be challenging, but we have an experienced team at the helm. This is why I'm pleased to report that 2 quarters into this process, we are on track with all the initiatives that we have set forth to create and have managed to do so while bolstering our financial stability and enhancing our strategic options to increase value in the business. With that, I'm going to turn it over to Jeremy to dive deeper into our operating activities this quarter. Jeremy, over to you.

Speaker 3

Thanks, Charles. I couldn't be more excited and pleased by the progress and momentum I have seen after now being here 2 full quarters. Both the pace and the progress are significant. And with the internal transformation programs well underway, it's exciting to be shifting efforts to scalable growth while abiding by the same fiscal discipline already in place. Let me start with an update on several of our transformation programs that support becoming a simpler and more unified Sangoma to our customers, partners and employees.

Speaker 3

As part of our business systems roadmap, we are well underway in our enterprise resource planning, customer relationship management and configure price quote programs, which will transform the end to end order to cash process. This enables better sales management, pricing and quoting, order management, service management and financial management. This program will see us achieve a 70% reduction in our finance systems, a 58% reduction in product SKUs and a 71% reduction in payment ports. In addition, as Charles mentioned earlier, this provides a much needed flexibility to support market expansion opportunities. The ability to be that best in class single vendor that provides enterprise quality support at affordable prices requires a focus on continuous improvement and we have through this quarter made some significant steps forward.

Speaker 3

We restructured our customer support model in line with the ITIL framework commonly used in the IT services industry. This tiered support model makes better use of our resources and skills with the objective of reducing response and resolution times. We've also introduced more modern instrumentation to ensure we are meeting the expectations of our customer, while maintaining a competitive cost structure. We are base lining our current performance and expect to see significant improvements in both customer satisfaction and net promoter scores. What a quarter it has been for our product lineup and our increased focus on innovation.

Speaker 3

As the former head of a multibillion dollar product P and L, I couldn't be more pleased with the progress the team has made. A few highlights of the quarter include audio transcription and video meetings, which allows users to automatically get access to meeting transcriptions for improved productivity Sangoma AI Assist, which is summarization of the meeting, extracting conversation key points, all leading to better collaboration experience and again improved team productivity. And then an early release of Sangoma Control Panel under the R and D development name NetOps. This is a portal that unifies all MSP network and security services into a single pane of glass. In the future, we'll expand to include all single services and is designed to enhance the value of our bundling strategy.

Speaker 3

As Charles highlighted, promoting our brand to end clients while selling through our vast partner ecosystem is a major tenant of our go to market transformation. This has been the driver behind our brand revitalization effort digitally and our ongoing education and training with our partners. This includes a broader marketing program covering updates to our web properties, partner programs, awareness campaigns and ensuring messaging that is more reflective of who we are as a company. We've maintained strong momentum in all major areas of our transformation efforts. Consistent with updates provided in our Q2 earnings call, we remain confident in our strategy and now more than ever need to sharpen our go to market, setting the stage for the next phase of our evolution.

Speaker 3

As we work with our partners and end clients selling the full breadth of the Sangoma portfolio, we need a different go to market approach, one which addresses the longer sales cycle associated with these higher value opportunities, supports improving our results by more effectively harnessing our existing channels and one which supports the expansion Charles mentioned earlier. In advance of our new CRO joining, we've already started to transform our go to market model, including the following: transitioning to a simplified organization structure more in line with industry best practices removing several unnecessary layers of management between our sellers and the senior team, prioritizing more programmatic demand generation activities with our most strategic partners versus a broad brush approach and introducing a strategic pursuits process, which is bringing the best organizational talent into our sales process to support more sophisticated opportunities. As I said at the beginning, I couldn't be more excited by the significant progress and momentum of the internal transformation program. That same excitement is now fully present in the sales and go to market transformation, a journey of quarters, not months, but one which will be executed with the same fiscal discipline and focus of the team.

Speaker 3

Thank you. And I'd now like to turn it over to Larry to provide an update on the financial results for the quarter. Over to you, Larry.

Speaker 4

Thanks, Jeremy, and thanks everyone for joining us today. Through our transformation activities, we've continued to demonstrate strong financial discipline, and I'm pleased to report our 3rd consecutive quarter of adjusted EBITDA improvement. Most importantly, our balance sheet continues to get stronger with $15,500,000 in net cash generated from operations and once again record high cash conversion, demonstrating the quality of our earnings and discipline with cash management. This is allowing us to continue to pay down debt while self funding our internal investments to pivot towards our growth strategy. Revenue for the Q3 of fiscal 'twenty four was $61,000,000 down 3% from the prior year and down 2% on a sequential basis.

Speaker 4

Services revenue was flat year over year at $50,400,000 and represented 82% of total quarter revenue, up from 81% of revenue in the same period a year ago. Our services business remains consistent and sets the foundation for the financial health of Sangoma. This is a testament to the stickiness of our platform and the value we bring to our core customers. To that end, services revenue churn for FY 'twenty four to date remains at just 0.9%. Product revenue, representing 18% of total quarter revenue, declined from $12,200,000 in the same period a year ago to $10,700,000 in the current quarter, a decline of 13%.

Speaker 4

On a sequential basis, product revenue declined by 8% from the 2nd quarter. This is the result of our strategic direction to focus our services go to market and the continuing global geopolitical and economic conditions, which caused companies to continue to manage and restrict their CapEx. Cost of sales during the Q3 decreased 2% to $18,000,000 compared to $18,300,000 a year earlier. The decrease was primarily due to overall revenue mix. This translated to a 3rd quarter gross profit of $43,000,000 dollars down 3% compared to the same period last year.

Speaker 4

Gross margin at 70% for the 3rd quarter was down by approximately 0.2% from the previous quarter and 0.4% compared to the prior year period. Our 3rd quarter operating expenses consisting of sales and marketing, research and development, general and administration and amortization of intangible assets totaled $42,700,000 versus $43,400,000 in the 1st quarter and declined from $44,500,000 in the 2nd quarter. Last quarter, I indicated that we had taken $6,000,000 of cost savings in the fiscal year and $9,000,000 on an annualized basis. Through the incredible work of the team and constantly finding more ways to be efficient, we're now on track for FY 'twenty four cost savings of 6,200,000 dollars $9,100,000 on an annualized basis since we began our transformation plan. This drove our continued improvement in adjusted EBITDA to $11,200,000 for the 3rd quarter, representing approximately 7% growth sequentially or 18% of revenue, up from 17% adjusted EBITDA margin in the 2nd quarter.

Speaker 4

Net loss for the 3rd quarter was $1,300,000 or $0.04 per fully diluted share. Now moving on to the balance sheet. The strong cash flow from operations of $15,500,000 was more than double the $7,000,000 in cash flow from operations generated in the prior year period despite similar levels of revenue. We continue to be very diligent in our working capital management, which includes trimming inventory, resulting in 139 percent rate of cash conversion of cash flow from operations to adjusted EBITDA. This is more than 2x the comparable rate of 50 7% a year ago and up from 88% in the immediate preceding quarter.

Speaker 4

We finished the quarter with cash balances of 18,400,000 dollars a $7,800,000 increase from $10,600,000 at the end of December, while continuing to pay down $4,400,000 of our term loan. As you can clearly see, the strength of our cash flow generation and cash management program is opening up options in how we can allocate material amounts of excess cash being generated, and I will touch on our capital allocation priorities in just a moment. But first, on to our guidance. With 1 more quarter in fiscal 'twenty four, we are reaffirming and providing further clarity on our guidance range for the year. Prior guidance projected revenues ranging between $245,000,000 $250,000,000 with adjusted EBITDA expected to fall within $41,000,000 $44,000,000 As Charles said earlier, we believe we are on track with our financial targets for the year and we are narrowing our fiscal year 'twenty four revenue guidance to the range of 246 point $5,000,000 to $248,500,000 with adjusted EBITDA forecast to be between $41,500,000 $43,500,000 This updated guidance reflects Sangoma's commitment to transparency and its confidence in its strategic direction, including our go to market transformation and overall operational performance.

Speaker 4

We remain dedicated to delivering long term value to our stakeholders while navigating evolving market dynamics. Now before we end for Q and A, I want to touch on our capital allocation priorities for the remainder of fiscal 'twenty four and fiscal 'twenty five. This is a critical piece in our strategy that is timed in connection with all the initiatives that Charles and Jeremy have talked about that will pivot the organization for new phase of growth. As you know, we have a strong and loyal customer base alongside strong operating cash flow and adjusted EBITDA. We will be prioritizing increased debt repayments with the goal of reducing debt to between $55,000,000 to $60,000,000 in fiscal 'twenty five.

Speaker 4

This will also provide the benefit of lower interest expense that helps our free cash flow going forward. Our capital allocation approach will also allow us to invest in our 3 vectors of growth organic, market expansion and inorganic. And of course, we will continue to self fund our internal activities, including our go to market, R and D, ERP program, CapEx and other working capital needs. At this time, we believe this is the most effective and efficient use of capital. We will update you as the coming quarters progress.

Speaker 4

This is an exciting time for Sangoma and we believe we are on a great path that will open up more strategic opportunities. That concludes our prepared remarks. Operator, let's open the call up for some Q and A.

Operator

We will now begin the analyst's question and answer session. The first question comes from Gavin Fairweather of Cormark. Please go ahead.

Speaker 5

Maybe just to start out, just on the growth acceleration as part of a plan. I mean, it's always been part of kind of the fiscal 'twenty five plan, I believe, as you're kind of busy executing on transformation right now. But I guess I'm just curious when you look into the pipeline, are you seeing any cream suits or KPIs that kind of stand out to you that provide some visibility on the growth acceleration that you're looking to execute on?

Speaker 3

Yes, great question, Gavin. I'd say a couple of things. The pipeline continues to grow quarter over quarter, which is a good sign, obviously. We're seeing larger, more material deals in the pipeline. And this quarter compared to the previous two quarters, we've seen improvement also in our close rate.

Speaker 3

So I'd say we're building momentum. We're trying to drive the multi products into single offer out to our clients, larger deals, sometimes a bit larger, longer sales cycles, but more predictable in revenue. So we're seeing the early indications as we're just starting to do and drive our go to market transformation.

Speaker 2

One of the things we're going to talk about, I think in Q4 is when the new CRO is announced officially and bring her on board is to be able to then start producing some channel metrics to answer that exact question with something more little bit more qualitative I'm sorry, quantitative to give you a sense of how the go to market is progressing in terms of the growth. So if you remember in Q2, sort of introduced the concept that we were sort of shifting away from some of the internal activities we were doing in the company and beginning to really put focus now on the

Speaker 4

go to market transformation

Speaker 2

with the same kind of figure we put into the 1st 6 months of more internally focused. We're about a quarter of the way through the go to market transformation activities. Obviously, they're bringing on the new leader. We'll kind of change that trajectory. We'll reinforce that trajectory of what we're trying to do there.

Speaker 2

I think by the end of the Q4, we'll be able to begin to show some of the progress in terms of the types of deals that are coming in, the size of the funnel, the win rate opportunities, even the number of services and relevance that clients are having with us. So these are all things that we're looking to bring forward in the next couple of quarters, just like we did in the first couple with some of the internal KPIs, now beginning to give you some external KPIs around the transformation relative to and specific to the go to market activities.

Speaker 5

And that's not really a good segue into my second question. I mean, obviously, fairly major overhaul of kind of how the channel program is being run. Do you have any kind of early feedback you can share in terms of what you're hearing from your partners as you execute on that?

Speaker 2

Yes. I mean, I can certainly chime in. So one of the things that we started early prior to the bringing in the new CRO is Jeremy and I started looking at account segmentation. We had a very broad set of partners of every mix and color, every size and shape. And so we began to really prioritize in almost an account segmentation pyramid, the strategic partners that we considered strategic, the mid level partners that we're scaling and then sort of the run of the mill component buying type of partners in the pyramid.

Speaker 2

And we started to adjust our go to market and we began with the more strategic partners. So the feedback from them is much more focused from Sangoma. We like what we see. We're able to align our investments in channel development programs in our spend with them, some of the incentives we even position with them, some of the joint co marketing development activities. And we've got a couple of pretty exciting opportunities with some of these strategic partners.

Speaker 2

The partner feedback has been, I would say, overwhelmingly positive, at least at the top end of the market. As we move down the pyramid into some of the more scalable partners, we're going to wait till our new CRO comes in and how to handle the scale of that level of partners. But at least at the early signs from some of our more strategic partners has been very, very positive. They like the messaging from us. They like the clarity of our vision and what we're telling end customers in terms of how our technology can solve some of the discontinuity that they face in their particular industries.

Speaker 5

Great to hear. And just next for me, I mean the press release mentioned your planned strategic emphasis and focus on services.

Speaker 4

I guess I'm just curious,

Speaker 5

did the existing product business, is the plan to just try and maintain it and harvest or milk and muskows as possible? Or should we see that start to, well, I guess, maybe continue to decline a little bit as you kind of reorient the business focusing on services?

Speaker 2

Yes. I would say I'll let Jeremy also chime in on this, but I would say our emphasis right now is being put on the services side of the business for sure. We like to maintain the product business because it's a healthy combination in terms of the bundles that we're going after with our sophisticated customers. They appreciate the opportunity for us to be able to provide both hardware, software and services in a single wrapper. So not only we're taking our foot off the gas on product, it's just not as focused for us in terms of some of the transformational activities as we move to the services side because that's where we see the long term MRR, that's where the profitability sits.

Speaker 2

And quite honestly, I think that's where the entire industry is going, towards that part of the world in terms of paying premium prices and really appreciating the value from a stickier services business. And that's why we're driving the company towards that direction.

Speaker 3

Yes. I just build off what Charles said. There are certain verticals and use cases where kind of a more hybrid approach that involves some of the premise equipment along with the cloud is still very attractive and we still see opportunity for that from a product perspective going forward. Definitely, the focus is services, but selling in to those clients or specific verticals, something that's more hybrid, allows us to sell and differentiate with the products because not all of the providers have some of the actual products. They're all in the cloud.

Speaker 3

And second of all, that actually drives healthy profit into the company to reinvest in R and D and our services growth. So it's a good opportunity for us to be in this hybrid space as well.

Speaker 5

That's great. And then just lastly for me, maybe for Larry, obviously a nice working capital inflow this quarter. I mean, it sounds like that's more from some internal changes to processes and management that you're doing versus quarter to quarter flows. So maybe you could confirm that. And I'm just curious whether you see some additional opportunities to harvest working capital as you put in place the new ERP.

Speaker 4

Yes. So certainly, Gavin, a lot of that is the effort internally relative to the effectiveness and efficiency that we have with working capital, how we're deploying cash, our efforts around things like ARAP inventory, etcetera, as well as the cost savings initiatives that were put in place beginning at the start of Q2. And you've seen that over the past couple of quarters for sure as we've realized those. We did have one tax refund item that was in there this quarter. As we continue the transformational efforts, I expect to see some additional items there, but it won't be at this level, I wouldn't think going forward given that one time item.

Speaker 4

But we continue to look to be as effective and efficient as we can be.

Operator

The next question comes from Max Ingram of Canaccord Genuity. Please go ahead.

Speaker 2

Hi, Max.

Speaker 6

Hi, this is Max on for Rob. Thanks for taking my questions. First, I wanted to ask how integration efforts are going. I know last quarter you touched on the plan that's now being executed on the focus on effective integration, whether that's respect to past acquisitions or bundling. So any color you could provide would be helpful.

Speaker 3

Yes, I'll take it sort of from front to back of the organization. We have unified our systems from a configured price quote perspective. There's more transformation occurring there to make it simpler and more automated. The big anchor, Charles talked about and I talked about is our ERP program. It's partway into production.

Speaker 3

So it's going to be a few more quarters before we see the efficiency and gains of that. And then I'd say the 3rd piece, which I touched on a little bit earlier is the ITIL framework that we implemented in our global support organization. That's probably the most meaningful one in this past quarter. And what that's done is really made us appear much more a single company to our clients and partners. And so as they have called in for help, for support or anything, it really gives the look and feel of 1 Sangoma.

Speaker 3

So I'd say that's been the major thing I would highlight this quarter that's unified the company and given a better experience for our partners and customers.

Speaker 2

Bill, just 2 more points on that more softer issues, right? I think I'm extraordinarily pleased with the integration of the company itself internally. Just the ability for the company to operate as a single company now, our divisions and our units, our structure, some of the processes that we've built inside of how we operate, order to cash, customer onboarding, our sales processes, even our marketing and the way we deal with our channel partners, all of that integration is done is really pretty much complete. I think now the next layer below that is to make that more efficient through some of the things that Jeremy about, the systems and the tooling and some of the longer tail activities that sew the fabric of communications and tooling into that process integration that we've done at the human level. So I think that's really been helpful and that then spills itself into the integration of our partners.

Speaker 2

We're now much clear on who our partners are, how strategic which are the strategic partners, how do we integrate ourselves with them, how do we co develop with them, how do we co invest with them. Those integrations are also going quite well. So on all fronts, integration is not just about tooling and systems and ERP program. It's fundamentally across all aspects of the business, including the human element in terms of how the company operates amongst its various factions and units within the company.

Speaker 7

Thanks. That's a lot of great detail. Thanks for that.

Speaker 6

And then my second question would be, it looks like U. S. Is roughly flat this quarter, while international was weaker. Are you able to comment on some of the dynamics you're seeing there?

Speaker 2

Not really. From a revenue point of view, we're actually quite pleased with where we are. I mean, I told you in the beginning of Q2, we are about to fundamentally alter our go to market. I told you in Q1, we're going through a fairly significant transformation of the company. The very fact that we're able to be relatively flat over these last three quarters and not go backwards, I mean, we were on a trend to go when I joined in September, the company was on a trend to go in a real downwards position.

Speaker 2

I think we've stabilized the company. We're seeing pockets of little drops here or there, whether it's international or our product business, But we feel that's going to fluctuate with a fairly small standard deviation, at least for the next quarter or 2, as I said, in terms of where we think our guidance is going to be at the end of Q4. So none of these things really alarm us. And quite frankly, it's about exactly where I thought it was going to be and what I indicated to you folks, but where I suspected it would be back in Q2.

Operator

The next question comes from Mike Latimore of Northland Capital Markets. Please go ahead.

Speaker 2

Hi, Mike. Hey, Mike.

Speaker 7

Great. Yes. Hey, good evening. Congrats on the nice results in the midst of a transformation here.

Speaker 2

Thank you.

Speaker 7

Maybe can you clarify just a little bit more around the bundle strategy? Do you feel like you have most of the bundles that you want in place now or are there more to come? And then over time, do you expect the majority of your sales to be bundles or you still think you'll have a healthy kind of a la carte and wholesale business?

Speaker 4

Yes, maybe I'll just answer it

Speaker 3

a little bit in reverse. I definitely think we'll still have cases where certain channels and partners buy a la carte and then we have other partners and channels that buy kind of the full bundle. I think that's just tied to the different markets we serve, the different verticals, the different kind of use cases that our kind of our partners are somewhat comfortable with or kind of where their insertion point is with their different clients. I'd say we're 50%, 60% into kind of bundling the pieces in as efficient a way as I would like to see it. Say, UCaaS, contact center, some of our CPaaS applications, they're more integrated, more bundled.

Speaker 3

We're now with some of the managed services and security. It's not bundled as efficiently as I'd like, but there's a sales process to go sell it as a bundle, right? So we're selling the full suite of Sangoma out to our customers. I'd say a portion of it we're delivering is automated as an efficient as we'd like. So the goal is to always propose the full Sangoma.

Speaker 3

The goal is to kind of lift off anything that if a customer already has UCaaS, etcetera, to then cross sell kind of the other things that are in the bundle to the existing base. So kind of in both cases, whether it's a new customer, we want to sell everything, or it's an existing customer, we want to cross sell or up sell everything. The goal is to sell the full Zynga proposition, but there is a very healthy channel still for kind of selling the 1 to 2s of the things that we have just based on the verticals they serve or even what those partners are comfortable with.

Speaker 2

Yes. And I'll just add a couple of things to that. One, look, clients in the SMB market are vast and dynamic and they cross multiple industry verticals and have multiple needs. What we're trying to build here is a company that can provide not preset bundles. There'll be some of those, particularly for the prem business that Jeremy spoke about earlier, where we'll prepackage bundles, we'll pick very selected partners that we're going to resell it through and then we'll distribute it that way.

Speaker 2

But the beauty of the ERP programs and some of the things we're doing internally is set the stage for being able to piecemeal bundled packages and components together to serve a particular need under the guise of a particular industry vertical. And just a quick example, something like the multi dwelling unit vertical, right, that crosses many borders, it crosses healthcare, it crosses hospitality, it crosses the prison systems, it can cross into residential buildings. All of these these are 4 different types of customers, all in multi dwelling unit environments that require several components of bundles that we might sell. Some might just want networking and security, some might want network security and managed services, some might want all 4 pieces, including some UCaaS, some might just want 1 or 2 pieces. So the idea of bundles, don't get it in your mind that it's some preset set of packages that we're going to put into the market and that'll be it.

Speaker 2

It's really going to be quite dynamic based on the needs of particular industry verticals that we're going to focus in on. That help clarify this understanding of bundles?

Speaker 7

Definitely, no, it's super helpful. So it sounds like the ERP system is kind of critical to this strategy.

Speaker 2

It's correct. It is.

Speaker 7

Okay. Okay, got it. Great. How about you talked about close rate improving. How about just kind of sales cycles and then collections from the base?

Speaker 7

Any changes there?

Speaker 3

Yes. I'd say overall, we've improved our close rate. The larger deals still have longer sales cycles. So that's just the nature of the industry is that as the deals get larger, they tend to have a bit longer sales cycle. I'd say, however, quarter over quarter, we've made some pretty significant improvements in our close to cash rate, like in terms how quickly we implement customers and get them up and installed and running.

Speaker 3

So we've seen some pretty healthy improvement.

Speaker 2

Were you asking a question about accounts payable in terms of collections? Is that what you were asking? That's what I thought I heard.

Speaker 7

Yes. Just particularly small businesses, are they still paying on time and under normal timeframes?

Speaker 4

Yes, sure. Sorry, I missed that question. Yes, we're certainly seeing across the entire customer base payments as normal. I think that's evident in our AR balance and what we're seeing there and our ability to convert that quickly into cash. So we've not seen any significant change in that at all, Mike.

Speaker 7

Yes. Great. All right. Sounds good. Thanks very much.

Speaker 7

Best of luck.

Speaker 2

Thanks. Thank you.

Operator

The next question comes from David Kwan of TD Cowen. Please go ahead.

Speaker 7

Hey, guys. Hi, David.

Speaker 8

Good afternoon. Good evening. So I was wondering the gross margin this quarter, so it was down, I guess, relative to a year ago, despite, I guess, the more favorable revenue mix. I was wondering if there was anything going on there that we should know about.

Speaker 4

Yes. No, nothing in particular, really, David. There's a mix even within services of what the margin really is. And although we don't specifically that way, you will see slight variations quarter over quarter or even year over year. Really from an overall margin perspective from 70.6%, 70.4% quarter on quarter, That's what we saw.

Speaker 4

Nothing really unusual or of any interest, just the mix within services.

Speaker 8

All right. That's helpful, Larry. And as it relates to the channel, Charles, you kind of talked about some of the positive feedback that you were getting from your channel partners. Can you talk about maybe some of the constructive feedback, we don't want to call it that way, as to stuff that they'd like to see you do, whether it's on the pricing side, bundling, anything like that?

Speaker 2

Yes. So I would break the feedback into kind of 2 buckets, right? So there is very positive feedback on, thank God, we're seeing some stability of the company. We're getting clarity on your messaging, getting clarity on the commission structures and how they're paid and getting better support. All of these positive feedbacks are coming in relative to just the stability that we're putting into the company and the clarity of our messaging.

Speaker 2

On the constructive side, there's still some guys, it's a little bit difficult to deal with still. And some of the legacy of some of the previous partners who only focus on one of the acquisitions. So one of the challenges that we had to face here is the integration doesn't just go into we're an indirect channel, it doesn't just go into our company. It also affects we have to integrate our partners because they are our sales force. And there are thousands of these partners.

Speaker 2

And so we're getting to all of them. Some of them are just used to buying Digium or NetFortis or Star 2 Star and that's all they bought, that's all they sold. And when you try and bring new products to them, they don't really understand it. And so this is why the account segmentation is important for us. And so those customers, those partners who actually want to sell our portfolio, who want to learn more about it, give us more feedback on, hey, can you help us better with training?

Speaker 2

Can you give us more support in terms of product information? Can you provide us more sales and adheres onto your site? So the constructive feedback is them desiring the full portfolio when they hear the message. They want to participate and they want to help them more with more training and more awareness of our portfolio and more giving them more ability to support and sell us. And that's really most of where the feedback comes from.

Speaker 2

That

Speaker 8

sounds helpful color, Charles. And just on the capital allocation side, so it sounds like debt repayment is the number one priority at this point. And then you kind of talked about some of the other uses of your capital. As it relates to M and A, like how should we look at that? Is there certain criteria that you would look to figure out when you might be actually interested in resuming M and A activity?

Speaker 8

And then when you make that decision, what types of acquisitions are you looking at? Would you look at stuff in the kind of the core communication services space or would managed services be an area that you really want to grow?

Speaker 2

So the first question, I think, of all those questions you asked was how should you look at it? The answer would be pretty it's a pretty obvious way to look at it, right? Everything we've been telling you is, if we want to provide optionality, our whole focus of the company is around providing optionality, whether it's optionality for our partners, whether it's optionality for our customers to buy and pick and choose various services, whether it's optionality for this management team the shareholders they represent in terms of how we want to grow the company. What Larry outlined for you is providing you optionality, providing us optionality for how to grow the company. One of those growth factors is inorganic.

Speaker 2

Great way to have an inorganic growth strategy to have a solid cash position, healthy balance sheet and the ability to leverage the company if we needed to go do some really good opportunistic things in the marketplace. So I would look at it any in almost the way it's being presented to you. We've given ourselves optionality to grow the 3 vectors of growth that we spoke about organic, inorganic and or geographic expansion. That's sort of that question. What triggers or what types of companies are we looking at?

Speaker 2

Really, that's for Jeremy to continue to assess and the management team to look at where there's opportunities, whether they're tuck ins, whether they're buttress acquisitions, whether they help support entry into a new market potentially, whether it's a new technology that fits very well and allows us to get into adjacent markets, these are all going to be criteria that we're going to be examining. We're looking at them as we speak always because the market is extraordinarily dynamic. I think we're going to go into a period now and in the next couple of years where a lot of the component players who came into the market in early COVID period are going to have attractive valuations for those who have cash. This company is in a position to have that kind of ability to capitalize on those opportunities to market those in front of us. So, I want you to look at it as just that simple word.

Speaker 2

What you're seeing is a company who's setting itself up for growth under 3 various sectors. 1 of those is inorganic. And the only way you do those three things is if you have a financial platform that allows you that optionality, which we now have and are going to continue to build on.

Speaker 8

That's helpful. Maybe one last question. On the M and A, you talked about potentially adding leverage, like how high a leverage level would you be comfortable with for an acquisition?

Speaker 2

We're not there yet, David. We're introducing to you the concept of how we're going to grow this company under those three vectors that we talked about. And we're showing you that we're doing it through this integration through fiscal management and through maintaining good levels of debt for the company. As we get more clear on how those triggers or those vectors are going to be executed, whether organic, inorganic or geographic expansion, we're going to be pretty transparent with you. We'll let you know what we're going to do.

Speaker 2

We'll let you know how we want to go. If we were even to use leverage at all, we may not be able to use cash. We may do smaller tuck ins. We may do we don't really we haven't really got to that point yet. We're just heading into the FY 'twenty five planning period.

Speaker 2

And I think at that point, maybe into the end of Q4, going into Q1, next year, we'll be able to be a little bit clearer with you on now. And let me tell you exactly how we're going to execute those 3 vectors. We're just not there yet.

Speaker 3

We're simply introducing to you that we're about to embark on a pivot to growth under the guise of the 3 areas that I discussed. Hey, David, it's Jeremy. I'd say to Charles, myself have been here long enough now. We have a really good understanding of the DNA of the company. We have a good understanding of how the company makes money, how it drives profit, and are much, much in a much, much better position to understand kind of how we leverage our cash position and that optionality to continue to keep that discipline and have kind of a P and L that's got the kind of profit that we all find attractive.

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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Earnings Conference Call
Sangoma Technologies Q3 2024
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