Sangoma Technologies Q4 2024 Earnings Call Transcript

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Provided by Quartr
September 18, 2024

There are 8 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. After the presentation, there will be an opportunity for analysts to ask questions.

Operator

I would now like to turn the conference over to Samantha Reburn, Chief Legal Officer. Please go ahead, Ms. Reburn.

Speaker 1

Thank you, operator. Hello, everyone, and welcome to Sangoma's Q4 fiscal year end 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 Falame, 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 Q4 of fiscal year 2024, which ended on June 30, 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, Tim, and good afternoon to everyone listening in. Really appreciate you taking the time to join us and for your support and interest in Sangoma. Hard to believe, but this month marks my 1st anniversary as Sangoma's CEO. As I said before, when I joined, I saw the potential to unlock value by integrating our strong portfolio of assets and focusing the organization on delivering a full stack solution of essential IT communication products and services to the SMB market. Over the past year, we've embarked on a transformative journey to realize this vision.

Speaker 2

We've assembled the right leadership team, streamlined our operations, reengage with our partners, upgraded our systems and processes and revamped our go to market. All the while, we bolstered our financial health and built flexibility into our model to put Sangoma on a scalable path to growth. I'm extremely proud of how the team has executed in the Q4 and throughout the fiscal year. We ended the year right on plan, and I love it when a plan comes together. With revenues of $247,300,000 which fell squarely within our guided range of 246,500,000 and 248,500,000 adjusted EBITDA of 42,600,000 that was above the midpoint of our guided range of 41,500,000 to 43,500,000 and adjusted EBITDA margins of 17% and net cash generated by operating activities of $44,200,000 representing cash conversion from adjusted EBITDA of 104%.

Speaker 2

Sangoma is now fully prepared to execute its FY 'twenty five operating plan with confidence. Our strategic focus for FY 'twenty five is built upon the foundation of the transformation efforts successfully implemented in FY 'twenty four. With a robust pipeline of initiatives, we are positioned to deliver on quarter on quarter sequential growth throughout FY 'twenty five. These initiatives, coupled with our detailed operating plan, set the stage for sustained momentum and continued expansion as we capitalize on the opportunities ahead. Our strategic plan for FY 'twenty five is centered around capitalizing on the 3 key vectors of growth, which I spoke about in our Q3 earnings call.

Speaker 2

With our strong balance sheet and differentiated offerings, we are now positioned to execute on the more strategic elements of our business through organic growth, inorganic expansion and market and channel development. As the market is rapidly evolving, companies like Sangoma are now well positioned to leverage their strength to seize the rich opportunities that are emerging. We are already seeing promising trends in AI, security and SD WAN, which can efficiently integrate into our portfolio through both build and buy models, driving sustained growth in the years ahead. In the next phase of our transformation, we'll focus on a set of software, hardware and applications that distinguish Sangoma as a communications platform provider at its core. Our ability to address the essential IT communication needs of the SMB market, including the increasingly sophisticated mid market sets us apart, driving demand for multiple products and services across the entire portfolio.

Speaker 2

These areas provide high recurring revenue for our business and foster long term relationships that yield greater customer lifetime value. Reducing churn remains a top priority for our business. Throughout our transformation, we have successfully maintained churn rates below 1%. Now by prioritizing exceptional client experiences, we continue to make significant strides in further reducing churn, aiming for industry leading retention rates. This focus not only strengthens our customer relationships, but also positions us for sustainable long term growth.

Speaker 2

This is shown through the appointment of a full time Chief Client Officer, Joel Kappas, who is spearheading the programs around customer operations that Jeremy will speak about in a moment. Now by building on a steady foundation, we will look to drive top line improvements. We are already seeing signs of stabilization in previously challenged areas of the business, such as our product business. Amid an uncertain macroeconomic backdrop, additionally, we're observing early positive results from our go to market, channel management and brand revitalization initiatives. I've talked in the past about our plans to bundle products and services.

Speaker 2

This isn't just about grouping and cross selling products. It's about delivering comprehensive solutions to address industry specific needs. For example, our CX, hybrid and cloud UCaaS solutions are all HIPAA compliant, enabling us to meet the communication needs of large multisite healthcare organizations. Our solutions also comply with international privacy standards, opening up market opportunities in the European Union, Canada and Australia. Through our proprietary technology platforms, we control the end to end delivery of services and adhere to strict data and security standards, allowing us to cater to specific industry requirements, including the public sector.

Speaker 2

Now moving on to capital allocation. Our high quality conversion of EBITDA to cash flow and strong balance sheet provides us with financial flexibility to pursue various strategic paths for maximizing value creation. Currently, our priority is debt repayment. As I announced in July, we accelerated debt repayment in the Q4 aiming to reduce Sangoma's debt position to $55,000,000 to $60,000,000 by the end of the fiscal 2025 year. We also continue to self fund our transformational activities, including R and D spending and the completion of our ERP programs in early 2025, which again Jeremy and Larry will discuss further in their remarks.

Speaker 2

A key benefit of the ERP program will be our enhanced ability to quickly integrate bolt on acquisitions efficiently and drive greater synergies and return on investments. With our debt to trailing EBITDA ratios expected to fall well below our capacity at less than 1.5 times, we'll be in a strong financial position to pursue inorganic growth opportunities through non dilutive means that align with our core platform strategy. We are at the early stage of building a pipeline and we believe market conditions will continue to favor us as we move into the next calendar year. Now before I turn it over to Jeremy to update you on the operational progress, I wanted to take a moment to acknowledge and welcome the addition of April Walker to our Board of Directors during this last Q4. April brings a wealth of technology expertise and insights into the areas of customer success and digital transformation, having previously held the role of Senior Vice President of Customer Success at Salesforce.

Speaker 2

At Sangoma, we are deeply committed to fostering a diverse and inclusive environment across the workplace, management levels and on our board By actively promoting and supporting a wide range of voices and experiences, we ensure that our team is equipped to tackle the challenges with creativity and insight. I am both proud and honored to have such a seasoned team around me. Now as we close out 2024, I'm incredibly proud of the remarkable progress Sangoma has made. This has been a year of transformation, resilience and growth. And I'm confident that the foundations that we've built positions us strongly for FY 'twenty five.

Speaker 2

Our team's hard work, our strategic initiatives and the commitment to innovation have put us on a clear path towards sustainable success. Moving into our pivot to growth year, Sangoma remains a compelling investment opportunity with a well defined path towards sustainable value creation. We are leveraging our strong financial foundation and executing a detailed operating plan that positions us to capitalize on market opportunities. I have immense confidence in our ability to deliver value to our key stakeholders, our customers, our employees and our shareholders. And I truly believe the best is yet to come for Sangoma.

Speaker 2

With that, I'm going to turn it over to Jeremy to dive deeper into our operating activities this past quarter. A. J, over to you.

Speaker 3

Thanks, Charles. I'd like to echo your comments earlier. Fiscal 2024 was a foundational year to reorganize and align the organization. And while there's still work to complete internally like our ERP program, automation projects and other operations improvements, this is all well in hand and our focus is clearly on our go to market and driving quarter over quarter growth. Spangoma Technologies at its core is a communication platforms company complemented by a rich and broad range of services and solutions.

Speaker 3

Our history of innovation and acquisition has resulted in a sophisticated set of assets and portfolios, most of which strongly aligned to our go to market and some of which I would describe as either late lifecycle in nature or at times competitive to our partner ecosystem. As we continue to align and improve our go to market, we'll concurrently optimize our internal investments with this in mind. We now have a strong operating plan that instills confidence in our ability to meet our targets. This confidence is driven by a growing pipeline and larger MRR deals. To provide more transparency, we'll begin reporting go to market metrics starting in Q2.

Speaker 3

In FY 2025, we'll continue to focus on becoming a simpler and more unified Sangoma to our customers, partners and employees. We have implemented cost savings programs, streamlined processes, made systems improvements and will continue to do so throughout our fiscal. Let me provide an overview of some of the key operating activities for FY 2025. In the IT and Business Systems team, we will see continued focus on our enterprise resource planning, customer relationship management and other programs supporting our end to end order to cash process. As outlined previously, fiscal 2025 will see a 70% reduction in our finance systems, a 58% reduction in product SKUs and a 71% reduction in payment portals.

Speaker 3

In customer operations, we have a robust program that will continue to see improvements across all major support metrics. Similar to what was noted in our July 22 press release, we expect further improvements in customer satisfaction, net promoter scores, churn, mean time to repair and average time to answer. Some notable improvements we have already seen in Q4 compared to prior quarters include support M2 and TR improved by 35% and average time to answer improved by 24%. I'd like to acknowledge the tremendous work of our Chief Information Officer, Mark and Chief Client Officer, Joel. The ability to be a best in class provider with enterprise quality support at affordable prices requires a disciplined and persistent focus on continuous improvement.

Speaker 3

As a communications platform company that is complemented by a rich and broad range of services solutions, it's important that we continue to evolve our product line in a manner that supports the increasing preference for multi product solutions, enterprise class support and digital interaction. With this very focus in mind, our 2025 product and engineering plan prioritizes efforts under 3 major themes. First is core platform capabilities. That includes advances in our established product lines and new forms of innovation. A couple of examples of recently released capabilities include Ask Sangoma AI Assist, a new AI bot trained on Sangoma products that has been soft launched internally, designed to further advance our support and to evolve as a support offering for our clients a new major release on our Switchvox premise platform, supporting our ability to capture share in the space and increased area of focus where we experienced quarter over quarter growth of 23%.

Speaker 3

2nd is portfolio integration. More seamless inner working of our offerings, such as tighter integration between our unified communications as a service and contact center as a service platforms, supporting that multiproduct preference I mentioned earlier. And third is our overall digital experience, continued development and evolution of our Sangoma control panel, which unifies our services into a single pane of glass. We have a clear plan that will see us delivering on 2 to 3 major releases per quarter across these three themes I just covered. Backed by a robust product and engineering plan, let's turn our attention to sales and go to market.

Speaker 3

Early in the Q4, we welcome Monica Walton as our new Chief Revenue Officer. Monica brings strong capabilities in business transformation and extensive channel experience with a proven track record in crafting and executing go to market strategies for the SMB market. The hallmark of our go to market activity is focus and prioritization. With such a wealth of capabilities at our disposal, it is critical to ensure there are strong portfolio alignment in our partner ecosystem. Our service revenue grew by 1.83 percent in FY 'twenty four.

Speaker 3

We kept churn under 1%. And now as part of our growth strategy, we have structured our go to market program around the pillars of partnership, sales talent, expanded lead gen and structure. Partnership revolves around our disciplined focus on our top 400 partners that support 80% of our revenue. Sales talent that focuses on skills development, increased training and leveraging our new talent, including both our new CRO and new North American channel chief expanded lead gen, which includes emphasizing more inside sales capabilities and intensifying our focus on cross selling into the base. Structure includes leveraging new performance management tools, better instrumentation to measure, track and target our programs, channel incentives and internal rewards.

Speaker 3

We have a fulsome go to market program that is well underway. And to quickly and steadily shift from Q4 into Q1, our sales plan naturally prioritizes NRR in early quarters given the longer sales cycles associated with the larger pursuits in our MRR business. I'm very pleased by the significant progress we've made in FY 2024 and the excitement and momentum we have going into Q1. The very same operating discipline used to execute on our internal programs, our cost savings in FY 'twenty four is now being applied to our go to market activities. Thank you.

Speaker 3

I would like to turn it over to Larry to provide more detail on our financial results. Over to you, Larry.

Speaker 4

Thank you, Jeremy, and welcome, everyone. We appreciate you joining us for today's call. Fiscal 'twenty four was a year of change for Sangoma, and that's why I'm pleased to report 4th quarter and fiscal year end results that were squarely within our guidance range on revenue and adjusted EBITDA. During the Q4, we generated $11,700,000 in net cash from operating activities, a 5% increase over the prior year period and converted 105 percent of our adjusted EBITDA of $11,100,000 into cash flow. In fiscal 2024, we have generated $44,200,000 in net cash from operating activities, an increase of 67% and reduced our total debt position by $23,000,000 Throughout this fiscal year, every step of the way, we remain focused on deleveraging the balance sheet and creating optionality for future investments as we pivot to growth.

Speaker 4

Revenue for the Q4 of fiscal 2024 was $60,900,000 a decline of 4% from the prior year period and down 0.2% on a sequential basis. Services revenue declined by 0.6% year over year at $49,900,000 and represented 82% of total quarter revenue, up from 79% of revenue in the same period a year ago. For fiscal 2024, services revenue of $202,100,000 increased 1.83%. This is a great testament to the sticky nature of our core services business that we have been able to grow MRR while undergoing our transformation activities. Our services revenue churn remains very low at less than 1% in FY 'twenty four.

Speaker 4

Product revenue representing 18% of total quarter revenue declined from $13,500,000 in the same period a year ago to $11,000,000 in the current quarter, a decline of 18%. On a sequential basis, product revenue increased by 3% from the Q3. For fiscal 'twenty four, product revenue was $45,100,000 a decline of approximately 16%. As Charles mentioned earlier, we are starting to see some stabilization in product revenue entering fiscal 2025. Although economic conditions have impacted CapEx spend across our industry, we have seen some of our competitors pull back in certain markets and this is giving us opportunity to step in to fulfill this demand.

Speaker 4

This will have a near term effect on product mix and blended gross margin in the first half of fiscal twenty twenty five, but also gives us the opportunity to acquire new customers to drive longer term recurring revenue relationships. Cost of sales during the Q4 decreased 11% to $19,100,000 compared to $21,400,000 a year earlier. The decrease was primarily due to overall revenue mix, which has shifted towards services. This resulted in 4th quarter gross profit of $41,800,000 that declined 1% compared to the same period last year. Gross margin at 69% for the 4th quarter was down by approximately 1% from the previous quarter and up 3% compared to the prior year period.

Speaker 4

Our 4th quarter operating expenses consisting of sales and marketing, research and development, general and administration and amortization of intangible assets totaled $41,600,000 versus $43,700,000 in the prior year period and declined from $43,700,000 in the Q3. Since we initiated our transformation plan that we call Project Diamond, the team has taken out $6,200,000 in fiscal 'twenty four cost savings and $9,100,000 on an annualized basis. This is not just about reducing costs, but improving our processes, data and efficiency in how we operate and scale the business going forward. With the completion of our ERP program in calendar 2025, we believe the greatest benefits are still to come. However, there will be some one time investments in fiscal 2025 that I will cover a little later in our guidance.

Speaker 4

The team has done an incredible job reducing OpEx, while at the same time, we have continued to invest more in our technology platform, with R and D increasing 8% in the 4th quarter to $10,000,000 and increasing 6% in fiscal 'twenty four to $39,500,000 Jeremy covered some of the areas that we are investing in, including AI, enhanced security and building greater integration across our core technology offerings to support multi product solutions. We reported 4th quarter adjusted EBITDA of $11,100,000 representing 2% growth year over year and was 18% of revenue equal to our adjusted EBITDA margin in the 3rd quarter. Net loss for the 4th quarter was $1,700,000 or $0.05 per fully diluted share. Now moving on to the balance sheet. As previously disclosed, we accelerated our debt repayments in the 4th quarter with a $5,300,000 repayment of our revolving credit facilities and $4,400,000 in term loans that brought total debt repayments to $9,700,000 in the 4th quarter $23,000,000 for the fiscal year.

Speaker 4

We finished the quarter with cash balances of $16,200,000 a $5,100,000 increase from the $11,200,000 at the end of fiscal 2023. For now, we're going to continue to prioritize debt repayments for a couple of reasons. First, it lowers our interest payments in a higher rate environment. And second, it provides added debt capacity that we can tap into at a later date as a strategic option as they present themselves. Now on to our guidance.

Speaker 4

For fiscal 'twenty five, we expect revenue in the range of 250 dollars to $260,000,000 and adjusted EBITDA in the range of $42,000,000 to $46,000,000 Since we're at the near end of our 1st fiscal quarter, we'll be providing guidance for Q1 with revenue in the range of $61,000,000 to 62,000,000 dollars and adjusted EBITDA in the range of $9,000,000 to $10,000,000 Within the guidance, there's a few points that we that are worth noting. From a top line standpoint, as Charles already mentioned, we are looking for growth to be gradual with revenue improvement on a sequential basis over the course of the fiscal year. Some of the contributing factors we see is stabilization in product revenue alongside a growing pipeline of MRR opportunities from our channel initiatives that we look to close in the second half of the fiscal year. Adjusted EBITDA guidance of $42,000,000 to $46,000,000 for fiscal 'twenty five includes approximately $2,000,000 in one time ERP costs. Excluding these ERP implementation costs, we would expect adjusted EBITDA margins to be in the range of 17% to 18% of revenue, similar to the margin levels we have been reporting recently.

Speaker 4

Now for some housekeeping and modeling purposes. We would expect interest expense in fiscal 2025 to be in the range of $4,900,000 to $5,300,000 depreciation and amortization of approximately $38,000,000 share compensation expense to be approximately $3,000,000 capital expenditures to be in the range of $4,000,000 to $6,000,000 We hope the additional detail around the guide provides added transparency towards how we see this fiscal year progressing and highlights the strong value we see in the business. We remain dedicated to delivering long term value to our stakeholders while navigating evolving market dynamics. In closing today, I'd like to thank the dedicated employees of Sangoma for all they do on a daily basis and thank all of you again for joining us today. This concludes our prepared remarks.

Speaker 4

Operator, let's open the call up for some Q and A.

Operator

Thank you. We will now begin the analyst question and answer session. The first question comes from Gavin Fairweather with Cormark. Please go ahead.

Speaker 5

Hey, good afternoon. Great to hear all progress on the turnaround. Maybe just to start on the pipeline, it sounds like we're due to get some increased disclosure, maybe alongside your Q2, but hoping you can maybe provide a bit of a sneak preview, maybe even from a high level, just in terms of the overall size of the pipeline, what you're seeing on deal sizes and win rates etcetera? Yes, a couple of things.

Speaker 6

I mean we're definitely seeing larger deals in our pipeline. The sales cycle on the MRR business still remain long, but the good thing is we're seeing more larger deals in the funnel. And I'd say from a go to market perspective and some of the metrics in Q2, I won't get into the metrics per se, but I'll tell you what the objective is. Really the objective is to show insight into

Speaker 2

how we're going to grow quarter over quarter and how we're going

Speaker 6

to hit guidance. So you'll get a little bit of insight into what's happening in the pipeline, how it's growing, kind of the deal size, kind of those are the types of things that we're looking at and producing going forward in Q2.

Speaker 5

That's helpful. And then just on the channel side, you've obviously done a lot of work to kind of redesign the partner program and done a lot of work to kind of integrate your various products and come up with bundles. Can you discuss what kind of feedback you're getting from those target partners in terms of the new approach?

Speaker 6

Yes, I would say that the feedback has been very positive and I think the positive feedback comes from us being more precise and clear around the core offerings, how we see executing on those together with those partners in the market. As I noted in my remarks, 400 partners make up 80% of our revenue. So really doubling down and prioritizing those partners allows us to work really closely with them on here's a set of offers or go to market motions that we know from our past have been successful. And we're building programs more specifically with them around different areas of focus. Some of our partners, for example, have more experience in particular verticals, so we can be more precise in focusing on specific verticals with them or horizontals depending on who their set of customers are.

Speaker 6

But overall, very positive. We've been very clear about how we can partner together, where we focus, and it's been received very well. Yes.

Speaker 5

And you touched on the part of the yes, keep going.

Speaker 2

I'm just going to add just a little color to that, right? You remember in Q3 how are you doing? Hope you're doing well. Jumped right in. But in Q3, you remember I talked about the idea of the go to market transformation.

Speaker 2

And one of the key pillars of that or tenants of that strategy was account segmentation. That has now been done. We've really isolated our focus in the top 400 partners which generate the majority of our revenue. Of those 400, we've begun to have very strategic discussions with the top 10% of those and there's a couple of partners in particular where we're actually launching go to market initiatives, joint go to market programs with them. Their receptiveness to us is now changing from one of a typical supplier agent model, which is historical way the channel has been run to We're really pioneering a new concept in this channel with strategic discussions, joint go to market, joint collaborations, industry specific focused transactions, and whether it's in healthcare or multi location retail, and we're starting to see some of that.

Speaker 2

In Q2, you're going to start to see the results of some of the early projects that we started last quarter, particularly over the course of the summer in various verticals and how they're going with very specific partners, which will kind of answer the question about how are some of the partners responding to the way we're sort of treating the segmentation model within Sangoma.

Speaker 5

That's helpful. And then lastly for me, maybe just for Larry, zeroing in on the Q1 guide. If I look at it sequentially, it looks like revenue is up modestly, EBITDA down modestly on a sequential basis. I'm curious what's driving that? Is that kind of product mix and gross margin?

Speaker 5

Are you starting to see some of the ERP costs ramping up? Or are there other kind of growth investment areas that we should be aware of?

Speaker 4

Gavin, the answer is yes and yes. So as we see the sequential growth building over the year, certainly it's starting as we're talking about and then grow throughout the year, right, on a sequential quarter over quarter basis as we mentioned. Certainly, in the beginning, we are seeing the margin impacted by the amount of product versus services revenue as we've talked about and we go to market as that takes hold. And you're spot on, right? In Q1, we are seeing increased ERP costs, higher really than we'll see the rest of the year.

Speaker 4

And we baked all that in so that we give you an accurate picture. Also Q1 traditionally for us is a little bit lower. We have some expenses that hit in Q1. And so we had great visibility into what that's going to look like.

Operator

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

Speaker 7

ahead. Hi,

Speaker 2

Mike. Hi,

Speaker 5

thanks very much. Hey, good afternoon. Congrats on the big year, big cash flow year during the transformation, looks great. Thank you. I guess just back on the pipeline, can you give a little more color there?

Speaker 5

It sounds like deal sizes are getting bigger, but I don't know if you can quantify the pipeline growth at this point and maybe get some color on small business versus mid market within the pipeline there. And then, what's in this demand? Are you seeing a lot of demand for certain services here?

Speaker 6

Yes, I mean it's similar to what

Speaker 3

I said before. I mean in Q2 we will publish go to market metrics. We are seeing larger size deals.

Speaker 6

I would say across the line of solutions we offer continue to see momentum certainly in UCaaS, certainly in our contact center platform. And then what's been encouraging is there are a subset of even our NRR product lines that we developed too that are seeing some increased momentum. So I think I touched on that in my comments earlier where even some of the premise hardware areas that hadn't had enough focus before, we're seeing some opportunity to drive some momentum in those as well. So we have some pretty rich communications platforms that we've been prioritizing with those top 400 partners and we're starting to see that show up in better larger deal sizes on the MRR but the sales cycle is a little bit longer and then some NRR opportunities to some products we've been manufacturing for a while where we see an opportunity to drive some momentum in those.

Speaker 2

One other area, Mike, that you for your own interest on the pipeline, so we started the go to market transformation really at the end of Q3, as I announced. And over the course of the summer, we picked very specific initiatives. One of them was the prem based environment, which we call our SwitchBox platform. Jeremy and the team kicked off a very aggressive pipeline build model, demand generation model, and we saw pretty significant growth, almost 23% growth in that particular portfolio in just the last quarter. And so this is how the go to market is going to transform.

Speaker 2

The pipelines are going to grow based on portfolio element that we decide to really go into the market with aggressively and very surgically. And that's one area where I can tell you we've seen upside in the potential of our client base. We've seen upside in the growth in that particular client area. And we're learning a lot about how the partners are being receptive to these new integrated bundles that we're putting together that are around either prem, hybrid or cloud based solutions and particularly for the more mid market customer that we're going after.

Speaker 5

Okay, great. And then on the ERP system, you highlighted how you can more easily integrate acquisitions. I guess, should having that upgraded ERP system also help just the sales cycle, sort of reacting more quickly?

Speaker 2

Yes. Well, I mean, obviously ERP does a lot of things for the company. It's why it's one of the most critical projects that I undertook when I first joined. It helps us obviously with cross sell and up sell, which is exactly allowing us for account expansion, which would fit and piggybacks very well on the account expansion story I talked about. It helps with integration of acquisitions that we want to bring in or buttress acquisitions that we consider in the future, helps for integrating that a lot faster, a lot smoother and a lot easier.

Speaker 2

And it helps with cost reduction in the company and streamlining our processes. It helps with customer experience by allowing for a single bill, single pane of glass, single invoicing models. And really, it helps with employee morale because you're now dealing with just one system rather than multiple systems in the company. So there are tremendous benefits from the ERP program across many, many fronts and we're going to leverage every one of those benefits as we execute and roll it out over the course of this year and into next year.

Speaker 5

Okay. Awesome.

Operator

The next question comes from David Kwan with TD Cowen.

Speaker 7

Curious to comment on the larger deal sizes. It sounds like it's mostly due to these industry specific bundles. But are you also is it also reflective of maybe going after some larger customers?

Speaker 6

Yes, correct. Hey, David, it's Jeremy. Yes, it's a combination of both, right. So in some cases, it's a combination of say, you guys and our contact center as a service platform, putting those as a bundle out into market. In other cases, I referenced in my remarks, we talked about enterprise capabilities at an affordable price.

Speaker 6

We haven't historically pushed hard enough on that opportunity. And so we're pushing our way with the right partners up into some of these larger deals, larger opportunities. So it's a combination of both multiproduct and just larger deals and being confident that we can go and hunt those down.

Speaker 2

I don't want to underestimate this idea of what I just talked about with Mike and also mentioned with Gavin, right? Account segmentation for us goes across 2 different models. There's segmenting your partners and there's segmenting your end clients. We sell through a channel, which is our partner. So as we've segmented the partners, we've gotten much tighter and much more focused on how we use market development dollars with those strategic partners to attract the future customers.

Speaker 2

In previous times, we were much more generic about how we use our market development. Now we're focusing on those partners that actually have larger customers who are interested in more integrated bundles, which are creating higher value deals for us as we go through them as our channel. And we've

Speaker 6

also added, David, just over the last couple of quarters, we didn't have a robust deal pursuit process for larger pursuits. We didn't have as robust say an RFP response processes as I say Charles and I used to from our past. So there are some disciplines and some frameworks that need to be put in place for us to be able to go after those opportunities. Those are well in hand now and we're leveraging those to get out those larger opportunities.

Speaker 7

That's helpful. The color that you provided, I know historically the company hasn't focused on the enterprise market. I think part of that was product related. So it sounds like you feel that the platform is in a much stronger place that you can kind of go after those deals?

Speaker 2

Absolutely. And the relationship with the strategic partners that we're now much more focused on and giving them the right attention, again, you've got to remember, we don't have a direct sales force. We use the channel as our sales force. And so by bifurcating the channel between high quality partners who actually are working on the mid market versus the partners who work on the low end of the market, we want to service both of them. But now that we know who are the ones that are focusing on the high end of the market, we can channel our market development dollars to them, which then brings us more at bats on the larger deals, which is exactly what's happening.

Speaker 7

That's very helpful color, guys. Just on the guidance, I think if you adjust for the one time ERP cost of just over $2,000,000 it seems to imply margins at the midpoint around 18%, which is kind of like what we've seen in the second half of the past year. Is this kind of where we should expect to see margins over the next couple of years, particularly as you look to drive stronger growth? Or maybe is there more cost optimization work that you could still do?

Speaker 4

Yes. This is Larry. So our continuous improvement methodology that really we started with Project Diamond and continue with today, we're always going to be looking for those opportunities to optimize. ERP will touch every single thing we do, including the optimization of our processes. And while we certainly haven't quantified that in the forward looking, what will that do from an EBITDA perspective.

Speaker 4

I would expect to see margins in that range or higher as we continue to evolve and drive to those operational efficiencies, as well as the ROI and something like that so quick that we'll start to see that as we get further along. It's not in 25 necessarily, but as we move beyond that. So that's certainly something we look at all the time.

Speaker 7

So it sounds like, Larry, that there's probably some modest upside here, I'm guessing, at fiscal 'twenty six, as it relates to the ERP implementation, but probably not too much more beyond that as you look to drive stronger growth?

Speaker 4

Well, yes, I think we'll certainly capitalize on it and we'll drive it. We'll start to see it 26%, and I'd like to see it be something that we talk about as these quarters come up, but certainly we expect to see something.

Speaker 2

I mean, David, I would say just refine it a little bit, right. So we've been pretty clear. We're focusing heavily on the MRR business, the company, the services side of the company. We have an incredibly rich set of assets that produce very high margins of which we control and own the proprietary technology of these platforms going forward. So the high margin part of our business is where I'm focusing.

Speaker 2

The ERP program is going to allow me to unleash cross sell and up sell across that portfolio, not only to the small market, but now bringing it up market, which gives me higher MRR and higher margins. All the while we're doing this, we're creating efficiency in the company through modernization, automation. Are going to use our own technologies inside the company to try to streamline our costs. So we're constantly going to be going after cost improvements, margin expansion, and obviously that coupled with growth from the market opportunities that our portfolio allows us to go after. So you can expect the company to continue to evolve itself in an upward trajectory to create value creation for the company through both growth mechanisms, efficiency mechanisms and automation mechanisms, all of which we've been discussing whether we use terms like ERP or automation or transformation, all of it relates to the same three topics.

Speaker 2

It's growth through many, many mechanisms, both internally and through growth opportunities the market presents. I hope that makes sense.

Speaker 7

Hey, Josh. Thanks again.

Operator

This concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you.

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Earnings Conference Call
Sangoma Technologies Q4 2024
00:00 / 00:00