Sangoma Technologies Corporation

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Technologies 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 David Moore, Chief Financial Officer. Please go ahead, Mr. Moore.

Thank you, operator, and good morning, everybody. Appreciate you joining us and welcome to Sangoma's fourth quarter fiscal 2021 investor call. We're recording the call and we'll make it available on our website later for anybody who's unable to join us live. I'm here today with Bill Wignall, President and Chief Executive Officer, John Tobiah, EVP of Corporate Development, and Larry Stock, Chief Corporate Officer, to take you through the results of our fourth quarter of fiscal 2021, which ended on June 30th, 2021, as well as those of the full fiscal year. We will also discuss the press release that was distributed yesterday afternoon, together with the company's audited financial statements and MD&A, both of which are available on CEDA and our website. As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS. During this call, we may also refer to a couple of terms, such as adjusted operating income, adjusted EBITDA, and adjusted cash flow that are not IFRS measures, but which are defined in our MD&A. Also, please note that an effort is stated or referenced to dollars to the Canadian dollar. Before we start, I'd like to remind you that statements made during the course of this call that are not purely historical are forward-looking statements regarding the company or management's intentions, hopes, beliefs, expectations, and strategies for the future. Because those statements deal with future events, they're subject to various risks and uncertainties, and actual results might differ materially from those 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&A, our annual information form, and in the company's annual audited financial statements posted on CEDA. With that, I'll hand the call over to Bill.

Thank you, David. Good morning, everyone, and thanks for joining us today. I have structured my prepared remarks in five sections for this call. I will first discuss our fourth quarter and then move on to cover our full fiscal year results. In my third section, I will share with you an update of the Star to Star transaction and integration. Fourth, I will offer my typical year-end look back on your company and our progress this year. And finally, I will review forward guidance for fiscal 22 as provided for the first time in yesterday's press release. As always, I'll then wrap up with a brief summary and then turn the call back to David for our typical open Q&A. With that, let's move on to Q4 results, where I will begin with our P&L. Before I start, just two quick reminders. Since we closed the acquisition of Star2Star on March 31st, this is the first quarter in which we see the impact of the acquisition on our income statement. And on our last call, you may remember that I spoke quite a lot about the exchange rate impact on Q3, given the significant movement in the U.S.-Canadian dollar rates at that time. Because the FX rate did not have the same kind of material effect on Q4, I've chosen to simply cover our Q4 results in Canadian dollars for this one last time, given we'll be moving to U.S. dollar reporting in fiscal 22 anyway. More on that later. Okay, let's get started. Sales for $61.5 million for the quarter, up 77% from the fourth quarter of fiscal 20, with the star-to-star acquisition contributing significantly, of course, our existing services and business continuing to grow and compound, and all partially offset by some continuing softness in our product sales. As a result, our services revenue expanded to 71% of total sales this quarter, up from 55% in the same quarter of the prior year, helped significantly by the addition of Star to Star. Meanwhile, sales in our more mature product category continued the trend we'd seen over the past quarters, driven by the decline of the PSTN, the trend towards more cloud solutions, and the impact of the COVID-19 pandemic which has placed tighter constraints on capital purchases in some companies and made it difficult to get on site for installs. Despite all the supply chain pressures around the globe, gross profit for the fourth quarter was $44 million, 95% higher than for the same quarter last year. And gross margin was therefore 72% of sales, up 7% from last year's 65%. Our cost of goods experienced some slight upwards pressure this quarter, impacted by the higher supply chain costs that many of you will have heard about in the electronics business specifically, but also in many other industries more generally. These supply chain pressures affected not only costs, but also availability of components. And those same pressures have affected the rates we pay for shipping, a situation that was then magnified by having to ship more products by air than normal, We typically do that the less expensive way by seat. But to ensure we had inventory when and where it was needed to deliver on customer orders, this was necessary. Nevertheless, Sangoma was able to fill most all customer orders in the fourth quarter and still deliver on our 70% plus expected gross margin. I'm very pleased with the Sangoma teams in this area who have been working tirelessly to keep abreast of demand under challenging circumstances. Operating expenses for the fourth quarter this year were $46.4 million, more than double that of last year following the incorporation of the OPEX from Star to Star. Given this is the first quarter with Star to Star in our P&L, I would also like to offer a few comments on the three individual OPEX buckets under IFRS, namely Sales and Marketing, R&D, and G&A. Regarding sales and marketing, you will notice that the portion of our OPEX that is in the sales and marketing category has increased in Q4 in absolute dollars and as a percentage of sales. That's because Star to Star has typically relied on an indirect sales strategy, acquiring customers primarily via channel partners, and a big part of the increase in sales and marketing costs are the trailer commissions paid out to those partners each month on an ongoing basis as a standard practice in our industry. With respect to R&D, almost all the increase in spending from Q3 to Q4 was due to the addition of the Star to Star engineering teams and expenses. And finally, the G&A bucket also shows a significant increase from the prior quarter, driven in large part by the intangible amortization associated with the Star to Star acquisition. This increased to about $9.5 million this quarter, up significantly from last year, and is a non-cash expense. So this might affect our adjusted EBITDA or cash flow, but of course does appear as an expense in our income statement. Okay, now leaving operating expenses and turning to EBITDA. Adjusted EBITDA was $12.1 million for the quarter, almost twice that from the same quarter last year, and that 19% of sales was just slightly higher than we expected. For those of you who join these calls regularly, you will know that I don't typically spend much time on the costs below adjusted EBITDA and above net income. However, just for this one quarter, I've decided to cover a few selected items from this part of our income statement, simply because there are a few material changes in this area for Q4 that result from the Star to Star acquisition. First, on interest expense. Part of the funding for Star to Star involves Sangoma borrowing an additional $66 million, and so our Q4 results include the additional interest that is now about $1 million per quarter. Sangoma is repaying about $4.5 million in principal per quarter now. Next, on transaction expenses, as you may recall, Sangoma accrued for the majority of costs related to the Star to Star acquisition in Q3, an amount that was just over $4.7 million. During Q4, we only added slightly to those transaction costs, plus that the total incurred is now 4.9 million. Please note that it is expected that there will be some integration costs recorded in Q1 as that activity comes to a close, and they will, of course, update you on that in November when we discuss first quarter results for fiscal 22. I now want to explain briefly a new entry on our P&L that some of you might have noticed for Q4, also related to the Star to Star acquisition, a line item called Consideration Payable. As part of the Star to Star deal, Sangoma expects to obtain periodic tax deductions for some payroll costs associated with handling stock options held by Star to Star employees. If and when we do get those deductions, we agree to pay the benefit of them to the Star to Star sellers with no cash flow impact to Sangoma whatsoever. However, the IFRS accounting rules require us to record this on a new line item called consideration payable. There's an offsetting deferred tax access. And for the most part, these will move in parallel to one another and thus have minimal impact on our P&L in any one quarter. This will continue to show until after the installment shares are issued. During this time, these two entries need to be recalculated each quarter, so we'll see this line called gain loss on consideration payable in the next few years. It will not materially change the net income of the company in any period, as the deferred asset will move by approximately the same amount as the consideration payable. Confusing, I realize, but those are the IFRS rules and the impact on net income is minimal. Okay, now back to our normal cadence for these calls. Net income for the fourth quarter was negative $1.6 million, primarily the result of the non-cash intangible asset amortization following the acquisition. That concludes my comments on the P&L for Q4, and I'll save the balance sheet and cash flow for the next section on full-year results. So let's turn our attention there now. Sales for the fiscal year 21 were $167.3 million, up about 27% from the $131.4 million in fiscal 20. This increase was due to a number of factors, including the addition of Star to Star in Q4, the continued growth and compounding of the company's services business, the inclusion of VoIP innovations for the full year in fiscal 21, all partly offset by some softening in demand for one-time product sales. Let's unpack that a little to examine the trends in our services revenue versus product sales. Our services revenue is now running above 70% of sales, as you just heard about for Q4. And for the full year, this figure was 62% for fiscal 21, up from 50% in fiscal 20. The drivers of this growth are, unsurprisingly, the same factors I just covered to explain overall growth. and product sales were 64.1 million for the year, down 4% from fiscal 20, again, for all the same reasons discussed in my few core comments. Close profit for the year was 114 million, 34% higher than the 84.9 million realized last year. Close margin was 68% of sales for the year, 3% higher than the same period a year ago when it was 65%. The primary drivers of this movement include the steady increase in the percentage of revenue coming from services, the inclusion of Star to Star for Q4, all partly offset by the supply chain costs discussed in some detail for the fourth quarter. Operating expense for fiscal 21 was $105.9 million compared to $74.4 million last year. Vending was higher due to the addition of the Star to Star costs. investments and growth, and the associated intangible amortization from the acquisition. Adjusted EBITDA was $32.3 million for the year and is 50% higher than last year. This is equivalent to about 19% of sales for the year compared to approximately 16% for fiscal 20. I have already covered the new items from this start-to-start acquisition that appear on our income statement. in my Q4 comments, so I won't touch on them again here. Net income for fiscal 21 was $0.8 million, down from last year's $3.9 million, and this is entirely the impact of the acquisition-related expenses and the amortization of the intangible asset. That brings my comments on our income statement to a close, and I'd now like to cover a few highlights from our balance sheet and cash flow, as I promised earlier. Our cash balance finished at $27.3 million, which by pure chance almost exactly matches where we ended last year. I'm sure you'd agree that this is indeed quite a coincidence if one considers that in fiscal 21, we raised $75 million of equity, secured $66 million in new debt, used $133 million in cash for Star to Star, and paid back almost $19 million of loan principal, ending up exactly where we started last year. Inventory is up slightly from $13.9 million at the end of Q3 to $14.6 million on June 30. As we shared during our last call, we had anticipated the need to increase inventory levels to help minimize the impact of supply chain disruptions. This slight increase of about three quarters of a million dollars reflects that. And we do expect inventory to increase slightly more in Q1 and Q2 of this new fiscal 22 year as we continue to navigate the supply chain challenges around the world. Trade receivables finished the year at $18.3 million, significantly higher than where we finished fiscal 20 at $11.2 million, mostly as a result of the Star to Star acquisition. Overall, we are quite pleased with the level of receivables given the COVID-19 related disruptions to so many businesses and indeed all economies during fiscal 21. And now a comment on cashflow. During the fourth quarter, we generated adjusted cashflow from operations of $9.6 million, well up from the 8.2 million for the same period in the prior year. And for the full year, our adjusted cashflow was almost $25 million very materially above the 15 million in fiscal 20. Finally, we are, of course, comfortably within the debt covenants, and our overall balance sheet remains very strong. That brings my comments on financial results to a close, and I'd now like to turn to my third section of structured remarks on the Star-to-Star integration. As many of you know, Star to Star represents Sangoma's 10th acquisition and is transformational, placing us clearly into the top tier of the growing cloud communications industry and fully cementing our transition to a SaaS business. I remain very pleased with how the companies are coming together as we continue to achieve our integration plan. As I shared with you last quarter, we identified a series of integration projects each covering a key part of bringing the companies together. These integration projects included people, product, customers and channels, back office systems, customer-facing cloud networks, et cetera. And I am pleased to provide you today with a significant update on these so you can see how far we've come in a short time. Let's start with people, the lifeblood of a tech company. The cultures of Sangoma and Star to Star were quite similar, which is one of the things that attracted the two companies to each other, and it was apparent very early on that people were coming together and gelling. Even though we are pretty good at this, given our track record in acquisitions, it was even more impressive with Star to Star, since many of the people had never been in the same room together during fiscal 21. You may recall from our prior call that we split the people integration project into two stages. First, almost immediately after closing the transaction, we integrated the staff functions. So here, think finance or legal or HR, to quickly leverage a common way of working in these key corporate functions. Second, we intentionally took our time with the line functions, and here think sales or engineering or marketing or operations, as it is always more difficult to integrate those functions immediately. It was vital to take our time, get to know each other for a while during the integration phase, and then combine those teams. The integration of our line functions is now nearly complete, taking place throughout Q4 and into Q1 of this new fiscal 22 year. And via this process, we've sought to build a foundation for a scalable, growth-oriented approach to people and talent, including strengthening our capabilities with a new senior executive in HR. I'll now share an update on progress with customers and channel integration. Like the people initiatives I just spoke about, the integration of customers and channel activities progressed throughout Q4 and is now nearly complete. Throughout this integration process, our team remained focused on clients and delivering excellent customer service. I would like to say a big thank you to everyone at Sangoma, including the new Star to Star employees, for continuing to take excellent care of our customers without which there is no business. We are now completing the work on channel integration. We started by holding initial meetings and webinars with the channel partners from each company to explain that we need them all and that the complementary mix of channels was indeed one of the key benefits of the deal. We have merged the channel programs together including a unified deal registration, one set of pricing levels, one process for them to take orders and place orders, along with one set of IT systems to handle this configuration price quote sequence. And this uses the star-to-star built system called RocketQuote, one process for partners to get information and support in which partners get loaded into our new CRM unified platform. one amalgamated product portfolio that all partners have access to, and one set of discounts and commission structures across the entire channel. I have now met many Star to Star customers and partners over the past few months as we've restarted live events. And in fact, I'm actually joining you today on this quarterly investor call, not from my office where I would normally do this, but from a three-day channel partner event that we are holding primarily for the Star to Star partners. This one follows a similar event we did two weeks ago for the key channel partners that come from the traditional Sangoma side of the combined company. These types of events are critical to maintaining momentum with our channel, removing any anxiety associated with the change an acquisition implies, explaining the merged product portfolio and channel program, fighting for mindshare in the channel, and providing one-of-a-kind forums to interact with our partners. The most common feedback I've heard is that they see Sangoma as one of the key cloud communication companies to work with and the one that has made enormous progress now cemented by the start of Star Deal. So that's the update on the channel part of customers and channel integration. What about the customers? In order to integrate our customer base, one needs to integrate our sales team so we can present one face to those clients. We have now cross-trained the sales team on the full suite of products and services with more to come, and all sales staff throughout the combined company can now sell the entire product portfolio. We have restructured the sales organization to allow our sales professionals to focus on specific customer segments. Specifically, that means separate sales teams dedicated to each of small and medium-sized clients, large customers, enterprise clients, wholesale, international, product overlay people focused on each of our newer products, a customer success team selling into our installed base, and a new dedicated team recruiting new partners. I'm very pleased with this revamped sales structure, one that we believe will allow our customer and channel-facing teams to continue growing revenue and provide an exceptional customer experience. Next, I'll touch on product integration. With the combination of Star2Star plus Sangoma, we now have the industry's most complete internally developed portfolio of products and cloud communication services, bar none. This includes UCaaS, Funking as a service, Video Meetings as a service, Contact Center as a service, CPaaS, Collaboration as a service, Desktop as a service, Access Control as a service, et cetera. together with all the capital P product line that you see as our second revenue category in addition to services. These products cover on-premise UC, connectivity lines such as SBCs and gateways, and endpoints such as phones and headsets, all available from a single supplier, all part of One Throat to Choke, unlike the partial solutions offered by our competitors. So it will make sense to you that our first priority in the product integration work was to decide on which products to keep for any categories where both Sangoma and Star to Star had a similar offering. I'm pleased to tell you that where we had product overlap, we have now made clean, decisive calls regarding which product we will go forward with, and somewhat surprisingly to me, presently so, such decisions were uncontentious and unanimous. We've now aligned the company around these decisions. For instance, we've chosen Sangoma's video meeting product called Sangoma Meet. We're standardizing on Starterstar's CPaaS product, and we're keeping both UCaaS lines, Sangoma's SwissFox, as well as Starterstar's Business Voice. As I've mentioned before, another high priority in product integration is to tightly integrate our various cloud services into one cohesive suite so they all share a common look and feel for customers. This is quite involved, interface design, UX or user experience as they navigate through our tools, single sign-on so customers register with us once via product or identify themselves and don't have to do it for each product in our suite. We have created one unified look and feel for all our as-a-service products so that customers have a consistent experience whether that product initially came from Star to Star or from Sangoma. We've also created one identity platform for customers, which includes single sign-on, entitlements, licensing, et cetera, once for all our cloud services. And as new versions of each product or service get released, they're getting upgraded to this new look and feel. While there remains more work to be done on products, as there always is, we have made solid progress in this area, and I'm pleased with how our product teams are working together. We now have a robust product roadmap for each of our 12 product lines, a dedicated product manager for each, something that neither company could afford previously prior to the merger, and a dedicated engineering development team on each product line with a senior leader and a significant size team on each, a team which is now approaching 200 engineers across the company. Next, I'd like to touch on the integration of our cloud networks. Let's start with a very simplified explanation of what I mean when I refer to customer-facing cloud networks. By customer-facing, we just mean the networks that our customers use as opposed to our internal IT infrastructure. And by a cloud network, I mean the complex software, infrastructure, data centers, public cloud services such as AWS, all the switches and routers that underpin the cloud services that our customers use. as well as all the information that feeds our own internal billing systems and taxation systems. Both Sangoma and Star2Star had their own versions of these, of course. There is now an opportunity to rationalize and consolidate all this architecture, data centers, service providers, to standardize the hardware and software for our cloud networks, all to make it more efficient and reliable to operate, as well as cheaper to run. This is done in a two-phase approach, with phase one being the design stage, followed by a longer phase two, which is the implementation. Phase one has been progressing throughout Q4 and is expected to complete in the near future. Phase two will take a bit longer, and I look forward to providing updates on our cloud network integration during future calls. Another integration project that I'd like to tell you about briefly is our back office. This is the set of internal systems we use and our customs and partners access to do things like quoting, ordering, licensing and enabling software, billing, etc. This was in the initial stages when we last spoke. We've made significant progress in this time, including selecting and standardizing on our go-forward CRM system, our CPQ systems, our learning management systems, all as part of the first phase of back-office integrations. Still to come, phase two will be more of the Sangoma internal systems mentioned above, and I plan to give you updates on those as we progress. And finally, the last integration topic I wanted to touch on is cost synergies. As you know, we did not expect large cost reductions as part of the Star-to-Star acquisition. That was not why we did this deal. This transaction was all about positioning the combined company in the top tier of the industry with the full suite of cloud services and supporting products and completing our transition to a SaaS company. However, I do expect to uncover some cost savings opportunities, of course, as we bring the teams together, the network, our marketing programs, and the back office success. As I mentioned on our Q3 call, we have decided that most such savings that get realized are expected to be reinvested back into R&D and marketing and sales to help drive Sangoma's growth. This exercise was not a part of the Q4 work, so it's not something I can comment much further on today, given it's still a bit too early to have a view on the final amount, but I expect we'll be able to give you more detail on our next earnings call. And with that, I'll bring my update on Star to Star integration to a close. I hope it was a fulsome one. And I'll turn to my fiscal 21 year in review. My quarterly investor call at the end of each year, I try to offer this idea of a year in review, a section where we step out of the financials and discuss what has been happening operationally and strategically in your company over the past year. It can actually be quite challenging to do so for a company in which so much is happening and changing all the time. So this year, in attempt to put some structure to this section, I'm going to touch on three aspects of fiscal 21 that I felt really highlight some of the most important themes from this past year. Strategy, resilience, and results. Let's start with strategy. I've often characterized Tangoma's expansion strategy by describing this combination of organic growth augmented with prudent M&A activity, all while demanding healthy profitability. This is a conscious decision from the Board of Directors, one that most of you also support, and we continue on that path today. Many of you are now familiar with the history behind this strategy. The turnaround phase when management came in to take over the reins and recognized that sales of telephony cards were unavoidably going to decline as networks gravitated away from the PSTN and towards the Internet. Over the next few years, we evolved from a single product line company to one with a much broader product portfolio of multiple product lines. We managed to transition from a hardware company to a software business, an extremely difficult leap, which took us on the path to becoming a full solution UC provider. Once we had that full solution, we began the metamorphosis from one times revenue to a SaaS and recurring revenue company by building up our valuable cloud business, another very tough step to make. especially one without missing a beat on revenue along the way. We built up some of these components ourselves and added others via acquisition, and that's why we say Sangoma employs these two approaches to scaling, one is organic growth and the other the prudent acquisitions to complement and accelerate that growth. In fiscal 21, this transition to a full SaaS company was capped off with the acquisition of Star2Star, positioning Sangoma in the top tier of the exciting cloud communications industry, an entrant into the big leagues that absolutely nobody could have predicted five or ten years ago. And we are well positioned to continue leading that consolidation taking place in the industry with our proven track record of M&As. To further that aim, we're in the process of working towards an uplisting to the TSX and a cross-listing to NASDAQ, a process that our shareholders overwhelmingly support, as evidenced by the special meeting held last week, at which over 99% of shares voted in favor of the consolidation. Thank you. We are optimistic that such steps should further help trading volumes and unlock multiple appreciations with our share prices. Next, I'd like to speak for a few minutes about the resilience of your company, a company that endured a lot this past year, some of which would have been visible to you and some would not, and by failure we proved our mettle and came out all the stronger for it. Indeed, fiscal 21 threw a lot at Sangoma. The year started in the depths of the COVID pandemic and the restrictions put in place by governments around the world, and we've still not fully emerged from the shadow of the pandemic with travel only now just really restarting. And then we had that ransomware attack, an all too common event these days, but one that nevertheless took an incredible amount of management time and energy to respond to. Next, we had what we understand to be a routine continuous disclosure review by the OSC, a process that is now closed off. And then in Q4, if you can believe it, one of the contract manufacturers we use in China, a critical one for us, had their factory totally destroyed in a fire. You can't make this stuff up. And again, a lot of work here by a lot of talented, committed employees to work around that without most people in our company even noticing. And last but not least, the global supply chain problems that I described earlier and that most of you will have heard about that is so pervasive. My point here, of course, is not to whine and complain. It's totally our job to deal with such things as they arise, of course. But I feel like being able to look back on a year like that, one that would have tested many lesser companies, is a testament to the strength we've built throughout the company over the past few years as Sangoma has been scaling. There is more work to do there, admittedly, as dealing with spikes like those just described can still take some heroics at Sangoma. The next stage will be institutionalizing that resilience by further developing our ability to scale and continuing adding bench strength. And the third part of my year in review for fiscal 21 is to couple together the strategy comment and resilience issue just covered, along with the execution of that strategy, culminating in what we know you guys ultimately care about, which is results. Everything else is supposed to be a means to that end. Given the context just described, I feel like the results Sangoma has produced look even better. This combination of organic growth and acquisitions has moved the revenue needle from around $10 million to what is now a quarter billion dollar revenue company. Looking back on the past five years, Sangoma has a compound annual growth rate of over 50%. And if you look back 10 years, it's still over a 35% CAGR, a very solid long-term record. During that time, we've taken EBITDA from break-even to over what is forecasted to be $40 million in fiscal 22, all of which has led to our enterprise value going from under $10 million to over $800 million, up by about 88 times or almost 9,000%. Not bad in the face of these crazy times. That concludes my year-end review section, and I'll finish my prepared remarks with fiscal 22 guidance. I'll begin this section with a reminder of the starting point to provide you context for this guidance. First, Sangoma is going to report all future results in U.S. dollars, which is the primary currency of our sales and now much of our costs. At this point in the call, I need to take you through this transition so that you are comfortable with what the comparative figures for fiscal 21 are, if stated in U.S. dollars, because that's what we'll be quoting in fiscal 22. For fiscal 21, we reported revenue of $167 million Canadian dollars and adjusted EBITDA of $32 million, so Canadian, and those results include Star to Star for the fourth fiscal quarter only. Given that, we felt it would be useful to point out what our fiscal 21 revenue would have been if Sangoma and Star to Star had been together for all of fiscal 21. On a U.S. dollar basis, revenue for the combined companies for all of fiscal 21 would have been about 193 million U.S. Again, U.S. dollars since we're going to be reporting in U.S. for fiscal 22. And as you may have now seen from our press release, we expect solid top-line growth but while demanding healthy levels of profitability still. And that's our guidance for fiscal 22 revenue is between 209 and 213 million U.S. dollars. with our recurring revenue expected to be in the 70 to 75% of sales range, a very positive sign of sustainability. And our guidance for EBITDA is 41 to 43 million, again U.S., delivering leading EBITDA margins now expected to reach 20% of sales for fiscal 22. Since this is the first time we're providing guidance in U.S. dollars, I thought I would simply point out that this range of EBITDA would be well over 50 million Canadian dollars, depending upon prevailing exchange rates, for those of you who may wish to compare the fiscal 21 Canadian dollar EBITDA. In determining this range of growth projections, we considered several factors, such as the expected growth in our services business, likely GDP growth, trends in Europe, Asia, North America, and Cala, the COVID-19 pandemic, the supply chain pressures around the world, and the expected gradual decline of our product sales, with the full set of such factors listed in the MD&A release yesterday and available on CEDAR or Sangoma's website. Okay, with that, I'll bring my prepared remarks to a close with a very brief summary. Overall, I remain very pleased with another really solid year for Sangoma, with what we accomplished for your company during a challenging period and with the super exciting end to fiscal 21 in the acquisition and integration of Star to Star. We delivered 27% growth in revenue during these COVID impacted times, continued to expand our cloud and MRR business, posed a transformative acquisition, and delivered over $30 million in EBITDA for the first time. As you heard when we explained the acquisition of Star to Star, We planned from the beginning for the integration process to be substantially complete in about six months. And that meant we expected to be mostly finished by the end of September. And I'm pleased to report that we're on track for that milestone. We've come a long way from a $10 million company several years back with a CAGR of 35% to 50% and an enterprise value that has grown by an impressive 9,000% over these past many years. We are now well positioned to take advantage of an extremely large total addressable market, one that most analysts think is well over $100 billion, and some think it's much more, in a space that's growing well. The macro trend of moving to the cloud is still relatively new in communications, and we expect to benefit from this for many years to come, both in North America and internationally as well, where cloud communications is more in its infancy. We continue to look for ways to drive your company to become one of the preeminent players in the industry. And we will do that by continuing on our dual-pronged growth strategy, one that most investors in SDC have become familiar with over the past several years. First, we will seek attractive organic growth by investing in sales and marketing, R&D, and customer acquisition. And second, we will keep augmenting that organic growth with deliberate, disciplined M&A. That concludes my prepared remarks, and we appreciate you all joining us today. I'd like to close by thanking our investors for your confidence and support. And with that, I'll turn the call back over to David for questions.

Thank you, Bill. And Operator, would you please explain to people how to join the question queue, please?

Absolutely. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. The first question comes from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.

Good morning. Congratulations on the good finish to FY21, and I like the outlook for FY22, but I did have some questions about kind of the implied growth rate here. I appreciate the pro forma number in U.S. dollars, and obviously being U.S.-based, I'm a fan of not having to do the translation anymore, but when you talk about that $193 million growing to midpoint $211 million, That's around a 9% growth rate, and I know there's ebbs and flows within your business. I'm specifically curious to know what your expectation is. Do we continue to see kind of the product decline, and then what is the implied growth rate of setting that on the services side? So just if you could kind of bifurcate that 9% growth rate.

Yeah, sure. Let me try and add some color, Eric. And nice to have you on the call again. I would say, you know, the business is at the stage where I would confess to you, it is harder and harder to be precise, you know, within a million dollars either way. You know, when we were a $20 million, $30 million company, that wasn't so tough. We're now a quarter-billion-dollar Canadian, 200 million U.S., and I think the range of guidance is pretty tight for a company of that size. Whether that means 213 or 211 or 210, that's really hard to know. And it's equally hard to know, you know, precisely, you know, plus or minus a couple of million dollars, how much will be services versus how much will be product. You know that we, of course, would model that ourselves. It's not something that we've typically disclosed in guidance. So I would want to tell you, you know, the percentage growth rate of X is, you know, Y in services and minus Z in product. I think let us get a couple of quarters under our belt with star to star. Let's get the sales teams together and firing on all cylinders. But in general, the way you described in your question, your qualitative assumptions is, of course, right. There's no doubt that the services business is growing faster than that percentage rate and the product rate. Business is declining slightly, and it's, of course, the arithmetic blending of those two. So that's the best I can do at this stage. It's probably not all that satisfying, but I hope you'll accept it. We need a bit more time with the acquisition before we get more specific there.

Okay. And then I'm kind of interested in tales from the front lines here. You just talked about a three-day meeting with channel partners. Obviously, you're talking about recurring revenue in the 70% to 75% range, in large part driven by the acquired revenue from star to star. What is the anecdotal evidence from the front line as far as appetite, given all the variables in the market, return to work, not return to work, delta variant, competitive landscape? What are you hearing?

Well, we certainly heard about all those points. As I said, it's a three-day meeting. This is day two. We did a similar one two weeks ago, as I touched on, so we've got lots of feedback. At the highest level, the first part of your question, what are you hearing, what do they think, I can be really specific about. The second one is work from home, lingering COVID and Delta, for example. It's a little bit harder for me to comment on because I'll admit to you there's a very wide range of opinions on that stuff. Let's touch on the first one, which is a bit more consensus. I would say that whether a partner came from the Sangoma side of the house originally or the Star to the Star side of the house, the overwhelming sense that you get in the room is one of excitement. When I finished my keynote in both cases, the last slide I popped up talks about you know, if I'm in your shoes, it's fine for me to walk around this big room with a whole bunch of people here and, you know, do a dog and pony show. But what do you guys care about? You're business owners. You own your own small company. I think you care about things like where is the company Sangoma positioned in the industry today? You care about is this a company that's on the upswing or the downswing? You care about Do we do better each year than the year before? And in all cases, the kind of things we hear are, you know, they're smart guys, right? Like if a customer has to get somewhat familiar with a vendor like us, they do it once to purchase a new system. Channel partners are part of the ecosystem. They know the players super well. And they would all say, The transformation of this company is pretty spectacular. Wow, what a good story from where it's come. They see the trend we're on, and channel partners want to be part of a company that's going somewhere. They often come from channel networks that were part of the older piece of the way the industry worked. I know you know this, Eric, but for the rest of the group, You know, think of the way this stuff was sold 20 years ago. These guys are in their 40s and 50s. They used to sell whatever, right? Mitel or Toshiba. And, you know, there's all this new stuff going on. They're super excited about it. You know, they come in as a company that sells our UCAS platform and they get introduced to, oh, now we can sell video meetings and trunking and CPaaS and collaboration and service and desktop. So there's a bit of a buzz there. That's all positive. And now we have to turn the buzz into real traction, right? Which is ultimately my objective by going to those things. I hope that's useful to you. What are we hearing about work from home versus return to the office? And what are we hearing about COVID? you probably realize that, as I said, there are wide-ranging opinions of that. Some people are still pretty dismissive of the whole thing. It's a little bit politicized in some parts of the world. Some people want to wear a mask. Some people are adamantly, again, I'm not wearing a mask. This is all crazy. And so for a company like us, we just have to find the middle of the road. We're not betting any of our projections on or product roadmap on assumptions about everybody's coming back to work right away, or nobody's ever coming back to work. And we use that with our own workforce. You know, you hear some companies say, you know, stay working from home till 2022, or maybe our employees are never coming back to work, or everybody has to be back immediately. You know, Sancoma has a more middle ground approach offices are all open people are asked to come back but if you're not quite comfortable we're not pushing it or forcing it and that's kind of how it worked in these settings too right opinions about covid and delta seem to vary widely you know there are people from some parts of the country and places around the world where um You know, they've been through a really, really tough spell. I was talking to the guy who runs our Indian business. The channel partners there are totally freaked out about Delta, right? Like India was decimated. But if you talk to someone from, you know, the Northeast or the Northwest, yeah, you know, it means it's continuing. You still have to be careful, get your vaccination. But things are gradually returning to normal, right? If you're in Florida where I am today or Alabama where I was two weeks ago, Delta's had a bigger impact. Vaccination rates are lower, so they talk about it a bit more. But I would say it's not been a big part of the discussion generally, Eric. That's helpful.

Yeah, that is helpful. I appreciate the color. Last question for me. Your fourth quarter, you had gross margins of 72%. You also talked about the The issues, the COGS issues, the supply chain issue, costs up, availability down, freight up. Based on what you know now and the outlook that you just gave for FY22, what is that implied gross margin for the year?

Yeah, that's such a hard one to know. To be candid about it, I kind of expected, had we had this discussion six months ago, that we'd be through the supply chain pressures by now, and we're clearly not. And I'm sure many of you have heard that it's now affecting industries that you don't think of as electronics industries at all, where you can't buy a damn car these days because they can't get the chips. So, you know, All we've really said is it's above 70. Does it become 72? Does it become 73? I don't really know that I want to predict that plus or minus a percentage or two right now. Everything's still moving around. The percentage of stuff we have to ship by air because it took longer to get the components and have the factory build it. is much higher than we've ever spent in the past. But I do expect it's going to gradually subside. You heard us talk about inventory levels staying up in Q1 and Q2, Eric. So that's a sign to you of how long we think this is going to last. I don't think it's going to continue forever, but I don't think it's going away this month or next. And, you know, whether... the extra costs we incur in our cost of goods are such that it's a point or two that's offset by the slight uptick of the higher percentage of revenue coming from services, and we end up at 72, or whether the higher contribution from services adds a little bit more than the extra costs in our COGS line. It's so hard to predict that. I don't think I want you to you know, count on 72 versus 73 or 71 versus 74. It's going to stay in this range and, you know, have my word that if we get a little bit more clarity on this over the next quarter, I'll do better next time to give you a bit more precision. Right now, it's just very variable.

Okay. I appreciate the insights. Good luck to you and the team in FY22. Thank you, Eric.

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

Oh, hey, good morning. Hi, Gavin. Congrats on the strong numbers. I wanted to start on kind of your recent communications on the channel, and I really wanted to kind of hone in on your efforts to start cross-selling and cross-pollinating between kind of the different channels. Maybe you can just provide some color on how that pitch is resonating you know, whether you think you're in a position to be able to realize on some of that, you know, near term or if more kind of change management or education is required and maybe whether you baked any contribution from that into your fiscal 22 guidance.

Yeah, so there is some baked in for sure. You could imagine that, you know, when a company at our stage is building up revenue projections, it's getting more and more granular with contributions from many different assumptions, including the one you just asked about. I can say very confidently that it's going to work. I can see it, how much and how fast. It's super difficult to pinpoint when we're just rolling out the combined channel program this quarter. Gavin, if you think about the kind of messages to the group here that I'm speaking to this week, This is primarily an audience, not exclusively, but primarily of channel partners from the Star to Star side. And they didn't have an on-premise product at all. And one of the things I did in my talk yesterday was kind of explain why does Sangoma care about premise and why don't you guys have a premise product now and what does that mean? And walking them through what percentage of the new adoptions in North America are still on-prem and how surprising that figure is. And don't ignore it. This is a very important part of the market. It's the business that you've not had access to in the past. Winning customers this way gives you a customer to upgrade to cloud down the road. So, you know, you can see in real time, you know, the light bulbs going on. Oh, yeah, I get it. Yeah, I guess we thought of premise as the old thing and we were on the new thing. But wouldn't it be good to do the old thing for a little while longer to make sure that You know, it's not someone else who's winning the customer. And you can go through many examples of that, right? So I'm really quite comfortable that your question about cost selling gets a big yes. It's going to work. But you're equally right that, you know, this is a game of what I call fighting for mind share. teaching people about the new product, getting not just the owners of these companies on board and comfortable, but getting them to talk to their salespeople who are on the front lines and their salespeople in, you know, whatever, like Kansas City, talking to our salesperson in Kansas City It takes time. And so we've been, I think, pretty rational in what we built into the forecast. We have it starting small and gradually accelerating over the course of the year. You know, that's about the best. I wouldn't even know how to tell you, Gavin, a quantified number, you know, because it's one of so many assumptions that go into it. But I can just instinctively feel it starting to work.

That's very helpful information. Just secondly for me, just thinking about star to star, you talked at the time of the acquisition about the potential to take that platform more international kind of down the road. I guess I'm just thinking about kind of timelines for that. Are you starting to lay the groundwork for that in terms of setting up data centers or distribution channels, or is it a bit too early to think about that?

It depends on which of the two parts of your question you refer to. It It's too early to be setting up data centers and infrastructure, but it's not too early to be starting to work on the sales type activity. So one of the reasons that we were interested in building an international presence several years ago as we started down this path was this kind of foreshadowing of what was to come. It's not just, oh, get some good revenue from those markets or extend the life cycle of a mature product line. It was... You know, it's a lot of work to build presence in those locations. You have to figure out how to hire people, which sounds easy, just go hire a person. But the way you hire people in all these 25 countries is different, right? And what are the rules about that? And then you have to find the right people. And then do you need an office or don't you need an office? And then those people have to go thinking about what kind of channel partners they need. And they have to go find the channel partners and blah, blah, blah. So we have been working on that actively. It's not too early for that. But the first part of your question, have we started deploying infrastructure and software and starting, you know, local presence in data centers or public cloud is generally no. We've started to get our toe in the water. It's not zero. So for some of our newest cloud services that can be deployed almost exclusively in public cloud and don't need us to put very much in our own colo facilities, then we started doing that. So, for example, the video meeting service that we have has got some capability and presence in Europe already. But it's really small as a percentage of what we need and small as a percentage of what exists in North America.

That's great. And then just before I pass the line, I wanted to touch on the EBITDA margins implied in the guidance of 20%. You know, obviously, both Star to Star and Sangoma were running kind of high teens, you know, prior to coming together. So is this kind of uplift to 20% related to just kind of greater scale and offending leverage as you grow and cost synergies or... How do you think about that 20% level versus your current appetite to spend for growth or kind of the CAC ratio available to you?

That's a good question, Gavin. And it is kind of a combination of factors. The first part of my answer would be, in fact, Star to Star was not high teams. Sangoma was already high teams, Star to Star slightly less, but still really solid. And my view of this is it's no one thing. You know, it starts not on the cost side that you specifically asked about, but on the revenue mix side, right? The compounding of our services business was already driving San Gomez recurring revenue as a fraction of total sales up, up, up each year. And that stuff comes with higher gross margin, obviously. Higher gross margin drives higher EBITDA margins. And then the addition of star to star pushes that further, right? So I said from fiscal 20 at 50% of sales being recurring to fiscal 21 at 62, and now at over 70 with the addition of star to star. So those are big factors. And then on the cost side, it's... Part of the long-term strategy that you guys have heard me talk about in prior years, I didn't really touch on that in this call because I felt like I covered it enough previously. But the idea that just generally, although Sangoma spends more money every year in marketing and sales and R&D than we did before, the year prior, in absolute dollars, the operating leverage is we increase the growth in dollars in those two cost centers more slowly than we grow revenue. And so while we spend more each year, we do it at a slower rate than the top line is growing. And that's contributing help to EBITDA. And then you're quite right, of course, the cost synergies that come from some of the amalgamations. As we said, we're going to invest most of that back into marketing and sales and R&D. But not all of it, I guess. And some of that comes from people and some comes from non-people. And it's that blending of those four or five things that that is the secret sauce. It's not one single component of it.

Okay. I'll pass the line. Thank you.

Okay.

Thanks, Dan.

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

Hey, guys. Great job on the corridor. Nice to see the strong guys that you guys put out. I'm wondering, just getting back to the global supply chain issues, It seems like there was some pressure on the gross margins just due to higher costs from components and shipping. Have you guys been adjusting your prices or are you planning to adjust your prices to reflect these increased costs? Or do you kind of view it as temporary and, you know, just looking to keep your customers happy that you're willing to eat it effectively? Hopefully it won't last too long here.

Yeah, well, the simple answer is no, we haven't increased our prices. If we peel back the layers of that a little bit, I would say it's not so much related to us just choosing to eat it. It's more related to, you know, it's a competitive business. Customers are price sensitive. Some of the products we're talking about are sold more internationally than North America, you know, more mature products. have longer life cycles in developing economies, as we've talked about for years, right? So a product that we might not sell very much of now in, I don't know, North America might still have some decent traction in, I don't know, Eastern Europe or Southeast Asia or Latin America. Those are the most price-sensitive markets. You know, maybe it's partly related, I guess, to some expectation we're going to come out of the supply chain pressures at some stage. I think it's more related to the accepting that these are the market conditions. And then the last part of my answer would be, David, there are some isolated examples of product lines where we felt like we had enough dominant market share in the industry that we could increase prices. But it's the exception, not the norm. And I wouldn't want you to take that as, oh, I guess Sangoma is just going to increase prices to offset the higher cost of goods. This would be isolated to examples like, I don't know, the original telephony cards, you know, and with Sangoma buying Digium and buying Biologic. No, there isn't much competition in that space. And so we're able to do something there. But it's not a strategy or philosophy that we could apply more generally.

That looks helpful, Bill. And then just one more question on the revenue side, the revenue mix. Can you comment on how much of the revenue now is coming through the channel? Obviously, Star to Star kind of only sold through the channel, so I'm curious what that mix is right now.

Oh, gosh, I wouldn't have that off the top of my head, David. There's nothing really changed in a big way about the mix that we've talked about historically for the revenue that came through the more traditional Sangoma side of the merged company. You're quite right that the star-to-star revenue mostly flows through channels. The way that we use this mix of direct and indirect also hasn't really changed for Sangoma. The majority of the revenue is channel as well. The truth is some of our really large customers want to buy direct from us, right? And one of the things I've been talking about at the events we're holding with our channels, you've heard me talk with Eric and Gavin about what's happening here at this one and the one from a couple of weeks ago, is our view and the way we talk to the channel about this is... is an issue or a topic that I choose to describe by starting by pointing to what's gone on in the B2C world. And I say, you know, this idea that any company, whether it's you, Mr. Channel Partner, or us, Sangoma, can kind of control and dictate, you know, the channel, I think is just less and less true every year. You know, the world was changed by e-commerce. People buy differently than they used to. That was also accelerated with COVID. And so one of the things we say is we want a channel strategy that allows customers to buy however they want to buy. We don't want to tell a customer ever, you shouldn't buy that way, you should buy this way. Or we want this channel model and not that channel model. And that's resonating. Everybody gets the B2C impact. Everybody buys stuff on Amazon. Fewer people go to stores, blah, blah, blah. And so over time, it is possible that that ratio of direct and indirect might shift around a little bit as customers decide who they want to buy from. But But our view is that's not something San Gomez should try to control or overly influence. We should make sure all types of channel structures, including the few customers that we sell to direct, are sold to the way they want to buy. And if that means we do a little bit, a few more points through channels one year, great. If it means we do a few more points direct one year, that's fine. And Well, not all of the channel partners love that in every way. And I had a question two weeks ago saying, oh, it sounds like I might have some competition in my area from a new partner in my city that came from Star to Star. Yeah, that's right. You know, if your expectation is, you know, you're entitled to a sale. If the customer happens to be based in your city, then we don't agree with you. You have to go, we're in the sale, you know, and same with the upper tier of the channel. If you're a master agent or a distributor, you have to convince the agent or the reseller under you that they should buy from you versus another distributor. And I don't really feel like this mix of how much comes direct and how much comes indirect is something that we're trying to control in the same way that many companies did four or five years ago.

Well, that's helpful, Bill. Sorry, one last question. Just on the proof form and number that you provided, the $193 million revenue in U.S., would that be an IFRS basis? I was just wondering, you know, relative to the color you provided when you acquired Star to Star and just looking at the financials that you filed, it looks like there's probably some adjustments from, I guess, what they would report under U.S. GAAP to what would come under IFRS.

Yeah, the change from GAP to IFRS, you know, it's reasonably complicated, as you probably realize. My suggestion would be so that I don't embarrass myself with... which of those specific changes I will remember from the top of my head, because I won't get it right, to be honest, David. If you want to go through that in some detail, give David Moore a call offline and you guys can talk about it. But I won't try and pretend I can do a thorough and precise job of that in real time. Thanks.

Okay, cool.

Thank you.

Once again, if you have a question, please press star, then 1. The next question comes from Gabriel Leung with Beacon Securities. Please go ahead.

Good morning, and thanks for taking my questions, and congrats on all the progress so far. Just had one question around M&A Bill. As you look into your M&A pipeline, can you talk a little bit about the things you're looking at now? Are you looking to fill in potential gaps in your current product portfolio? Are there any areas that you feel you still need to strengthen? And also, if you're able to talk about it, given your expansive customer base now, have you, have the board, has your management team considered expanding your service portfolio to perhaps, you know, let's call it non-traditional UC products, which can leverage your existing infrastructure, things like, I don't know, managed services, disaster recovery type services. Has that thought been brought up?

Both good questions. On the product line side, you know, as you mentioned, think about that as a filter for potential acquisitions, if I understood your question correctly. I guess I have two thoughts about that. One is we are now confident and absolutely say publicly with pride that we have the broadest product portfolio in the industry bar none. We have the widest set of cloud services and the only real cloud company that also is a product company. The other companies with which we compete, think, I don't know, Ring or Zoom or Twilio, et cetera, none of those are product companies, and none of them have the breadth of cloud services that we do. And so in general, Gabe, I would say that when we're looking at acquisitions, it's less and less because we have a gaping hole in the product portfolio. If there's a product focus to an acquisition target, it's more likely that they would have revenue strength in a product category that's newer and less developed for us, rather than we don't have a product at all. So that would be my answer to the first part of your question. On the second part, have we thought about cloud services that go beyond, you said you see, I'll use the word communications. The answer is a big, huge yes, and I'm going to give you two very specific examples of it so that you'll see it's not just You know, Wigmo trying to say yes, but we've actually done something about it. So these are both brand new. Both have very little revenue. You know, you can't ask me how material is it as a contribution to the top line. Neither of them is material yet. But we developed a product called Smart Office, which I know you're familiar with. It's access control as a service. Part of our cloud communication services includes soft phone clients that install either on your desktop computer or your mobile device or both. And many of our customers have all of their employees walking around their office with these apps on their cell phones. And we can use that same idea to have those employees walk around the offices and get rid of white swipe cards and key fobs that you wave past those little black rectangles attached to the wall to unlock doors. We know who the employees are. We have them all in our database. They already have an app installed on their smartphone. We can do this all wirelessly. You don't have to install all those wires inside the walls to connect the old way of doing access control into the locks in the doorframe, which is a very expensive installation, as you can imagine. So that is the first example of a new product diverging entirely from communications, consciously targeting the IoT space. It's brand new. It's been available for a couple of quarters now. I confess that it launched at a terrible time. You launch a product that's intended to help manage access in an office when nobody was going into the office. So timing was definitely suboptimal. But that's an example of one. And from the start of Star Acquisition, there was a second example that they had worked on, and that's desktop as a service. And we are the only company in the world that can install communications cloud services inside virtual desktops. And I'm super interested in that. It's quite complicated. And so explaining to a channel network how that works takes some time. And if you're a channel partner that's grown up in communications and doesn't really know a lot about virtual desktops, it's even harder. For some of our MSP partners, it comes a little bit easier. But those are two examples, Gabe, of real tangible, we're already doing something. rather than would we consider it down the road? And I'm absolutely interested in exploring this. We just have to be careful not to over-rotate on it and invest so much in that area that we somehow punish the core product lines that are driving the revenue. So we're just doing it carefully and prudently at the beginning.

Gotcha. Thanks for those examples and for the feedback, and good luck for fiscal 22. Thanks, Matt.

This concludes the question and answer session. I would like to turn the conference back over to Sangoma Management for any closing remarks.

Hello, this is David again. Thank you very much for joining us today. We really appreciate your attendance. I think you'll find we've given a pretty comprehensive update today with regard to our fiscal 21. We're looking forward to fiscal 22. And we really appreciate your shareholders for your support, as well as the rest of the team that we have at Sangoma. And with that, I'd like to bring the call to a close. Thank you very much.

Thank you, everyone. Bye.

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