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spk00: Thank you for standing by. This is the conference operator. Welcome to the Sangoma Technologies Q2 fiscal year 2022 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.
spk01: Thank you, operator. Good morning, everyone, and welcome to Sangoma's second investor call of our fiscal year 2022. We're recording the call and we'll make it available on our website for anyone who is unable to join us live. I'm here today with Bill Wignall, Sangoma's President and Chief Executive Officer, and Larry Stock, Chief Corporate Officer, to take you through the results of the second quarter of our fiscal year, which started on October of 21. We will discuss the press release that was distributed yesterday, together with the company's unaudited interim Q2 financial statements and MD&A, which are available both on CDAR and on 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 otherwise stated, all reference to dollars are now to the U.S. dollar as we started reporting U.S. dollars for fiscal 22 and beyond. This includes all prior period comparisons which have been converted to U.S. dollars as described in note two of our financial statements and in our press release. Before we start, I'd like to remind you that the statements made during the course of this call that are not purely historical are forward-looking statements regarding the company or management's intentions, hopes, beliefs, expectations, and strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results might differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in the accompanying MD&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.
spk03: Thanks, David. Good morning, everyone, and thank you for joining us today. I have structured my prepared remarks for this call into four sections. I will first focus on Q2, then move on to year-to-date results. In my third section, I will give a brief update on strategy. And finally, 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 back over to David for our typical open Q&A session. With that, let's move on to the first section covering our Q2 results. Sales for the quarter ended December 31st were a record $54.24 million, more than double the $27.09 million in the second quarter of fiscal 21. This increase in sales was driven by the Star to Star acquisition, as well as our existing services business continuing to grow and compound together with an uptick in our product sales. Sequentially, our Q2 revenue grew by approximately 3% from Q1. And our services revenue continues to expand very well right on strategy. In Q2, that services revenue came in at over $37 million. So while total revenue doubled, as you've just heard, or stated another way, grew about 100%, our services revenue is up by 140% year-over-year and represented over 70% of total sales for the quarter, consistent with our expectations for fiscal 22. As I did during one of our quarterly calls last year, I'd like to just take a step back in time for a moment and examine the longer-term trend in services revenue at Sangoma. In fiscal 18, we had services revenue of under $5 million per quarter, typically. In fiscal 19, that had grown to something like $10 million per quarter. By the year following, in fiscal 20, we were averaging around $15 million most quarters. Last year, Sangoma was about $20 million per quarter. And finally, this quarter, we're well over $37 million, hitting greater over $30 million, hitting greater than $37 million in Q2. We think this is a pretty impressive long-term trend and one that has been achieved without any of the more typical significant drops in total revenue as most other companies navigate the transition to recurring revenue normally encounter. Solid, consistent strengthening that is a testament to our strategy and vision for the company. Gross profit for the second fiscal quarter of 22 was $39.4 million, also more than double that of 17.9 million in Q2 of last year. Gross margin for the quarter was over 72% of revenue, up from 66% in the same quarter a year ago. This is driven principally by the steady increase in the percentage of revenue that comes from services, including the positive contribution from star to star on this metric. These levels of gross margin, amongst the very highest in our industry, are even more satisfying given that our cost of goods continues to feel pressure from the global supply chain disruptions. The Sangoma team continues to do a remarkable job in managing these challenging circumstances, and I will touch on this a bit more in my comments on inventory coming up. Operating expenses for the second quarter this year were $40.24 million versus $15.13 million in the same period last year. The higher operating expenses were primarily driven by the cost that came with the addition of Star to Star, the associated spending, and the non-cash intangible asset amortization arising from the acquisition. As I've done in prior quarters, I will offer some additional insight on the three individual OpEx buckets under IFRS, namely sales and marketing, R&D, and G&A. Regarding sales and marketing, you will notice the portion of our OpEx that is in the sales and marketing category has increased in the second quarter of this year versus Q2 of the prior year. This was primarily the result of the addition of the StartStar sales team the channel partner commissions, the incremental marketing staff, and the accompanying marketing program spent. You will notice that percentage of revenue spent on marketing and sales is up this fiscal year for those same reasons. With respect to R&D, the increase in the second 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. This follows our general approach to OPEX spending. As measured in absolute dollars, Sangoma continues to invest more money every year into marketing and sales for customer acquisition and into R&D for product development than we did in the prior year. But we seek to grow that spending in such a way that in general and over the long term, the percentage of revenue spent in these areas can gradually tick downwards as a fraction of revenue, and thus the operating leverage. You see that trend in R&D spend this quarter. 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 statements. Adjusted EBITDA was a record in the second quarter at $10.43 million, exceeding $10 million for the second consecutive quarter, and more than double the $5.14 million from the second quarter of the previous fiscal year. This level of adjusted EBITDA is equivalent to about 19% of sales and is in line with our expectation for this point in fiscal 22. Net income for the second quarter was negative $2.48 million, primarily the result of the non-cash intangible asset amortization following the Star-to-Star acquisition and the one-time expenses associated with the listing on the NASDAQ and TSX exchanges. That brings my commentary on our Q2E income statement to a close, and I'd now like to cover a few highlights from our balance sheet and cash flow. As you will see, our overall balance sheet remains very strong. Our cash balance at the end of the second quarter was $16.95 million, which is about $2 million lower than at September 30. This was driven primarily by an increase in accounts receivable and a buildup of inventory ahead of the Chinese New Year and to deal with the supply chain pressure. Trade receivables increased finishing the second quarter at $15.98 million as compared to the $14.07 million at September 30. The increase this quarter was in part due to the fact that December is often a month when some customers wish to use up their budget before their year end. This can lead to us getting some orders quite late in the quarter as such customers have naturally not yet been paid by December 31st. This is not unusual, not a problem for us, and as always, we continue to monitor receivables on an ongoing basis. Inventories were $14.34 million on December 31st, $1.65 million then at September 30th, reflecting the current supply chain pressure. This includes several factors that many, many companies around the world are contending with these things, such as component supply shortages, longer lead times and sometimes higher prices for such parts, extended manufacturing periods at our contract manufacturers, delays in shipping, and some increased shipping costs. Sangoma expects such challenges to continue for the next few quarters until the supply chain stabilizes. More importantly, the positive manner in which our supply chain operations and logistics teams have been dealing with such challenges has been just excellent, enabling us to ship most all customer orders and, in fact, at times becoming a competitive advantage when Sangoma had product in stock that our competitors did not. From a cash flow perspective during the second quarter, we generated adjusted cash flow from operations of $3.90 million. This measure of adjusted cash flow excludes the impact of acquisitions, financing, and other non-operating anomalies. I will touch on cash flow a bit more in my year-to-date remarks coming up next. That brings my comments on our Q2 financial results to a close, so let's now turn to those year-to-date results. Sales for the six months of fiscal 22 were $106.71 million, double that of the $53.3 million in the same period of fiscal 21. The increase in sales was due to the same factors I covered in Q1, namely the star-to-star acquisition, the continued growth and compounding of the company's services business, and an uptick in the product business. As a percentage of total sales, our services revenue increased is 70% for the first six months of fiscal 22, a solid increase from the 56% in the same period last year. Gross profit for the six months of 2022 was $77.26 million, more than double the $35.24 million realized last year. Gross margin was over 72% of sales on a year-to-date basis, up from 66% in the same period of 21. It's especially gratifying during a much tighter global supply chain to see Sangoma at these levels of gross margin, a level at or near the very top of our industry. Operating expense for the first six months of fiscal 22 was $78.95 million as compared to $29.9 million during the same period last year. This was expected with the incremental expense associated with the addition of Star to Star and the company's continuing investments to drive growth. EBITDA was $20.52 million for the year so far, and is more than double the $10.09 million of the same period last year. This is equivalent to about 19% of sales for the first six months, which was similar to the prior year. Finally, year-to-date net income is negative $4.78 million, which, as noted earlier, is primarily the result of the non-cash intangible asset amortization following the start of star acquisition. And that brings my commentary on our year-to-date income statement to a close. We've already covered the balance sheet in my Q2 remarks, so I'd like to just touch briefly on cash flow. For the first six months of fiscal 22, we have generated adjusted cash flow of just over $9 million compared to just over 7.8 in the same year-to-date period of the prior year. This figure is always lower in the first half of our fiscal year, with cash flow expected to be materially higher in the second half, of course, and is a bit lower year-to-date than it would otherwise be as a result of our spending in response to the supply chain pressures. Finally, as was the case with prior quarters, we are, of course, comfortably within the debt covenants and our overall balance sheet remains strong. This brings my comments on our fiscal results to a close. Let's now move to our third section today on strategy. I will touch on three things in this section, competitive differentiation and positioning first, then M&A, and finally, investor relations work this quarter including Sangoma's graduation from the Venture Exchange. So let's start with competitive differentiation. The cloud communication space, or what is sometimes just called UCAS, a significant oversimplification in our view, is competitive. It's this way precisely because it's exciting, transforming a rather old-stage telecom industry, growing well with a huge total addressable market. In that competitive space, it's important for any player, especially the key players in the upper echelon like Sangoma, to have a competitive distinction. We are clear about what makes us stand out, and we work hard to ensure our customer-facing teams communicate this consistently to customers, prospects, and partners. You can imagine that in a technically advanced specialty, that can sometimes be challenging, but I think we're quite good at this. Those of you who have joined us on other calls may have heard me talk about the first three, the most important three, unique selling points. They are, Sangoma has the widest set of cloud communication services in the industry. This has been a very conscious goal for some time, and the start of our acquisition has helped us round out this broad set. We now offer UCAS, trunking as a service, contact center as a service, video meetings as a service, collaboration as a service, CPaaS, desktop as a service, access controllers, et cetera. Sangoma fundamentally believes that most customers do not want to go to one company for video meetings, another supplier for contact center, another vendor for voice, another for collaboration, et cetera. They prefer a single solution from one vendor that they trust one bill each month, all nicely integrated together. Secondly, Sangoma is the only real cloud communication player with an equally strong on-premise offering. We know that most companies around the globe still use on-premise communications. We wish to be able to tell the world that we want you as a customer, whether you're ready for all cloud right now, still need on-prem, or prefer a hybrid solution. It is not uncommon for a company with multiple offices to start some locations in the cloud and then do the others a bit later. For instance, they might say our IT competency is strongest at our corporate headquarters. So please upgrade this location to cloud first. We'll get comfortable with that and then do our other locations. And we also hear the opposite. Our headquarters location is not our testing ground, so go upgrade all of our satellite offices this year, get us comfortable with that, and then we'll do our headquarters next year. And our third critical unique selling point is our suite of cloud services is complemented by our own set of built in-house products that round out the offering and allow Sangoma to offer the industry's only true full end-to-end solutions. That means we don't need to rely upon some third-party vendor for phones, or if you want a session border controller to secure your voice network, like you would use a firewall to secure your data network, we don't send you to someone else. We do it all, and you as a customer have one number to call, one throat to choke, a common and somewhat unpleasant phrase that often one hears for such capabilities. And not only are these three things so critical to Sangoma's success in getting ourselves into the top tier of a growing cloud communications industry and driving your SaaS and recurring revenue model, they are also resonating with customers. As an example, we recently put a customer onto our CCaaS or contact center as a service product. Sangoma is no longer just a UCaaS company. This customer, a last mile logistics provider, had previously used a competitor's solution and switched to our CCAS service for its enhanced capabilities. Taking upwards of 90,000 calls per month, the customer was able to realize significant savings in labor and license costs while getting a fully integrated solution. Or an automotive dealership company with dozens of locations in Texas and surrounding states. This was an example of a company that was originally an on-premise customer for us and migrated their hundreds of seats to our cloud offerings in a simple, elegant upgrade. The second part of my strategy section today is a very short update on M&A. We are starting to get more frequent questions from investors these days that all go something like, what or when is your next acquisition? I know that you know, I'm unable to be very precise about those kinds of topics until we have something quite specific to announce. Suffice to say for today that given the integration of Star to Star has gone well, and we are most of the way through that, we are now once again very active working on prospects for the next acquisition. There are absolutely good opportunities in front of us. Sangoma is well respected as a proven buyer who does what we say we will do, and we are financially well positioned to act. I'm afraid I can't say a whole lot more on this today, as you'll understand, and I fully realize that's not wholly satisfying. Please just stay tuned. And my third part of today's strategy update is on our investor relations activity. I'm not completely sure this is the optimal title for what I wanted to share in this section, but I really just wanted to speak for a moment about the activities your company is taking to raise our profile in the public equities market given our really solid operating and financial performance. Your board of directors continues to believe strongly that our stock is very dramatically undervalued, a viewpoint that I know most of you will undoubtedly share, even more so given what has happened with share price the past several months. And while Sangoma may have fared better than many of our peers, that's no consolation. So we've been actively working on multiple initiatives in this area and I'd like to take you through two of them. First, as previously announced, of course, we successfully graduated from the Venture Exchange to the Toronto Stock Exchange. We also announced our cross-listing to NASDAQ in December, trading under the symbol S-A-N-G or SANG. This is obviously a major milestone for our company, a testament to our continued progress, and an important step in our growth. And just a quick reminder of the reverse stock split we also undertook in Q2 using a 7 to 1 consolidation ratio. Secondly, we've been focused on increasing our research coverage. I'm pleased to point out that over the past few months, we've added coverage from three excellent analysts at each of TD, BMO, and most recently Canaccord just this week. Really good progress. So while the cloud communication sector has seen share prices decline sharply from their highs of one year ago, and of course, Angoma is not fully immune to this trend in spite of our share price somewhat outperforming our peers, we remain optimistic that completing major steps such as these should help trading volumes and our share price as well. That concludes my comments on strategy, and I'll now move on to my fourth and final section today, about guidance for fiscal 22. On the last call at the end of our first quarter, I reiterated our fiscal 22 guidance. At the time, we reconfirmed expected revenue of between 209 and 213 million US dollars and adjusted EBITDA in a range of 41 to 43 million. With our performance through two quarters, we have now increased guidance for this year, as you may have seen yesterday. We now expect revenue to be between 215 and $219 million for fiscal 22 and adjusted EBITDA of 42 to 43 million. This increase in guidance factors in many considerations as outlined more fully in our press release, but includes assumptions regarding revenue continuing along on the trends we've experienced year to date, demand and subscriber growth for our products and services, no additional material impact on our supply chain, and the increased costs associated with our NASDAQ listing, such as much higher D&O insurance premiums. With that, I'd now like to bring my prepared remarks to a close with a quick summary. Your team here continues to do a remarkable job across the company, which is evidenced by another solid quarter. We have demonstrated proven top-line growth over an extended period, solid and expanding EBITDA, a consistent increase in our services business where the recurring revenue is generated, the successful integration of our largest acquisition to date, and an adept handling of the global supply chain crisis, a challenge that has snookered many, many other companies. An exceptional job all around while continuing to exceed our customers' expectations during uncertain times and on a competitive playing field. So a special thank you to everyone at Sangoma for all your hard work. I'd also like to highlight our capital markets maturation, in addition to delivering solid operational and corporate development success. Our listings with the premier exchanges in the market, namely the TSX and NASDAQ, along with expanding research coverage from three excellent banks recently, bode well for Sangoma as we seek to get our story and our track record out to more investors in Canada and the U.S. Our long-term strategy of transforming your company from a sneaky little hardware company with one product, no recurring revenue, and a nano-cap stock into a cloud communications powerhouse with a SaaS business model is remarkable for both its boldness and its success. Sangoma is very well positioned to take advantage of a growing industry and the macro trend of moving to the cloud. Finally, throughout my prepared remarks, both today and on prior calls, You've heard me emphasize growth. Sangoma utilizes what we call a total growth model, which I have described as a combination of organic growth with prudent, disciplined M&A activity. We believe this strategy of organic and growth via acquisition serves us particularly well in today's consolidating industry. These recent achievements have me excited about the future of Sangoma and the path we are on as a company. I'd like to thank you, our shareholders, for your continued support. And with that, I'll turn the call back over to David for questions.
spk00: So we'll 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 two. We will pause for a moment as callers join the queue. The first question is from Steve Kaushal from BMO Capital Markets. Please go ahead.
spk08: Hi, good morning, Bill. Thanks for taking my call. It's Deepak here. Yeah, just a couple of questions for me. You know, good uptick in revenue, particularly continued strength on the on the product sales. Can you just give us a sense, you know, qualitatively or intuitively, is this still coming from a rebound, uh, falling, you know, a bit of a slowdown a year ago, or are you seeing some increased momentum there on the, on the product side, or are we now at a steady state for that side of the business?
spk03: Yeah, that's, that's a very good question. And, and, and in fact, you know, even for us, it's a little bit tough to know we've only had this one or two quarters now in general, Steve, we've, we've said to the markets over, in quite a long period, a large number of quarters, certainly multiple years, that we do not see the product business as a high-growth business. You know, it contains products that generally, for instance, you know, the premise you see business is being – you know, gradually transition to cloud or it contains products that connect into the old PSTN. So I don't think we want you guys to take a message away from here, which is, you know, product is all of a sudden, you know, reinvigorated and going to become a growth engine. I think more what has happened is the disruptions from COVID on the economy, government responses to COVID with shutdowns, the impacts of the global supply chain have just disrupted a lot of things. And so that's changed the kinds of products that some people needed if they were working from home, like we had a spike in headset sales as example. And it's meant some of the products in our capital P products portfolio have been hard to get from our competitors. And that's kind of what I was referring to when I said you know, our good job managing the supply chain has meant, you know, it turned into a bit of an advantage, but I just don't think we want you to extrapolate that to something that is just a bit too early to know.
spk08: Okay. Okay. That's helpful. And then, you know, when I think of on the services side, the synergies with Star to Star, I think there's several categories, whether it's, you know, cross-selling on-prem versus software, you know, international markets or some cross-sales in the channel. Now, how would you kind of say, you know, rank the progress of achieving those synergies? What inning are we in, in terms of progress to your plan for driving those synergies? And when might we start to see accelerating services growth as a result of those synergies?
spk03: Yeah. You know, I think, you know, synergies means two different things, whether we're talking about revenue synergies or cost synergies. And I think You know, which inning we're in is quite different between the two. That's why I'm drawing the distinction. On the cost side, you know, as we think about, I don't know, two marketing groups coming together, right, that stuff is in the latter innings. You know, we've been through that process. That's what we mean when we say most of the integration is complete. And I just picked one. It was the same with, you know, people or systems or, you know, putting two HR teams together, et cetera. The revenue synergies are in much earlier innings, of course, right, where we've just put the sales teams together. We've only had one meeting with the partners. They were separate meetings at the beginning, one with the Star-to-Star partners, one with the Sangoma partners. The next partner or event we do to kick off our new fiscal year will be with everyone together. So I guess the bottom line is the definition of synergies as costs is later innings, the definition of synergies as revenue, earlier innings.
spk08: Okay. Got it. And then just for my last question, perhaps just a bigger picture question. And I think one of your competitors undertook a recent rebranding exercise for the entire company. You know, I know that you're in the process of, of, you know, bringing your teams together from star to star in Sangoma and communicating that to your channel. What do you think about the merits of that kind of rebranding strategy? And I know in your guidance, you've maintained a 20% EBITDA margin discipline. Is branding something that you can significantly invest in under the current cost structure? Is that something that you might consider more investment in somewhere down the line?
spk03: Yeah. I think it depends upon what you have in mind when you say branding. We've absolutely thought about, we've talked about, we've analyzed Should we rename the company as like the very biggest potential rebranding, you know, Sangoma and Star to Star coming together? We're not quite ready to make that decision yet. It's a big decision. It's an expensive investment. You know, we're thinking about branding at a slightly lower level than that. Can we invest in the brand and tell the market, you know, in a better, stronger, clearer way what we stand for. So that one I feel like we are prepared to invest in, but if what you pictured was, you know, is Sangoma going to completely rename itself, while we do consider it, we've done some work on it, we've worked with an agency, you know, I don't think it's something we're about to jump into right now.
spk08: Okay, if that's helpful, well, thanks for taking my question. Appreciate the opportunity and look forward to continued conference call.
spk03: Yes, you're welcome. Nice to talk to you. And guys, by the way, David just told me that I screwed up on the script at one point. I guess in the guidance section, I said 42. What did you say, David, to 43? And of course, I should have said 42 to 44. My apologies. It's been a late night.
spk00: The next question is from Eric Martinuzzi of Lake Street. Please go ahead.
spk07: Yeah, just curious, and it may be kind of picking at a minor issue, but in the guidance revision, and by the way, I appreciate the fact that it is upward revision to guidance, and that's always a good thing, but just seeing that the revenue moves up $6 million at the midpoint and the adjusted EBITDA moves up $1 million at the midpoint, just curious to know, you know, that's a 17% incremental margin. What's going on as far as either the cost of goods or the OPEX that's causing that to maybe be less than what I would have expected for incremental margin?
spk03: Yeah, that's a good question. I don't think that's really nitpicking, Eric. It's perfectly fair. I think it's pretty simple, but it's not a singular explanation. It is this conscious decision at Sangoma not to take all the growth that's available and all of the cost savings that we generate and have those simply drop to the bottom line. As I've mentioned in prior calls, we're prepared to balance our wish for growth with our wish for ever-growing EBITDA. And While we want more EBITDA, we don't want more EBITDA at the expense of revenue growth and vice versa. So while revenue is growing nicely, as did EBITDA, you're right, not quite as fast in our guidance increase, we're also investing in things like more marketing, to the prior question about branding, a return to business travel as the COVID restrictions lessen around the world, We're starting to do large sales events where we bring larger teams of people together, and those are expensive, right? We just did a large internal sales kickoff with, I don't know, 250 people or something there. There are costs associated with the TSX and NASDAQ listings. The ongoing expense of D&O coverage, which is super expensive, of course, most of you know, just means that It's not like we don't understand it, Eric. We're just choosing not to plow every possible dollar of revenue growth back into amping up every last point of EBITDA margin increase. That's all.
spk07: Okay. And then my second question has to do with the gross margin. If I look back a year ago, that kind of the pro forma analysis of the gross margin of the combined businesses, Legacy, Sangoma, and Star to Star, I want to say gross margins were in the neighborhood of, they were north of 75%, and I'm certainly mindful of the supply chain pressures that you're dealing with. But here we are just above 72. There was a time when we were well north of 75. Based on what you know now and what you see in the supply chain, do you have a timeline that's realistic for when we could get back to that legacy gross margin or something north?
spk03: Yeah. Two thoughts. First of all, I would say for certain, Sangoma has never been at 75%. The only time you see numbers above where we are now is some kind of smashing companies together, financial model. And secondly, I think this goes partly back to my answer to your first question. You know, what are we choosing to spend on? Where do we invest? And so spending on things like cost of goods is something Sangoma is prepared to do because, you know, while sure, 73% is better than 72%, 72% is arguably the top gross margin in the entire industry. Go look at all of our competitors. And so We're just conscious of the need to drive growth versus the need to invest to drive that growth and the offsetting expense that affects if it's COGS gross margin and if it's OPEX EBITDA margin. So it's absolutely possible that we could be at 73% or 74%, no doubt, And yet we've chosen not to do that in order to better position the company for the future, including things like I touched on, which may not be two or three years of future, but two or three quarters of future, how we've invested in inventory during the supply chain problem. That has contributed to the uptick in product sales because our customers could get stuff from us they couldn't get from someone else. So that's what's going on there, Eric. totally get the point that, you know, a couple of extra points of gross margin is attractive to everyone. But it's a metric where we feel like we're already doing super well and at the very top. And so, you know, goosing up that further is probably not our top priority.
spk07: It was really more about if you had visibility into a timeline rather than I'm certainly Appreciate the accomplishment the backward-looking and as well as the best use of the word snookered in a prepared remarks of any company in the industry Okay, thank you for that But it was it doesn't sound like you do have a view into that Timeline so I'll leave it there and thanks for taking my question Okay, sure
spk00: Thanks, Eric. The next question is from Gavin Fairweather from Cormark. Please go ahead.
spk06: Oh, hey, good morning. I thought I'd start out on the fiscal 22 guide and thought I'd come at the product angle a little bit differently. Maybe you can just share your expectations for product in the back half of your fiscal year as you were coming up with that fiscal 22 guide, and then what does that imply for services?
spk03: say the very last part of the question again, the implication of our guidance on product expectation and on services.
spk06: And I'm just trying to figure out like when you're coming up with your fiscal 22, what assumptions did you make for both lines?
spk03: Yeah, I don't think we want to try and break that out. We've not done that for guidance in any prior period, Gavin. I don't think we want to do it here. What I will say is we don't, really know exactly what to expect about product sales. Um, you know, consistent with my earlier comment to the, to the first question, um, it's caught us by a little, a little bit by surprise too, to be honest. Um, uh, you've heard me say on multiple calls that, that it wasn't expected to be up. You know, we kind of treated as maybe it's flat, maybe it's minus two, maybe it's plus two, maybe it's minus four. Um, And so we're not assuming product is going to stay up and be a growth business, but it could. It could for a quarter or two, or maybe there is something structural. Maybe, you know, people are never returning to the office in the levels we thought they were, and more work-from-home employees are going to need to keep buying things they use at their home office that they used to get, you know, from their employer at their office. It's just really, really hard to know, only a quarter or two into that trend. All I can say, Gavin, is we are going to continue investing in areas that we think support it. So if having the right products on the shelf to help a little bit of extra product sales be realized needs slightly more investment in COGS, that's okay by us. And if that means we're 72% gross margin instead of 73%, that's okay by us. But I don't think we want to get into what's the growth rate over the next two quarters in product versus the growth rate of the next two quarters in services.
spk06: That's fair. I thought I'd try. It's been a couple years since you've been talking about this strategy of being a one-stop shop for your clients. And obviously that took a step forward with Star to Star. Maybe you can just provide us with an update on your customer success efforts, how conversations with clients are going on buying more than one product from you, and how that's influencing your ARPU in the business.
spk03: Yeah, perfectly fair. I would say it's going well, but it's consistent with my earlier comment, the early innings of this. We're seeing customers buy into it. We're seeing excitement from the partners. I was just talking to one of our largest partners in Florida yesterday, and, you know, they're all over this. You know, this is what they see as the big benefit from bringing together Star to Star and Sangoma. But Sangoma's, you know, a bigger ship now, and it takes a little bit of time to turn that ship. We're seeing some of the sales team get it immediately, start embracing it. We're spending a lot of time talking to our frontline customer-facing people about it. But for sure, it's still the minority of the existing customer base that has the full suite. And that's the big opportunity for us is, as you just said, going in and increasing ARPU by having a new customer adoption be not UCaaS, but UCaaS plus CCaaS, like the one I cited, or UCaaS plus video meetings plus collaboration, and also improving existing customer expansion by being able to go back to customers that purchased UCaaS two years ago and say, are you interested in any of these other X cloud services? So we're all over it, but it's just a little early to comment on it quantitatively. I can say we're seeing lots of adoptions of it. We're even hearing little signs in the marketplace about it going beyond cloud services into other things. I read a report from Frost and Sullivan this month about maybe companies want not only cloud communication services, but other communication services from the same vendor. So we're very confident. It's a trend that's here to stay, but it's early stages for us still, Gavin.
spk06: That's great. And I'm maybe just curious if I could check in on some of the conversations you're having with private companies. Given what's going on in the public markets and cloud communications, are you seeing that maybe access to capital is drying up for some of your smaller private competitors and that's driving more deal flow? Any thoughts on what those private dynamics are like?
spk03: Well, for sure, right? There's no doubt. And why would communications generally or cloud communications specifically be any different? That's true. So if you are a private company running at losses, making use of readily available capital over the last few years, that gets harder now. Or if the capital you tapped was equity capital, As I just said, you know, you fall into that bucket. If, you know, the way you paid for operating losses was adding debt, you know, the cost of debt is getting more expensive. And so, you know, one's ability to service the debt gets harder. So I think in general, our industry will not be different than others. Companies that don't have a path to profitability will find it harder. We're starting to see that a little bit. in our industry. I wouldn't say it's the focus of our M&A efforts, but for sure there are visible signs of it starting to emerge, yes.
spk06: Thanks so much, Apostle. Okay.
spk00: The next question is from Robert Young from Canaccord Genuity. Please go ahead.
spk09: Hi, good morning. Thanks for taking the question. Maybe just a simple one to start the guidance, the second half is implied at a higher level of EBITDA margin. I think the bottom end, if you calculate, it looks like 19.2%, which is precisely what you just reported. So you're expecting the second half to be a little better at a high level. Are there any things that you'd suggest would be drivers for that if the supply chain is still expected to be a headwind?
spk03: Yeah, I think there's a couple of things going on there, Rob. You know, as I said, we absolutely have this lever visible to us in expenses, right? And so we can turn up the OPEX and COGS to invest and turn it down a little bit. And as revenue continues to scale, the amount by which we have to turn it up, you know, can drop a little notch. And so we do think the markets in the back half might be a little bit better. But it's very fine-tuning, right? And, you know, the only caution I would offer is we've been careful through this call and done prior ones. I know this is, you know, the first time after you've launched your coverage, thank you, that you've been on the call. And we don't really want to guide people to just expect continuing coverage. EBITDA margin increases every quarter. We've guided towards a 19% number for the year. Maybe the back half will be a little bit more. Next year might be a little bit higher. We'll see. What I really care about is using that lever to adjust the outcome on growth. And so that's what's on our mind. We'll see how that goes. If we see both coming in a little bit stronger than we might have expected. We'll put a little bit more in. But if you think back to my answer to the product question, we have that small piece of our business in a mode that's just a little bit unpredictable right now. And we're just trying to acknowledge that to you guys. As I said, it's even caught us a little bit by surprise. the thing that's much more predictable that we have a, a stronger feel for where to put that lever on is the services business.
spk09: Okay, great. Thanks for that color. I mean, another, maybe another question or extension of what Gavin asked around cross-selling with star to star. I mean, are you seeing any benefit from star to star customers, uh, Getting an engagement with your engineering talent on the non-cloud side, is that sort of deeper engineering pool helping them solve problems that they've had in the past? Are they seeing the benefit of the broader organization that Sangoma is able to bring to bear, just beyond the addition of hardware in the end-to-end? Are there any other engineering benefits you're able to bring?
spk03: Yeah, so, I mean, I think the answer to that is yes, both in the services and the product category. You know, on product, for example, if, you know, we think about the kinds of things that go on a customer premise, whether it's, you know, an SD-WAN or something like that, you know, Sangoma has a number of appliances that are capable of doing that. It's not the focus of our company anymore, but we're good at it. Sangoma is able to design and manufacture our own desk phones, which was not possible at Star to Star, and that gives us opportunities both in terms of the functionality that can be delivered through that phone, if you own both the endpoint and the software stack, as well as managing the unit economics of situations that involve giving away a phone with a contracted subscription. So for sure we see that benefit in the Star to Star world. On the services side, what we see is a larger engineering pool with deeper talent being able to address things that maybe never got to the top of the priority list or something. And so, you know, making one product integrate more elegantly with the other. or continuing to ratchet up network uptime as customers get bigger and accept less and less friction in the way one operates a network. So all of those are working. I hear that very explicitly from start to start customers, even from start to start partners who will reach out and say, wow, we really do see the difference, the impact of the larger engineering team And so you asked more specifically about the products getting some benefit. I would just say, Rob, it's in both buckets.
spk09: Okay. Okay. And last question, maybe a quick one, just to summarize the use of the balance sheet. You gave us a bunch of information already on that. Sounds as though M&A is the priority. You paid down some debt and said the board sees the share. Price is undervalued, so maybe there's some thought around buyback. If you could talk about where the priorities for cash are and balance sheet, and then I'll pass the line.
spk03: Yeah, thank you. Good question. You may not know that Sangoma did, tried a share buyback many years ago. I would say shareholders didn't love it, to be honest, Rob. I think we have good uses for cash. So I don't see that at the very top of the priority list. Whether it's investing, as you just hinted at from my earlier comments, things like cost of goods and inventory to help us position ourselves better, or investment in R&D or marketing and sales for customer acquisition, or as you just said, number one, M&A. I think that's where we're more likely to use the capital. And my reference to the prior NCIB is just, I don't know, to give you some visibility to the fact that we do know about it, we understand it, we did it, and I would just say it's probably not in the top one or two priorities for our use of cash right now. Great. Thanks for taking the questions. Okay. Thanks, Rob.
spk00: The next question is from David Kwan from TD Securities. Please go ahead.
spk02: Morning guys. How should we think about the trajectory of the services revenue line in the coming quarters here? Understanding, I guess, there can be some fluctuations quarter to quarter, but do you expect to see quarter to quarter growth trending upward as maybe your direct sales reps and channel partners get even more familiar with the combined suite of solutions and you see some more success from a cross-selling perspective?
spk03: Yeah, I mean, I think, David, it depends how precise you're trying to get me to be, right? It borders very close to Gavin's question, right? What's the growth trajectory for services versus product? And I just don't think we want to get into that. I will say qualitatively, what we can tell you is, yeah, absolutely, we expect services to be growing sequentially. Whether it grows at 5% or 3% or 2% or 4%, I don't think we can forecast that with that level of precision. We don't have a very long sales cycle or install cycle that allows us to use bookings received in one month or one quarter to inform our judgment about billings three months or six months out. But in general, yeah, you're completely right. This is the driver of growth for our business, so it absolutely has to be growing quarter to quarter. But it absolutely can bounce around a couple of points here and there, and whether it's up five one quarter or up three the next, and whether it will be up four or up two or up five, that just is not something I think we want to get into today. quarter-by-quarter guidance and then quarter-by-quarter guidance between services or products. So I totally get the question. I don't want to evade it, but it's something I think we're not going to get into on this call.
spk02: Okay. That's fair. One other question. Just given where the share price is right now, I'd assume, I guess, for acquisitions, you'd probably look to lean more on debt in terms of funding them. But would you maybe target kind of smaller deals now that you could possibly or, you know, completely or mostly fund through debt while still kind of maintaining a manageable leverage level?
spk03: Yeah, I think we would probably not use as a first or second screen on a possible acquisition, go find small ones. You know, our screens, as we've talked about on prior calls, involve much more things like, you know, what products exist, what strategically does that product help with, what customers does that company have access to, what channels do they have that might be useful to us. And all of those things are more important than, you know, can you find a company that's $20 million versus $50 million versus $80 million. Having said that, Sure, if a company was small enough that it made sense to use more debt, given where our share price is, I think you're completely right. Whether it would be all debt, David, I don't know. I think that depends on a bunch of factors, right, including what the selling company is interested in and what whether we want to use all of the leverage available to us at that point in time. So there's a number of factors. My sense is, though, that in general, you're right, maybe a little bit more debt as a percentage of the sources of funding than in prior deals.
spk02: Yeah, I guess I was just trying to get a sense of your willingness to issue equity, especially a significant amount of equity at these levels, and that maybe if you had an acquisition target, a couple acquisition targets that were essentially nearly identical, at least from a strategic standpoint, as you pointed out, would you look at maybe the smaller one, given that you probably wouldn't have to issue as much equity for it?
spk03: Yeah, I mean, I don't want you to think I had a comprehension problem and didn't understand your question. I totally get it. I'm just saying to you, It has never happened, and I do not think it will happen, that we'll find two companies that are equally attractive at the same point in time that we both want to do, and they're for similar reasons, and one's smaller and one's bigger, so we pick the smaller one and can do it with more debt. We don't really see that. I guess in that extreme hypothetical example, sure. But I think it's really, really unlikely, right? The acquisition opportunities we see are typically not two identical companies where everything's very similar except at different scales. And so that's why I said, you know, it makes sense what you're asking, but in practice I think wouldn't play out exactly like that.
spk02: All right. Thanks, guys.
spk00: The next question is from Jeff Schachter from TD Bank. Please go ahead.
spk05: Hi, guys. Actually, your last couple of callers had some questions that will probably overlap on, but just really on the sales pipeline first, are you seeing with your well-talked-about diversified product suite, are you seeing the sales pipeline move to larger deals Are you seeing opportunities for competitor, entrenching on competitor territory and then bringing over new clients? Is that starting to play out yet? And are you happy with the speed of adoption or do you think it can be better?
spk03: I think we are happy with the speed of adoption. When you say could it be better, Like for sure, everybody would love it to be better. But for us, you know, as I've said to you one-on-one, Jeff, and hinted at in one of the prior questions, we have this delicate balancing act between, you know, why isn't EBITDA going up a little bit faster given revenue growth? And then, you know, the next question is, you know, why can't you get it adopting a bit faster? And, you know, we're constantly balancing those two. I'm quite sure we could ramp up adoption a little bit more if we took EBITDA from 19% of revenue to 15% or to 10%. But generally, that's not where we're going. That's not what most of our shareholders want. That's not what our board is directing us to do. To the first part of your question, are we seeing larger customers? The answer is yes, but more from the point of view of it going up a little bit in ARPU as we see more customers adopt more than one service. Then we see it going up in customer size. We're not yet deeply into that enterprise segment that some of our competitors are. Star to Star helps there because they have and have some larger customers and channel partners who specialize there. but we're still more in the mid-market than the enterprise market. That's an opportunity for us over time, but that hasn't shifted in a material way yet, whereas a customer of 100 seats buying just UCAS versus UCAS plus CCAS or UCAS plus video meetings or UCAS plus CPAS or UCAS plus collaboration, that's a larger customer, but I don't think that's quite what you meant when you said larger, right?
spk05: No, I just mean just large corporate clients that can come on and be significant, either newsworthy or help help momentum forward with uh with with wins and and just really increasing your profile in the united states given that you know i mean one of the things is you've you've had this nasdaq listing and and you know there's next to no volume on the um on the nasdaq so uh you know clearly it it demonstrates to me that there's still a little bit of a of a you know unawareness of who you and maybe even on that front, we've had some Canadian coverage. Are there plans for U.S. coverage or some more recognition through just coverage in the U.S. and utilizing that NASDAQ symbol?
spk03: Yeah, so I think that's right, Jeff. The answer is yes. I would say that expecting that to get solved by all of a sudden announcing that you know, 100 customers with 10,000 seats each. It's not realistic. That's not how we're going to crack that nut. The way to get better visibility in the U.S. with institutional investors is a bunch of other initiatives, including, as you've just asked about, U.S. research coverage. So we're absolutely working on that. We have a couple of U.S. analysts on this call. We're speaking with them regularly, working on that. One of the reasons that I wanted to touch in this call on the progress we've made with TD and BMO and Canaccord is we see that as a step along the path with more to come, especially in the U.S., as you just asked, yes, but also other initiatives that we're working on and thinking about how to get more stock trading down there. I'm not at liberty to talk about that right now, but for sure that's on our radar screen. You're absolutely right.
spk05: Okay. And then just finally, there's been a couple of questions on this M&A. You know, I think part of the NASDAQ jump was to try to do an M&A deal. I don't, you know, it didn't go as planned. And now you have to potentially, you know, look at equity even at a potentially lower price, hopefully not too much lower. But how do you see – what wins on the M&A front when you're going up against companies like Twilio with $5 billion in cash and 8x8 with $250 million in cash? Where does the attractiveness – is it that you're a smaller entity? How do you compete in the game of acquisitions against some of those well – well-stocked competitors with cash.
spk03: Yeah, I think we continue to compete in the same way we have. Star2Star was an attractive company known to many of our largest competitors, many of which had spoken to Star2Star, and yet they ended up wanting to be with Sangoma, which was true of many of our other acquisitions and of some of the ones we're looking at next. It's not just about size, nor even just about the size of your balance sheet. You have to have the resources to do the deal. So if you can't do the deal, that's a different problem altogether. But if you do, then, you know, there are much more, you know, soft factors. Like what's the combination bring to the table if they join our company and Do they feel better about the contribution to the business success being with us versus with someone else? Soft stuff like the people fit. What's their confidence that if we say we're going to do it, we'll get it done compared to the track record of other companies that are much less experienced with acquisitions? Do they feel like they're getting into a company that's, on the upswing and doing well versus just bigger but stagnant. So there's a lot of factors there, Jeff. While we've certainly lost some deals because of size, that generally has not been a common impediment.
spk05: Okay, that's it for me. I look forward to hearing where you move next and your plight to significantly increase top-line revenue and profitability going forward. Thanks. Okay, thank you.
spk00: The next question is from Derek, a private investor. Please go ahead.
spk10: Hi, well, thanks for taking my question and congratulations on the quarter. So I was just wondering if you could comment a bit on how headline CPI numbers and inflation impacts revenues and are the service contracts generally linked to CPI or is that something that happens on contract renewal and how would that flow through revenue over time?
spk03: Yeah, in general, I would say for us and almost all of the other players in our space, the monthly price in a contract is not linked in any way to inflation or anything else. So there's no there's no normal opportunity or tendency for the price to go up just because there's some inflation, whether, you know, in the middle of the contract or at the end. I would say, in general, to the contrary, customers who have been with you for three or five years are much more likely at the end of the contract to say, hey, I know I've been paying $35 a month, but, you know, we got a quote from someone else at $34 a month, and the price goes down a dollar, not up a dollar because of inflation.
spk10: know there's there's there's places where inflation does come in you know like i don't know buying something from suppliers but it's not subscription agreements to to customers perfect thanks and then uh i was just wondering if you could provide any uh i guess more general commentary on kind of competitive threats for the company or or how they've been evolving over time uh do you see competition in the future or currently coming from more from bigger names like the Microsoft Teams of the world where they focus a bit more on being kind of a platform that integrates with other services or is it still diverse and market dependent?
spk03: Well, I think, you know, the competition is very diverse. We didn't really talk about that a whole lot on this call other than me just referencing that it is a competitive space and it's competitive because it's attractive. I would say there's a couple of ways to think about competition. One is, you know, the direct competition from other cloud service providers. And, you know, most of the folks on these calls who've joined us repeatedly over quarters and years know who we mean when we say that. You know, that's I don't know, if it's Twilio, think CPaaS. If it's video meetings, think Zoom. If it's collaboration, think Slack. If it's UCaaS, think Ring or 8x8 or what used to be Vonage, right? So those are the direct guys, and I don't see the competition from those guys changing in a material way. We're there in the marketplace. We fight every day. The most important observation about those kinds of competitors is is not them changing their competitive position against us. It was Sangoma getting into that top tier when no one would have seen our ability to do that five or ten years ago. The second category of competitors I would talk about would be the much older, more traditional kinds of companies like that have been in communications for decades or in some cases, believe it or not, a century. So those are the telcos that used to be one per country 50 years ago and now competitive, but you know who those are, right? Or the equipment vendors who used to supply equipment to those telcos upon which the telcos built their networks. that they generally have not been very visible as competitors to companies like Sangoma or any of the direct competitors I talked about in category one. We're just starting to see a little emergence as some of those start to realize, wow, this cloud thing is real and it's big and it's going fast. And so there's not much competitive activity there to see, but you see, I don't know, company like RingCentral doing a deal with Avaya, right, to take advantage of that install base, or a company like Ericsson acquiring Vonage. So there are literally merging examples of it. And then the third kinds of competitors are the ones that weren't really in the space at all. And for sure, Microsoft would be an example of that with Teams. And Sangoma has to contend with all three. We have to know all three. We have to understand all three. We have to know how we're different and how we fight against them in the marketplace. Our sales organization has to be able to explain to customers our advantages against all three of those kinds of competitors. It's much more common that we're asked to talk about how we're unique compared to our direct competitors, but that's how we think of the competitive landscape. I hope that's useful.
spk10: Yeah, I appreciate the call. Thanks.
spk01: Okay, sure. So Bill, that's our last question today. Oh, sorry. That's the last question today. So thank you very much for joining us and for your ongoing support for Syngoma. We really appreciate it, and we wish you a good weekend. Operator, could you please bring the call to a close? Thanks, everyone.
spk00: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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