Sangoma Technologies Corporation

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Technologies Q1 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. Good morning, everyone, and welcome to Sangoma's first investor call of our fiscal year 2022 that started in July. We're recording the call and we'll make it available on our website for anyone who was unable to join us live. I'm here today with Bill Wignall, Sangoma's President and Chief Executive Officer, Larry Stock, our Chief Corporate Officer, and John Tobiah, our EVP of Corporate Development, to take you through the results of the first quarter of our fiscal year, which started July 1. We will discuss the press release that was distributed this morning, together with the company's unaudited interim Q1 financial statements and MD&A, which are available both on CDAR and our website. As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS, and during the call we may refer to a couple of terms, such as 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 unless stated, all references to dollars are now to the US dollar, as we have started reporting United States dollars now for fiscal 22 and beyond. This will include all our prior period comparisons, which have now been converted to USD, and as described in note two of our financial statements and in our press release. Before we start, I want 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, hopes, beliefs, expectations, and strategies for the future. Because such statements deal with future events, they're subject to various risks and uncertainties, and actual results might differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in the accompanying MD&A, our annual information form, and in the company's annual audited financial statements, which are posted on CEDAW. And with that, I'll hand the call over to Bill.

Operator, how is the voice quality since we've had to change connections here? Is it okay?

Yeah, you sound loud and clear.

Thank you, David. Good morning, everyone, and thank you for joining us today. I've consciously kept my prepared remarks a little shorter for this one, because I provided a very extensive update on our year-end call just a few weeks ago. So if there is anyone joining us for the first time today, I would invite you to listen to the September 30 recording of our fiscal 21 results from our website, as that will give you a much fuller picture. Back to today's call, I have structured my prepared remarks in three sections. First, I will take you through our Q1 results. Second, I will share a brief refresher on strategy and corporate development, including a short update on the Star-to-Star integration. And third, I will touch on our forward guidance for fiscal 22. As always, I'll then wrap up with a brief summary and turn the call over to David for our typical open Q&A session. With that, let's move to our first section, covering our Q1 results. Sales for the quarter ended September 30 were a record $52.48 million, more than double the $26.22 million in the first quarter of fiscal 21. The increase in sales from the prior year resulted primarily from the Star to Star acquisition, the continued growth and compounding of the company's services business, and for the first time in a while, an uptick in our product sales. Our Q1 revenue also grew by approximately 5% sequentially from the immediately preceding Q4, an equally encouraging sign. And our services revenue represented over 70% of total sales for the quarter, consistent with our expectations for fiscal 22. Glow's profit for the first fiscal quarter was $37.9 million, also more than double that of Q1 last year. Gross margin for the quarter was 72% of revenue, 6% higher than the 66% in the same quarter a year ago. This is driven principally from the steady increase in the percentage of revenue from services, and that of course includes the impact of the higher fraction of star-to-star revenue that also comes from services. Our cost of goods continues to feel some pressure from the higher supply chain costs that most of you will have heard about in many industries. The supply chain pressures affected not only costs but also availability of components and increases in shipping costs as we ship more product by air in order to ensure that we've had inventory when and where it was needed to deliver on customer orders. As I have said in recent calls, 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 first quarter this year were $38.7 million versus $14.8 million in the same period last year. The materially higher OPEX were primarily driven by the cost that came with the addition of Star to Star and the non-cash intangible asset amortization arising from the acquisition. As I did last quarter, I will offer just a few comments on the three individual OPEX buckets under IFRS, namely sales and marketing, R&D, and G&A, given this is just the second quarter of including Star to Star. Regarding sales and marketing, you will notice that the portion of our OPEX that is in the sales and marketing category has increased in the first quarter of this year versus Q1 in the prior year, both in absolute dollars and as a percentage of sales. This was primarily the result of the addition of the Star to Star sales team, the incremental marketing staff, the accompanying marketing program spend, and the channel partner commissions. With respect to R&D, the increase in the first quarter of fiscal 22 from the same quarter in the prior year is largely due to the addition of the Star to Star engineering teams and our continued investment in innovation. And finally, the G&A expense also shows an increase from the prior year, driven in large part by the intangible amortization associated with the acquisition, as mentioned. As a reminder, this intangible amortization is a non-cash expense, so it does not affect our adjusted EBITDA or cash flow, but of course does appear as an expense in our income statement. Adjusted EBITDA was a record in the first quarter, exceeding $10 million for the first time and more than twice the $4.95 million from the first quarter of the previous fiscal year. This level of adjusted EBITDA is equivalent to about 19% of sales and is in line with our expectations for this point in fiscal 2022. As you may recall from our prior calls together, I do not typically spend much time on the costs below adjusted EBITDA and above net income. However, I mentioned during our last quarterly call that I would update you on the costs related to the Star-to-Star acquisition. As you might remember, Sangoma accrued for the majority of the transaction costs related to the Star-to-Star deal in fiscal 21. Of course, we also expected that there would be integration costs and that activity was undertaken primarily during Q1, so we recorded integration expenses of $0.84 million this past quarter. Net income for the first quarter was negative $2.3 million, primarily the result of the non-cash intangible asset amortization following the Star to Star acquisition. Please note that the admittedly and somewhat confusing entry entitled gain or loss on consideration payable, which I explained in detail last quarter, had minimal impact on net income this quarter as expected. And that brings my commentary on our income statement to a close, and I'd like to cover a few highlights from our balance sheet and cash flow. As you will see, Sangoma's balance sheet remains strong. Our cash balance at the end of the first quarter was $19.1 million, which is about $3 million lower than at June 30. This was driven primarily by our regular debt service payments, the annual staff bonuses, and the cash paid to purchase certain assets of M2 Telecom for $2 million. As you may recall, M2 was the leading sales channel for our wholesale task service, and as part of sales integration across the combined company, we have restructured the way we sell that cloud service by incorporating it into the one company-wide sales organization. Inventory is up modestly from $11.8 million at the end of Q4 to $12.6 million at September 30. As we shared on our last call, we had anticipated the need to slightly increase inventory levels to help minimize the impact of the supply chain disruptions and maximize our ability to fulfill orders. This helped our product sales this quarter. We expect these global supply chain challenges to continue a little longer still, and certainly through Q2. Trade receivables also exhibited only modest changes, finishing the first quarter at $14.07 million, down slightly from the $14.7 million at June 30. As always, we continue to monitor receivables on an ongoing basis. And now a comment on cash flow. During the first quarter, we generated adjusted cash flow from operations of $5.16 million up from the $3 million in the same period of the prior year. This measure of adjusted cash flow excludes the impact of acquisitions, financing, and other non-operating anomalies. We also made debt service repayments of $3.6 million, and we continue to be very comfortably within our covenants. This level of adjusted cash flow was around 52% of adjusted EBITDA, a little lower than we average, as you've seen over the years. It is quite normal for Sangoma's conversion of adjusted EBITDA to operating cash flow to fluctuate somewhat from quarter to quarter, with Q1 typically being towards the lower end of the range. That brings my comments on Q1 financial results to a close, and I will now move on to an update on strategy and corporate development. In this section today, I'm going to cover four topics. A final update on the integration of Star2Star within Sangoma, a short recap of Sangoma's strategy, the TSX up listing, and our share consolidation. Let's begin with the integration. As many of you know, Star2Star was Sangoma's 10th acquisition and was a very important one, 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 have come together as we continue to achieve our integration plan. In the past couple of quarters, I have shared with you that we undertook a series of integration projects, each covering a key part to bringing the companies together. These projects included people, product, customers and channels, customer-facing cloud networks, and back-office systems. Let me start by saying we have achieved our timeline for the first phase of integration, which we plan to take about six months. And the longer-term items are also on track. Since our last call was not too long ago and the integration projects were covered in quite some detail there, in fact, Several of you had reached out to us afterwards to say that was one of the most fulsome updates you'd heard from any company on an integration. This quarter's update is shorter. Now a few words on each project, starting with people. The cultures of Sangoma and Start to Star were quite similar, which is one of the things that attracted the two companies to each other. This is even more so today as our people have come together brilliantly And so I'm very pleased to report that we are now one team across the board. You may recall from our prior call that we approached the people integration project in two stages. First, the staff functions such as finance, legal, or HR were almost immediately integrated after closing the transaction. Second, we integrated the line functions such as sales, engineering, marketing, or operations over the first two quarters together. The integration of both the staff and the line functions is now fully complete, so let's turn to product. With the combination of Star2Star plus Sangoma, we now have the industry's most complete internally developed portfolio of products and cloud communications services, bar none. This includes UCaaS, trunking as a service, video meetings as a service, contact center as a service, CPaaS, collaboration, access control, together with all the capital P, products, all available from a single supplier and all part of a one throat to choke solution. Our first high priority in the product integration work was to decide on which product to keep for any product categories where both Sangoma and Star to Star had a similar offering. During our last call, I told you we decided on which product we would go forward with and that those decisions were uncontentious and unanimous. such as Sangoma's video meeting product and Star to Star's CPaaS product. Our second high priority in product integration was to tightly integrate our various cloud services into one cohesive suite. We have created one unified look and feel for all of our as-a-service products so that customers have a consistent experience, whether that product initially came from Star to Star or from Sangoma. And as the new versions of each product get released, they are getting upgraded to this new look and feel. We now have a robust product roadmap for each of our 12 product lines, a dedicated product manager for each, and a dedicated engineering development team on each product line with a senior leader and a significant sized team on each, a team that is now approaching 200 engineers across the company. I'll now share an update on progress with customer and channel integration. The integration of customer and channel activities progressed throughout Q4 of last year and into Q1. We started by holding initial meetings and webinars with the channel partners from each company and ended with comprehensive multi-day live events with these key partners to ensure the messaging and actions were well understood. We have now completed the work on customer and channel integration, so I'd like to thank everyone at Sangoma for continuing to take such good care of our customers throughout that process. And of course, to integrate the customer base, we have to integrate our sales teams and present one face to our customers. Last call, I updated you on how we restructured the sales organization. The new sales structure will allow our customer and channel facing teams to focus on the key segment they are each uniquely responsible for. And finally, regarding sales integration, I'm very excited to tell you that I've just flown back from our sales kickoff event. This is an internal event that we will now hold annually and was the first time that the merged Sangoma and Star to Star sales teams had been together. It was a truly great event, energizing, inspiring, and focusing for the approximately 150 sales staff who attended. Many of these folks have been selling in our industry for over 20 years and have been to 20 or 30 of these events over their careers, having worked for multiple companies. We heard repeatedly that this was the best such event they'd ever attended. Next, I'd like to touch on the integration of our cloud networks. Both Sangoma and Star2Star had their own versions of these, of course, and this provided an excellent opportunity to rationalize and consolidate all of this architecture, data centers, and 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 less expensive to run. This is done in a design and then implement approach, with the design being complete now and the implementation phase taking place over the next several quarters. As you may recall from our last call together, back office is the set of internal systems we use and that our customers and partners use to do things like quoting or ordering or licensing and enabling software or billing, et cetera. We have now completed phase one of this integration and the longer term items in this project will take place in phase two. And finally, I wanted to touch on cost synergies. As you know, we did not expect large cost reductions as part of the start of their 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. And that is what we appropriately have focused on. However, as we've said before, we would see some cost-saving opportunities, of course, and we continue to follow our plans to reinvest them back into R&D and sales and marketing to help drive Sangoma's growth. We are indeed on track with that, and I can now confirm that we estimate those synergies to be about $3 million, with the majority of this being reinvested, and this is already factored in to our budget and guidance. With that, I will bring my update on Star-to-Star integration to a close and move on to a brief reminder about our strategy. I often characterize Sangoma'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 approach today. Many of you are familiar with the history behind the strategy. The turnaround phase when new management came in to take over the reins, and recognized the sales of telephony cards were unavoidably going to decline as networks gravitated away from the PSDN 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 made up of multiple product lines. We managed the transition from a hardware company to a software business, an extremely difficult leap, which took us on the path to becoming a full solution unified communications provider. Once we had that full solution, we began the metamorphosis from a one-time revenue firm to a SaaS and recurring revenue company by building up our valuable cloud business, another very tough step to make. Along the way, we built some of those components ourselves and added others via acquisition. And in fiscal 21, this transition to a full SaaS company was capped off with the acquisition of Star2Star, positioning the merged company 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 back. We are now well positioned to continue on this strategic path, and that's the natural segue into the other two topics in this section today on strategy and corporate development. On October 29th, we announced that Sangoma received approval for the listing of our common shares on the Toronto Stock Exchange, with trading commencing on November 1st. As we said in our press release, graduating from the venture exchange was indeed a major milestone for our company, a confirmation of our progress, and another important step as we become a larger and even more valuable company. And then, on November 3rd, we announced a share consolidation over a reverse stock split, an action you overwhelmingly approved at a special meeting of shareholders held on September 23rd. The ratio was one new common share for every seven previously outstanding common shares, and the new share count took effect on Monday this week, as many of you will no doubt have noticed. We remain optimistic that completing such major steps as these should help trading volumes and hopefully multiple appreciation with our share price as well. That concludes my comments on Sangoma's strategy and I'll move to my third and final section today on guidance for fiscal 22. On the last call, I shared our guidance for fiscal 22 revenue would be between 209 and 213 million US dollars with our services revenue expected to be about 70% of sales, a really positive sign of sustainability. I also discussed our guidance for adjusted EBITDA of $41 to $43 million, again US dollars, delivering leading adjusted EBITDA margins, now expected to reach 20% of sales for fiscal 22. You've now seen our results for this first quarter and heard additional color from me today. We are pleased with your company's performance in Q1 this year and have therefore decided to reiterate our guidance today, remaining confident in that forecast. With that, I'd now like to bring my prepared remarks to a close with a quick summary. Sangoma has grown from a very small nano-cap company with about $10 million in sales to a strong, growing, much larger business with over $200 million in expected revenue this year and an enterprise value approaching $1 million Canadian dollars on the TSX. We have demonstrated proven top-line growth over an extended period, solid and expanding EBITDA, an increase in our services business, where the recurring revenue is generated to over 70% of sales, and robust cash flow. We continue to be well positioned to take advantage of an extremely large total addressable market in a space that's growing well. The macro trend of moving to the cloud is still relatively new in communications, and we expect the benefit from this for many years to come, both in North America, and internationally as well, where cloud communications is more in its infancy. And we look for ways to further expand your company by continuing on our dual-pronged growth strategy via organic growth, driven by investing in sales and marketing, R&D and customer acquisition, augmented with deliberate and disciplined M&A. Finally, before I close off my prepared remarks today, just a reminder, that we have our annual general meeting coming up next month as normal. Date and time are still being finalized, but it will be late December again this year. In order to ensure the safety of our shareholders and the Sangoma team, we have decided to do this one virtually, hopefully for one last time. Please stay tuned as we will be issuing the circular shortly with all the details, and we just wanted to encourage you to participate with us. With that, I'll turn the call back to David for questions.

Thank you, Bill. To make sure everybody knows how to ask questions, I'm going to ask the operator to go over the instructions. Operator, we're ready to take questions now, please.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 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 2.

Thank you, Operator. Actually, before we take the first one, we've had a number of investors ask about how the fractional shares were handled in the share consolidation. So, Larry, could I ask you to please explain this, and then we'll take additional questions from those on the call.

Certainly. Thanks, David. Good morning, everyone. As David mentioned, we've had a couple of shareholders email us with some questions about not providing a cash equivalent for the fractional portion. that a shareholder may lose as part of the rounding down due to the divisor being an odd number, in this case, seven. So we thought we'd just tackle that one right out of the gate. As a reminder, just prior to the consolidation, there were 133,151,508 common shares issued and outstanding. And post-consolidation, there are 19,021,614 common shares issued and outstanding. And while no fractional shares are issued as a result of the share consolidation, the application of the consolidation was done in a pro rata basis, such that the percentage of ownership remains the same prior to and subsequent to the consolidation. So if someone owned 100 shares before and they own 14 now, the basis is a little bit lower as a result of the way that the rounding works. And therefore, the percentage owned for everyone is done pro rata and remains the same. I hope that answers that question, and feel free to email me with any specific questions, and we can handle those individually as well.

David, back to you. Yes, thank you, Larry. Operator, let's open the lines up to the investors, please.

Certainly. The first question is from Gavin Fairweather from Cormark. Please go ahead.

Oh, hey there. Good morning. Hi, Gavin. I wanted to start out on the service of the lawn. If we do some math, you know, on FX, it looks like you grew that line by about kind of 5% sequentially, uh, which feels a bit hotter than, than maybe what's implied by your guidance. And in a summer quarter where we know it can be sometimes harder to get deals, you know, across the line, maybe you could just provide some color, you know, on, on that strength and which pockets of the business it's coming from and help us kind of understand that. Cause it did look like a nice print there.

Yeah. Uh, I think that is the right interpretation. It was a good solid quarter. Um, So maybe I have two thoughts in response. Gavin, as part of your question, you touched on the seasonality that's existed at Sangoma. And you are quite right about that, of course. What I thought I would explain there is not that the seasonality has gone away, right? Of course, it's still true that if you, whatever, live in, I don't know, Italy, you're probably still taking July or August off. But The fraction of our business which comes from product is declining, and the fraction of our business which comes from service is growing. And that services business being where the recurring revenue is means the impact of the lumpiness of product sales on Sangoma is decreasing each year. given seasonality affects new product sales and not the recurring revenue attached to a customer who signed up 23 months ago, in general, I think as a trend, seasonality will start to decrease over time. So that's the first part of my answer. The second part is the quarter was stronger kind of across the board, right? The services revenue was strong. And I also mentioned this It's been quite a while since we saw an uptick in product sales. Those are the two big factors that I think contributed, Gavin. It's the seasonality impact declining, which of course is a key one factor only, and the general shift of product to services driving that. Secondly, solid sales across the board, not just on the services line with the compounding, but also with product this quarter.

That's helpful. And then secondly, for me, just a couple questions on M&A. I mean, it's certainly the integration of star to star. It seems like it's pretty well kind of in hand at this point. And, you know, looking at your balance sheet, you got just over a turn of leverage. So, you know, kind of curious, you know, whether you feel like the business today is ready to do another acquisition and maybe you can just kind of touch on the deal flow and deal environment that you're seeing right now.

Yeah, sure. So let's take both of those in turn. Yes, the business is ready to start thinking about M&A. You know, without saying something I shouldn't and can't. You have seen public disclosures about things like share consolidation, the explanation for why we're doing that. So you guys certainly understand that we're heading in the direction of becoming a U.S. listed company down the road. I would like that to finish first. before the next acquisition, and we're working on that. But generally, yes, you're quite right that the integration has gone very well. I've updated you guys on the last two quarters about that. You probably wouldn't need to do another update on the integration. And so the management team would split its time between running the business and raising capital and upgrades to the CSX or across the border, M&A can now focus a little bit more of our time on that so timing is starting to be good we don't have anything you know well advanced or about to be announced just to be clear and then secondly on the you know the amount of headroom in debt and What the deal pipeline looks like, for sure, you're right. We're, I don't know, David, somewhere between one and one and a half times that EBITDA, very low, very manageable. You guys have seen us quite comfortable between three and three and a half times at the point of an acquisition. We have several ideas in our acquisition funnel and starting to work on, as I said, nothing far enough along that would make sense for me to talk about, but, but it is a robust funnel. There are good opportunities out there. Sangoma is absolutely seen as a high credibility buyer by a seller. And so that feels pretty good right now.

That's great. And then maybe just lastly, for me on, from a competitive standpoint, I'm curious for your perspective on the RingCentral and Mitel deal. You know, I thought it was interesting for a couple of reasons, you know, Number one, it included kind of a hybrid middle step to cloud for Mitel's on-prem base. And the second piece is that Mitel did have kind of a cloud offering. So it tells me it's not always easier, clean cuts to kind of migrate, you know, customers over. So maybe just, you know, talk about that and refresh us on how you're thinking about kind of stick handling, you know, the opportunity to move your on-prem base to a hybrid and then, you know, full cloud over time as they're ready.

Yep. So, of course, you could imagine that we watch such announcements with deep-seated interest. We follow it closely. We analyze it, you know, at length. It being, you know, the transaction you've just asked me about, the Ring Mitel one, feels to me very much like the Ring Avaya announcement. So, for example, Gavin, you're quite right that Mitel had a cloud business like Avaya did. I think the difference between those kinds of companies and Sangoma is the degree to which we have successfully managed the transition to cloud. The fraction of our revenue that comes from on-prem maintenance is very low. And if you're a 1980s or 1990s prem PBX company, maintenance revenue is the crack cocaine, right? Like you are addicted to it and it is everything. And it's really hard to get off it. And those companies had not as successfully transitioned to cloud as Sangoma has. There's no benefit to me sitting here and criticizing other companies. So I think I stopped short of that. But Sangoma has. We are a cloud SaaS business and it is on one hand a little bit surprising to see a company with a prem business to some degree abdicate the ability to upsell that user base to cloud. But on the other hand, one might understand that if you think through the degree to which a Mitel relies upon the prem business compared to the degree to which Sangoma does. So I think that's what I feel comfortable saying at this stage, Gavin. I hope that was useful and was somewhat on point to your question.

Very helpful. Thanks so much.

Sure.

The next question is from Eric Martinuzzi from Lake Street. Please go ahead.

Yeah, good morning. Congratulations on the Q1 results. Good to see that. sequential growths are very healthy, and then the coverage across both lines of the revenue. I had a question regarding, you know, you just came back from the sales kickoff. I got to believe pipeline was part of the discussion at sales kickoff. Anything that you're learning about the macro demand environment from pipeline review and anything anecdotal from the sales kickoff that you can share with us?

Yeah, good question, actually, Eric. You know, it's hard for us to talk about stuff that's not generally in the public domain. So I have to kind of abstract out of that. But of course, you're completely correct. That is one of the things that gets covered there. Absolutely. I think what I would choose to say is that the pipeline is going exactly in the direction that one would have hoped when merging Sangoma and Star to Star together. So, you know, just decide from the general trends in the industry, you know, which are, this is going to become a very, very big industry, right? This is an industry that most analysts, you have opinions about this, I know, Eric, you know, believe is hundreds of billions of dollars, and whether that means 140 billion or 200, you know, depends upon the person. But it's going to be big. And there are only three companies that have even exceeded a billion dollars, right? So, Our view of the macro drivers in the industry have not changed, and that's reflected in our pipeline. And then the second thing I would say is we are starting to see some uptick in cloud demand outside of North America. You and I have talked about this explicitly, Eric, and we're kind of on the record about this, that the US is so far ahead of the rest of the world in cloud adoption. And yet, you know, Prem is still a significant fraction of it here. But in Europe, you know, and then Asia and then Latin America, you know, cloud is not nearly as penetrated. And we are starting to see early signs of that in funnels as a slightly higher fraction of customers in whatever Germany or the UK are talking about cloud. Not so much yet in Asia, but here and there. And then the third thing I would say about funnel is we are starting to see exactly what we hoped we would see, which is some of the cross-pollinating of any of the products that came from the traditional part of Sangoma being embraced and adopted by the part of the channel that came from Star to Star and vice versa. some of the products that came from Star to Star being embraced by some of the products that traditionally came from Sangoma. We actually had a discussion about this not only at the sales kickoff but at the board meeting yesterday. And those early signs are encouraging. It's not one or two orders. There's now lots of them. It's not for one product from one company being adopted. It's two or three products into the other side of the channel. It's not one or two channel partners. It's dozens. So that early work on building up funnel in which a salesperson or channel partner begins to take advantage of the products that came from the other part of the company is the third thing about funnel, I guess I would just mention.

Okay. You talked a little bit about reduced seasonality just because of the continued growth in the services line. Some of us are modeling at home on a quarterly basis or an annual basis, but sequentially, how should we be thinking about it? I mean, typically, I would see a December quarter up sequentially on both the revenue and the adjusted EBITDA. Is that an appropriate assumption?

Yeah, we haven't typically done guidance by quarter, so I don't think I want to get pulled into that quite yet right after the acquisition. But what I will say is if you look back at the trend inside Sangoma over the last several years, that would be a valid assumption based upon historical records. And so you said it more generally across other companies, and I'm just confirming that that is how it's worked at Sangoma. Historically, we're not yet far enough into Q2 for me to say anything about that. But if you looked historically, that would not be a bad assumption.

Okay. And then lastly, you touched on it a little bit, but the NASDAQ up list, just a layer deeper there. Can you give us, is the ball in their court, your court, timing, barriers? Where are we?

I think that's when I just have to say I can't say anything about it. We are right in it, Eric. It's going very well. But, you know, we're at that time when all the lawyers are around saying this is not something to be discussing publicly, so I just have to be super careful on that one. Yeah, I'm not trying to evade your question. It's just... This is one that at this particular point in time we can't be talking about publicly, but everything is kind of on track.

Okay. Fairly well handled. I don't think you'll get in trouble with the lawyers for that.

Thank you for not pushing me too much farther.

All right. That covers it for my questions. Thanks, guys.

Okay.

The next question is from Nihal Upadhyaya from TD Securities. Please go ahead.

Morning, guys. Congrats on the quarter. I just got a couple of questions here on behalf of David Kwan. So firstly, excluding any COVID and supply chain related headwinds, how should we think about the growth profile of your product revenue going forward? And are there any other potential headwinds like transition to the cloud, for example?

Well, I don't think there's anything about the Q1 results which would cause us to alter our view of the long-term trends on product revenue. The long-term trend, as you pointed out in the second portion of your question slash statement, is towards cloud. And we don't see product as a driver of Sangoma's growth. That hasn't changed in any way because of Q1. What I could say about Q1 to explain why we don't see that as all of a sudden, oh, you know, product's going to start growing quickly, which is not what we're saying, is that, you know, product revenue is more lumpy, right? It's not recurring. It's partially driven by the return to the office trend that we're seeing in most developed economies. It doesn't mean every single person It's going back to the office. We totally see what everybody else sees, which is a more split workforce where some people are in the office full time and some people are working from home and some work from home part of the week and work in the office other parts of the week. So we're not missing that in any way, but more people are returning to the office, which has bumped demand a little bit. Part of our product increase is tied to services. So the non-recurring revenue portion of the star-to-star demand that drags along, for instance, desk phones. And part of it was tied to what you said, you know, please, you know, putting aside the supply chain challenges, but that actually worked in our favor in Q1. The way Sangoma has managed the supply chain challenges put us in a better position in terms of having the right inventory and the right levels in the right places versus our competitors. So if a customer was looking for something, it was more likely Sangoma had it than someone else. That's not an increase in demand. That's a share shift. So it's probably more detailed than you were looking for, but that's how we view the product trend in Q1, and it's not something that we would tell David to go model and assume Sangoma is going to be ramping up product sales over the next while.

Gotcha. No, thank you. That's helpful. And then just the last one from me was, could you provide some general feedback from the couple of channel partner events you hosted recently?

Yeah, we did that a little bit on the last call. So if you want more detail, I would say check out the recording. The feedback we got generally was, okay, good, I don't have to worry that Sangoma only cared about one set of channel partners versus the other You want us all. That's really important to maintain a channel's motivation and commitment. Secondly, if you came to the combined merged company from the traditional Sangoma side, one of the things you were trying to figure out as a channel partner is which of the new products that are now part of the company are big opportunities for me. So we spent a lot of time talking with those channel partners about things like contact center as a service, or desktop as a service, or collaboration as a service. If you came to these partner events from the Star to Star channel, we would talk more about which products you now have access to from the traditional Sangoma side. So yes, we know the world is going cloud, of course. But in North America, depending who you listen to, somewhere between 25% and 40% of new purchases are still on-prem. You've not had a solution for that. You're walking away from 40% of the market. Here's how to use prem. We're not saying use prem in place of cloud. We're cloud first. But if your customer wants prem or needs a hybrid, here's how to sell it. Or, I don't know, the Sangoma video meeting product, or we make our own phones. So that's what we were focused on was getting the channel confident and reassured, explaining where to focus, and then uniting the channel programs so that they didn't have to worry about, oh, how do I buy these products and I buy this one this way and that one another way. So that was really the focus of the two events.

Perfect. Thanks, Bill.

Okay. As a reminder, it is star one to ask a question. The next question is from Gabriel Lunge from Beacon Securities. Please go ahead.

Good morning, and thanks for taking my questions, and congrats on all the progress. Hi, Bill. Bill, hi there. Bill, just wanted to go back to questions around the sales funnel again. I'm curious, given your greater scale now, both in terms of product and sales firepower. I'm curious if there's been any changes in terms of the characteristic of the sales funnel. And I'm thinking specifically about, you know, are you starting to see, you know, more business potentially coming from new customers as opposed to existing? If you're starting to see also, you know, bigger sales opportunities, bigger ticket items,

um from the get-go which may you know potentially impact sales cycles going forward yeah i don't think there's anything like really earth-shattering or revolutionary yet that's changing in the funnel gabe you know there are some things that i could talk about there but it's not you know it's it's just too soon after the channels have been integrated and the sales teams have been combined and know we do this big sales kickoff event and explain for them what to focus on that that stuff would not yet have manifested in oh you know the the average size of a new incoming opportunity is way bigger already um what what i could say is um the the kinds of customers that we're seeing in the sales funnel look pretty similar to the kinds we've seen before. So they're looking for the same kinds of products. They come from all of the different verticals. They range in size from 10 seats to 2,000 seats. So that all feels the same. What we're starting to get a little glimpse of is customers being interested in more than one cloud service at a time. So customers being interested in first, I don't know, contact center, and then saying, oh, you also have UCAS, so let's look at both. Or the other way around. It's more common they would come in for UCAS and then say, oh, you also do video meetings in collaboration. So that, I think, is the most important trend that we're just starting to see in the funnel. And for me, Gabe, that's arguably – the one that we need to be most focused on. That is the way that over time the company can increase ARPU. It's the way we can offset any trends in price erosion as more and more people adopt UCAS and like any other technology product or service, products and service prices come down over time, not go up. So we're starting to see that, but it's very, very early. The other thing that I talked about in the answer to the prior question about funnel was we are beginning to see entries in the funnel from the portions of the channel that came from either of the predecessor companies embracing products from the other. But it's dozens, not hundreds yet. So we can see, I don't know, a Sangoma channel partner we'll have, you know, I don't know, a contact center as a service prospect that we wouldn't have had three months ago. And if there's, I don't know, 10 such opportunities, it's not one channel partner with 10, it's seven different channel partners across which those 10 opportunities are spread. So we can begin to see that, but it's not far enough along for me to comment on it quantitatively at this point.

Gotcha, thanks for that feedback. My second question, maybe for David, just in terms of the business integration costs in the quarter, the $836K, sorry, I might have missed this, but was that paid out in the quarter? And second question, do you anticipate any more meaningful integration charges over the course of the fiscal year?

So, Gabriel, good question, thank you. So we have accrued for the costs that we see in front of us. So the answer to the first part of your question is, yes, this should be in the ballpark, but not that it will necessarily be the final number. But in fact, probably only about 30% of that has been paid out in cash at this point in time. So we have accrued what we think it will be to that sort of order of magnitude. But it is possible there will be a few other things that come along, but it's our best estimate at this point.

Awesome. Thanks for that. And congrats again, guys.

Thank you, Gabriel. That actually is the last question. So with that, ladies and gentlemen, I'd really appreciate you joining us today. This concludes the conference call, and we will provide a recording on our website shortly. Thank you very much for participating today, and we do hope that some of you will join the AGM via this same kind of conference call format. Have a very pleasant rest of your day.

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