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spk01: Thank you for standing by. This is the conference operator. Welcome to Sangoma Technologies fourth quarter 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.
spk00: Thank you, operator. Hello, everyone, and welcome to Sangoma's fourth quarter and year-end fiscal 22 investor call. 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, Larry Stock, chief corporate officer, and Samantha Reburn, general counsel, to take you through the results of the fourth quarter, which ended on June 30th, 2022, and as well as the full fiscal year. We will discuss the press release that was distributed yesterday, together with the company's audited financial statements and MD&A, which are available on CEDAR, EDGAR, and on our website. As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS, and during the call, we may refer to terms such as adjusted operating income, adjusted EBITDA, and adjusted cash flow that are not IFRS measures but which are defined in our MD&A. Also, please note that unless otherwise stated, all references to dollars are to the U.S. dollar, as we started reporting U.S. dollars at the beginning of fiscal 22 and will continue to do so. This includes all prior period comparisons which have been converted to U.S. dollars as described in Note 2 of our financial statements. 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's 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 posted on CEDAW. With that, I'll hand the call over to Bill.
spk07: Thanks, David. Good morning, everyone, and thank you for joining us today. I have structured my prepared remarks for this call into five sections. I will first discuss our fourth quarter and then move on to cover our full year results. In my third section, I will share with you an update on the recent Net Fortress acquisition. And on that topic, just a quick reminder that since the acquisition closed on March 28th, this is the first full quarter in which we see the impact of the acquisition on our income statement. Fourth, I will provide a year-end look back on your company and our progress this year. And finally, I will review forward guidance for fiscal 23. As always, we'll then wrap up with a brief summary and turn the call back over to David for our typical open Q&A session. But just before I begin today, I simply wanted to start with an acknowledgement. The team here at Sangoma has worked really hard over many years to build a relationship with the street. A relationship that I hope you'd agree involves credibility, transparency, and a clean company. So I just wanted to acknowledge that this is the first quarter in many years where there is admittedly a bit of messiness with the goodwill impairment and accounting reclassification. Two points that I'll address head on in my comments today to ensure you understand them and are not unduly concerned. I guess I just wanted to declare that upfront and face it straight on as I think many of you would have come to expect from us. So let's get started with our Q4 results. Patrick Corbett- sales for the fourth quarter or a record $66.3 million or 62.5 million following the accounting reclassification from the first three quarters that many of you will have noted in our press release. Patrick Corbett- As always, we attempted to be quite clear in our mdna with describing this accounting reclassification, but it is indeed a little confusing so while this reclassification has no impact on adjusted EBITDA. no impact on prior year's results and reflects no change in the underlying operation of our business, I'd like to just take a moment now to explain it to ensure everyone was able to follow. Please bear with me for a minute as I walk you through it. During the first three quarters of fiscal 22, we classified certain amounts from legacy Star to Star customer contracts as revenue in accordance with the company's accounting policies. During the fourth quarter, we determined that due to contractual differences, in the former Star to Star contracts, certain amounts relating to such contracts should be reclassified from gross to net revenue. This resulted in a total reduction in revenue of approximately $3.79 million when summed across the first three quarters of fiscal 22. Because this reclassification did not have a material impact on revenue in the first three quarters of the year, we recorded the entire reclassification in the fourth quarter and here's where it can get a little bit confusing if you notice the use of both the 3.79 million dollar figure and the 5.5 million dollar figure the 3.79 million is the amount of the reclassification from q1 to q3 and the 5.5 million is the amount the reclassification would have been for all four quarters that is the 3.79 plus 1.8 million for q4 that's why we explained that q4 revenue was 66.3 million dollars without the reclassification from q1 to q2 which is the 62.5 million plus the 3.79 it's also why without the reclassification at all our q4 revenue would have come in at about 68 million dollars which is the 62.5 plus the 5.5 million And finally, that's why we explained that the effect of the reclassification was to reduce our expected fourth quarter revenue of $68 million by approximately $5.5 million, where that expected value came from our guidance on May 12th, which contained full-year guidance and our Q3 year-to-date results. As we report fiscal 23 results and compare back to fiscal 22, we will use these reclassified revenue numbers, which are in a simple table for you in our MD&A. And finally, before we move on and return to results, just a reminder that this reclassification has no impact on EBITDA or earnings because of the offsetting expense that we also removed from marketing and sales, which I'll touch on shortly in the OpEx section of my comments. Okay, so with that rather long explanation, now back to the Q4 results themselves. Using the $62.5 million in reported sales, our revenue was up 25% from the fourth quarter of fiscal 21. Or looked at another way, referring you to the table we provided in the MD&A, Q4 revenue without the impact of the reclassification was $66.3 million, a 32% increase year over year. The increase in sales was primarily driven by the acquisition of Net Fortress, the continued growth and compounding in our existing services business, and by an uptick in our product sales. Our recurring revenue through our services business continues to be our strategic focus, and we've seen significant growth year over year. In Q4, our services revenue came in at approximately $45 million this year, a 29% increase from the $35 million from the same quarter last year. This $45 million represents 72% of total sales for the quarter. As discussed on previous calls, our long-term trend of strengthening services revenue from under $5 million per quarter in fiscal 18 to about $45 million this past quarter has truly been a milestone achievement in your company, analogous to going from what would be $20 million annually up to $180 million per year in services. Gross profit for the fourth quarter was $40.7 million, up 13% from the $35.8 million in Q4 of last year. Gross margin for the quarter was approximately 65% of revenue as reported, or using the figures from the table in the MD&A updated for the reclassification, would have been 67%. This gross margin is slightly lower than the same quarter last year due to the impact of the revenue reclassification, the global supply chain pressures, and the slightly lower average margin from the managed services part of the net fortress portfolio. Operating expenses for the fourth quarter this year were $41.9 million versus $37.8 million in the same period last year. The higher operating expenses were primarily driven by the cost that came with the addition of Net Fortress. As I've done in recent quarters, I will offer some additional insight on the three individual OPEX buckets, namely sales and marketing, R&D, and G&A. Let's start with sales and marketing. You'll notice that sales and marketing actually shows lower than the prior year, but that's solely due to the OPEX that came out of our expenses as the offset to the revenue reclassification I covered earlier. Adding that back, for comparative purposes, sales and marketing was $15.6 million, representing a $3.5 million increase, primarily the result of the addition of the Net Fortress sales and marketing staff, the channel partner commissions, and the accompanying marketing program spend. With respect to R&D, the increase in the fourth quarter of fiscal 22 from the same quarter in the prior year is largely due to the addition of the Net Fortress engineering teams and their continued investment in innovation. This follows our general approach to OPEC spending. As measured in absolute dollars, Sangoma continues to invest more money every year into R&D for product development than we spent in the prior year, but we closely control that spending as a percentage of revenue. And finally, the G&A expense also shows an increase year over year. which, as in recent quarters, was driven primarily by the addition of the net fortress and min groups, the non-cash amortization of the intangible assets, and the increased cost of compliance associated with the TSX uplisting and the NASDAQ cross-listing. Adjusted EBITDA was a record in the fourth quarter at $11.1 million, an increase from the $9.8 million from the fourth quarter of the previous fiscal year, and exceeding $10 million for the fourth consecutive quarter. This level of adjusted EBITDA is equivalent to about 18% of sales. Our continued attention to generating meaningful and leading EBITDA margins as our business continues to grow, combined with the net fortress cost restructuring were important factors. Net loss for the fourth quarter was $99.3 million, obviously up a lot from the prior year due to the significant goodwill impairment, which I'm sure you will have noticed. This impairment resulted primarily from the substantial and rapid decline in our share price and market cap during the latter months of fiscal 22. While virtually all other companies and our industry sector have experienced similar and in most cases even sharper declines, that is of no consolation. We are extremely disappointed to see our stock price where it is today. And believe me, you have all 750 plus staff, as well as our board of directors, focusing intensely on the tasks at hand to reverse the recent share price trends. Trends that are not immune to the factors I'm sure you all see, such as economic uncertainty, inflation, higher interest rates, risk of recession, etc. Without getting too technical here in explaining the impairment, IFRS requires that we undertake an annual assessment of potential impairment to goodwill. That assessment is a prescriptive process which considers the recoverable amount to be the higher of the fair value, less costs to sell, and value in use. When we perform the valuation of the recoverable amount, it was less than the carrying value as of June 30 by $91.7 million, again driven mostly by the decline in share price. Accordingly, we recorded a non-cash write-down of goodwill by that amount, bringing the carrying value down to the recoverable amount, and that's why the net loss was so unusual for Q4. That brings my commentary on our Q4 income statement to a close, so let's turn our attention to the full year results, and I'll then touch on some balance sheet and cash flow items. Mayor Mrakas, sales for the fiscal year 22 or a record $224.4 million up 71% from the 131.4 million in fiscal 21. Mayor Mrakas, Please allow me a moment to explain our fiscal 22 sales versus guidance realizing that such guidance was provided prior to the accounting reclassification which I described in details earlier. As you may recall, our guidance for annual revenue was 230 to 232 million for fiscal 22. If one considers that revenue as reported was 224.4 million and adds back the effect of the reclassification at $5.5 million for the year, given our guidance was provided on that basis, you see that our comparative revenue for fiscal 22 would have been almost exactly $230 million on guidance, albeit at the low end of that range. The 71% increase year over year was due to a number of factors, including the continued growth and compounding of the company's services business, the inclusion of Star to Star for the full year, the net fortress acquisition, and an uptick in the product business. As a percentage of total sales, our services revenue is 71% for the year, a solid increase from 62% in the same period last year and 50% in fiscal 2020, a trend we are proud of as a team and in line with our overall strategy. Gross profit for the year was $156.9 million, much higher than the $89.5 million realized last year. Gross margin was approximately 70% of sales, up from the 68% in the same period of 21, especially gratifying given the global supply chain has been so strained throughout the year, as we've discussed on prior calls. Operating expense for the year was $162.8 million compared to $83.4 million last year. The increase was mainly due to the incremental expense associated with having star to star for the full year in fiscal 22, the addition of net fortress and the increased amortization outlined earlier. EBITDA is $42.1 million for the year, up 67% from the 25.2 million last year and 162% higher than the 16 million in fiscal 20. This is equivalent to about 19% of sales for the year and is in line with our EBITDA guidance from May. That brings my commentary on our income statement to a close, and so I'd now like to cover just a few highlights from our balance sheet and cash flow, as I promised. Our cash balance at the year end was $12.7 million, down from the prior year as we funded a portion of the net fortress acquisition with cash, made prudent purchases of inventory to manage the supply chain issues, and continued repaying debt. Both trade receivables and inventory have increased somewhat over the prior year, with AR expanding from just under $15 million last year to just under $17 million this year, and inventory growing from just under $12 million to just under $17 million, all for the reasons we've discussed previously. For fiscal 22, we've generated adjusted cash flow of $25.7 million, This represents an increase from the prior year of over 3 million. In thinking about the adjusted cash flow from operations, it's important to look at some of the major components. For example, we've needed to use working capital to respond to the global supply chain pressures, to fund receivables as our sales have grown, to draw down deferred revenue somewhat as we move more and more from a product company to a SaaS model, such that on-premise maintenance gradually declines and gets replaced with cloud MRR. We've increased modestly our development cost investments and had to pay higher taxes. As you've heard me say earlier, we expect the supply chain pressures to continue for some time, but we fully expect to manage through them as successfully as we've been doing in order to continue meeting our customers' expectations. Finally, as was the case with prior quarters, our overall balance sheet remains strong and we are, of course, comfortably within all debt covenants. That brings my comments on our full year financial results to a close. Let's now move to our third section today, a quick update on the Net Fortress acquisition. As most of you on this call will know, Net Fortress represents Sangoma's 11th acquisition in 11 years. As we noted when we announced the acquisition, it's an exciting transaction for us because it further accelerates Sangoma into the upper echelon of SaaS communication providers, and it extends our industry-leading suite of cloud services with new MSP capabilities, thereby delivering even more one-stop shopping for our customers and providing larger share of wallet for Sangoma. All at a time when we're hearing more clients seeking more of the communications they need, from fewer trusted vendors. I remain very pleased with how the companies are coming together as we continue to integrate the two businesses. In some ways, I feel like a broken record in that most all our acquisitions follow a similar pattern, revealing a successful integration. Much like with Star to Star that I spoke about last year around this time, the Sangoma and Net Fortress teams are working well to bring the two companies together. As I shared with you last quarter, we focused our integration efforts on four main areas. Customers and channel, product, the integration of the organization, and synergies. I'm pleased to provide you with an update on each of those four today so you can see how far we've come in a short time. The integration of customers has progressed nicely through our fourth quarter and is nearing completion. with a relentless focus on delivering excellent service and taking great care of our customers. I've now personally spoken to many of the larger Net Fortress customers myself, who are excited by the broader product suite and by the financial stability that Syngoma brings to the combined company. Senior leadership in both sales teams are now getting exposure to the other's customers, and at our recent sales kickoff, one of the main themes was getting the entire sales organization to cross-sell so that everyone is capable of selling the full portfolio. We are also nearing completion on channel integration as well so that both sets of channel partners can also access the full suite of combined products. Next, regarding product integration, as I highlighted last quarter, one of the first steps in the process was for us to explain the complementary products now available to each prior customer base, channel, and internal sales team. As you've just heard me say, that is nearing completion. So we've now begun work on the core part of integrating the product portfolios themselves. For example, Net Fortress did not have a video meetings as a service product, and instead they resold Zoom. In the first quarter or so after closing the acquisition, we have already successfully integrated our video meetings product called Sangoma Meet into the Net Portrait Suite and replaced Zoom. We are also already partway through replacing their soft clients for both mobile and desktop with Sangoma's versions, so we are all using the same end user facing applications. And finally, within the next few months, we will have integrated our collaboration as a service product as well. The other key early product work is on network planning as we start thinking about how to best bring the Sangoma Network and Net Fortress Network more together. This is all the data centers where the SaaS software is hosted, all the switching and routing, all of the databases, all the security, all the traffic handling. I mentioned on our Q3 call that at that last point, We had begun the work on traffic engineering, and I'm pleased to confirm that we've now already begun saving traffic costs as we've started integrating the networks and traffic handling with more to come. And now for organization alignment and integrating the Net Fortress team into Sangoma. We have already made significant progress on bringing the people together. As mentioned last quarter, our general approach at Sangoma has always been to gradually integrate the acquired businesses into our broader company, rather than have it continue as a standalone operating entity. And that's exactly how this is happening this time as well. We've already integrated most of the functional groups from Net Fortress into their respective departments at Syngoma, all in just a few short months. That includes finance, legal, HR, marketing, product management, engineering, our network group, operations, et cetera. And the sales team will integrate during our fiscal Q2. Finally, in the last part of my Net Fortress update, I want to touch on synergies. Some of you may recall that when we announced the acquisition, we explained that we expected about $4 million US dollars in annualized cost savings. These savings are coming from the areas we outlined when we announced that acquisition, namely efficiencies, removing duplication in staffing, consolidating traffic and data centers, eliminating redundant spending on things like marketing programs, audits, insurance, et cetera. That integration is sufficiently far along with the restructuring of duplicate costs well underway, but I'm pleased to confirm we now know with certainty that we will at least hit our $4 million target for synergies and likely exceed it, probably getting to $5 million in annual savings by the time the integration is completed in the next few months. That brings my Net Fortress update to a close for today, and I'll now turn to my fiscal 22 year in review. Each year at this time, I provide a section where we step back a bit from financial results and discuss what's been happening operationally and strategically in your company over the past year. To do so, today I'm going to touch on your company's competitive differentiation in the market, then on a set of the top five highlights from fiscal 22, and finally the one biggest disappointment, being candid as we have always sought to be. Okay, let's start with Sangoma's strategy and positioning in the market for competitive differentiation. As I've highlighted on previous calls, the cloud communication space is competitive and is seeing consolidation. For a company to remain a top player in this sector, one needs to have clear competitive distinction and know what you stand for. At Sangoma, we are very deliberate about what makes Sangoma stand out, and we work hard to ensure our customer-facing teams communicate this consistently to customers, prospects, and channel partners. We describe our competitive differentiation in three clear, concise points. First, we have the widest set of cloud communication services in the industry, from UCAS, to trunking as a service, to contact center as a service, to video meetings as a service, collaboration as a service, to CTAS, DAS, access control as a service, and now including MSP services, such as managed security, managed access, and managed SD-WAN. Nobody else even comes close. Sangoma increasingly believes that customers want an integrated buying experience or one-stop shopping. Most customers do not want to buy five different cloud services from five different vendors, likely requiring them to evaluate at least 10 different products or suppliers, negotiate five different contracts, have five different tech support processes to follow, receive five different invoices each month, and then have to figure out how to make those five different products talk to each other. Second, our ability to offer multiple deployment options from pure cloud to on-premise to hybrid solutions. Sangoma is arguably the only significant communications company that can say this. There are no large on-prem companies that have truly navigated this transition successfully, and there are literally no large cloud communications companies that offer an on-prem solution. At Sangoma, we just want the customer. And if they're ready for full cloud now, that's great. But if not, we still want them and we'll be there for them when they're ready for cloud in the near future. And third, we make the entire product portfolio, complementing our cloud services with our own set of products, such as desk phones, session border controllers, headsets, and their own soft switches. Doing so allows us to make these products do things our competitors cannot when they simply buy parts of their solution from other third parties. It enables us to offer a true one throat to choke commitment, or stated more pleasantly these days, one hand to shake. Contributes to network uptime performance. After all, who knows the technology better than the company that developed it? Helps us navigate challenging supply chains, especially important during the last year or two. and delivers better margins, because if you make the desk phone, you can do so at much lower costs than our competitors buy their phones from a third-party supplier, especially important if giving it away with a three-year subscription contract. Next, I said I'd cover a top five highlights list from fiscal 22, so here we go. The first highlight is one that's not glamorous, I realize, but it remains as important now as it was five years ago, consistency. Sangoma continued its trend of growth with profitability, growing 71% from $131 million to $224 million, while delivering over $40 million in adjusted EBITDA for the first time. Number two is the acquisition of Net Fortress. The idea of combining traditional MSP capabilities with over-the-top cloud services is a fairly new concept, one that few UCaaS companies have embraced and one that we believe will be a lucrative model for us, securing a larger share of wallet and ARPU while being much appreciated by our customers and channel partners. It is our existing strategy that included the widest set of cloud communication services that made the acquisition of Net Fortress such a good fit specifically for Sangoma as we further expanded that approach with our new MSP offerings. The next highlight on my list is the uplisting to the TSX Big Board and the cross-listing to NASDAQ, where we admittedly have more work to do to increase trading volumes in the U.S. Number four on my list may not be as obvious to you, but at Sangoma, we're continuing to gradually strengthen our senior management ranks, positioning us even better for future growth a trend that continued in fiscal 22. And my final fiscal 22 highlight is the progress on that fortress integration, a process which is going to deliver more synergies than we originally anticipated and is even slightly ahead of schedule. And for my final point in this year in review section, I promised to touch on my number one disappointment, which has to be our share price. a low light that should surprise no one on this call. It really is extremely disappointing indeed to see Sangoma's share price today. It's the one big item from fiscal 22 that is so upsetting to the team here and to your board of directors. At $8 per share Canadian, we are trading at less than one times run rate revenue and something like five to six times adjusted EBITDA, depending upon whether one looks at trailing 12 months or future 12 months. multiples that are very hard to understand and make our stock seem like an incredibly good buy at these prices. I just want to say emphatically and definitively that everyone at your company is completely focused on the tasks in their area of responsibility. The one that we believe will contribute to addressing this number one disappointment. That concludes my year in review commentary. And with that, I'll move on to my fifth and final section today, of guidance for fiscal 2023. I'll begin this section with a brief reminder. Our fiscal 23 guidance factors in many considerations as outlined more fully in our press release and MD&A. These considerations include items such as inflation levels not seen for many years in most parts of the world, government monetary policy in response to such inflation, ongoing supply chain challenges and their ability to manage them as in the past, our ability to attract talent in what remains a very hot job market, revenue and demand trends continuing, as well as the risk of a global recession. This is a significant list this year and is indeed one that we factored in to our forecasts for the fiscal 23 year. Our guidance reflects Our expectation for solid top line revenue growth and strong adjusted EBITDA to continue. Fiscal 23 revenue guidance is between $275 million and $285 million, which would deliver growth of 23 to 27% over fiscal 22. We are also including in our revenue guidance this year an estimated range for services revenue, which we expect to be in the 70 to 75% of sales range. true signs of sustainability and what should be value creation for shareholders. And finally, our guidance for adjusted EBITDA is for $48 to $52 million this year, demonstrating that we expect to continue generating really substantial EBITDA margins in the range of approximately 18% for fiscal 23, despite the economic headwinds I just mentioned. With that, I'd like to bring my prepared marks to a close with a quick summary. Overall, I'm very pleased with another year of solid financial results for Sangoma and with what we've accomplished. We continue to take steps to drive your company to become one of the preeminent players in the industry. We are well positioned to take advantage of an extremely large total addressable market. We have a well-defined, competitively differentiated strategy, and we continue to penetrate the market through our total growth approach. As most of our investors know, We seek attractive organic growth by investing in sales and marketing, R&D, and customer expansion. And we remain uniquely positioned to augment that organic growth with deliberate, prudent M&A using a disciplined approach that reflects an astute awareness of current share price, all while maintaining strong adjusted EBITDA and cash flow. You have a team here at Sangoma that works hard for you every day and that is determined to dramatically improve stock price and create shareholder value. And with that, I'll turn the call back over to David for questions.
spk00: Thank you, Bill. To make sure everyone knows how to ask questions, I will ask the operator to go over the instructions for you. Operator, we're ready to take questions now, please.
spk01: Certainly. 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 two. We will pause for a moment as callers join the queue. The first question is from Eric Martinuzzi with Lake Street. Please go ahead.
spk06: Yes, I'd like to dive into the economic headwinds and challenging global environment that you noted. And specifically with regard to the results, even after we adjust for the revenue reclassification in Q4, you did come in at the low end. I'm guessing you didn't anticipate that heading into Q4. So what was it that caused the low end?
spk07: Yeah, I don't think it was any one of those individual things, Eric. It's that combination, both of the factors you just asked about, a little bit of supply chain pressure, having products in inventory. There were one or two projects that were scheduled to complete late in the quarter, which seemed very predictable and on schedule. And then just with the chaos of what's going on in the world got pushed out until early the next quarter. So I don't think it's any one thing. It's not the fear of a recession or inflation being high or the interest rates being up. It's just the combination, maybe a little bit of slowness in decision making at customers, project implementation going a little bit slower than expected. There was no single event that caused it.
spk06: Okay. And in the slowness, are we kicking it up to higher-level reviews, multiple reviews, the budget's there, then the budget isn't? Any insight there?
spk07: Yeah, I think that depends whether we talk about it from the point of view of the services or the product business, Eric. On the services side, I would say that's less a concern. Of course it's true for large enterprise customers, and we certainly have some of those. And, you know, if you're spending $100,000 a month, that certainly gets scrutiny. But if you're spending $3,000 a month, it tends not to. You know, it's an OpEx decision, not too problematic for most companies. On the product side, your question's right on. You know, if you're buying something that's lumpy and tens of thousands of dollars or a couple hundred thousand dollars you might go a little bit slower that's right it might need an extra level of approval we've seen some customers with some financial challenges inside their business that have absolutely nothing to do with us just going a little bit slower with decision making because of that so you know again it really depends upon whether it's services or product
spk06: Okay. And then as we look out to the guidance, you know, it seemed pretty solid there, around $280 million at the midpoint for FY23. This incorporates the new treatment or the reclassification of the gross versus net. That compares pretty favorably with where the street was at $286 million. But I was interested to note that you're only looking at about 18%. EBITDA margin, which is where you finished out Q4, was about 18%. But why are we not, you know, given this increased revenue growth, why are we not anticipating some margin expansion?
spk07: Yeah, I think that's just two things. It's the falling down through or cascading down through the income statement and with gross margins in the high 60s rather than 70. And, you know, that's very much supply chain driven. And then just maybe a little bit of being slightly more conservative with spending. We want to invest in growth. And so we've got some initiatives in there that we think will drive it. You heard me say we're not at all happy with share prices, where share prices. And so... You know, we've got extra money in there for things like directly targeting our relationships with what historically was called master agents or now sometimes telecom service brokers or technology distribution. You know, there's many names for it. So that's why, you know, it could certainly be a little bit better than that. But from a guidance point of view, given what, you know, the what we see out there on the horizon, I think 18% is a good number to be at for now.
spk06: I understand. And last question for me. You've had a couple of pretty substantial acquisitions here over the last 18 months. I'm just curious to know your headcount retention. It's a war for talent out there every day. Have you been able to hang on to the talent that you brought on board? Yeah, good question, actually.
spk07: I would say... Generally, yes, but not in a way where I'd want to pretend everything's 100% perfect. We fight that same battle you asked about that everybody else is fighting. We've certainly lost people. So there's no difference here compared to other companies who are having to really think through this in a renewed way. That includes what you do with compensation, and we've certainly given larger increases this year than in prior years. It includes flexibility with working conditions and how much of the time we ask employees to spend at an office versus working from home. I don't think Sangoma has any magic or silver bullet on this, Eric. We're doing just fine. It's not causing us any big, huge grief, but You know, it is an issue for everyone, especially in the tech sector, and it's one for us too that we have to fight and think about every day. Great.
spk06: Thanks for taking my questions.
spk07: Sure. Good to talk to you.
spk01: The next question is from James Green with William Blair. Please go ahead.
spk02: Thanks. Thanks for taking the question. I'm wondering if you just give a couple, some commentary just around the net forest acquisition. You've had it closed for a quarter now, and I think you talked about a very minimal customer overlap when you initially bought that company. Maybe talk about some of the cross-selling you may be seeing and some of the interest you're seeing from both sides.
spk07: First of all, I want to know, who's this guy, James Breen? I only know Jim Breen. Is this the same fellow?
spk08: It is.
spk07: Yeah, no kidding. Hey, man, I would say that NetFortress is unfolding just as expected. We talked about that briefly in our reports. There's a bunch of ways I could take this question. One is, how is the product stuff going? How are the customers going? How is the team integrating? In almost all respects, that feels really good. I would confess to you that I think we've learned something from the Star to Star acquisition that's informed a little bit more about how we've handled the Net Fortress integration, and that has indeed influenced the outcomes you're asking about. So, you know, I think when we did Star to Star, because it was a larger one, we probably went slower than looking back with the benefit of hindsight we should have. It's not right or wrong or good or bad. We made the best decisions we could at the time. But that means with NetFortress, we've gone faster, faster integrating the teams, faster talking to the customer bases, faster talking to the channels, even in situations, Jim, where, you know, we would be telling them about something that was not 100% buttoned down. So I don't know. That's too abstract. You know, the channel partners wanted to know, what's the plan with Zoom? You know, we resell Zoom as the video meetings product, and we were much clearer about that earlier on. You know, as opposed to saying, oh, we're working on it. We don't want to tell you until it's done. We said, Zoom will be going away. We have our own video meetings product. We're going to integrate it fully. We're going to do that fast. It was done within a quarter. So all of those kinds of actions have influenced the way NetFortress is performing today. The sales teams are coming together. The big sales kickoff that I just mentioned to you was a combined one with both parts of the company. So just in general, whether it's product or whether it's organization or whether it's the way we face to the customers in the channel, that feels very good. And it's gone faster than in past situations and kind of on plan.
spk02: Great. Thanks. And then, you know, just a more broader look at where your growth is coming from and sort of what you've seen as sort of organic growth here, probably mid single digits. You know, you talked about some supply chain impacts. Is there any sort of specific products across what you guys are selling, where those hit more than others, you know, whether it's UCAS, CPAS, or some of the MSP products? And then just in terms of customers, Um, just any thoughts on where you're seeing traction, uh, mid, mid-sized companies, small enterprise, just where you're seeing the most growth.
spk07: Yeah. Okay. So let's talk product first and then I'll talk about, you know, customer segments. Um, on the product side, what I would say is it sure feels like the industry has moved more and more to bundled suites, Jim. So as opposed to, you know, a customer buying video meetings from us versus UCAS or UCAS versus contact center or contact center versus collaboration, our positioning to the market of this broader set of cloud services is typically explained as a bundled suite. And so we don't really have the ability to separate How much of the $20 or $30 a seat did someone attribute to the collaboration piece of it or the video meetings part or the UCAS? It's really that combination that sets us apart. And so I don't think we would say it's because we have a UCAS product that's blowing the doors off or a video meetings product that's blowing the door. It's the combination of them, the way they integrate together, the way you move between them elegantly, the single soft client that works across all of the different cloud services. I would certainly say with the more credible CCaaS product that we got through the Star to Star acquisition, we're getting more CCaaS business. As we've started to launch our collaboration products, so you can think Slack-like or Microsoft Teams-like, we're getting lots of uptake there. Customers really like that. It's being used in a way that allows us to promote other products from that cloud suite inside the user interface of the collaboration client, which is quite unique in the space. And then if I think about your question on... you know, the size of the customer base or the segments in which ones are, you know, driving more growth. There isn't really any big change in the SMB category. You know, that's still where both Sangoma and Net Fortress and even Star to Star to a large extent began their histories. So the majority of the installed base is SMB. The SMB business is a little bit less subject to these seismic shifts if something goes on with you know any interest rate or a concern about recession you're only making a decision for a few thousand dollars a month so it's not such a big deal but in general sangoma has been moving more up market so more of our customers are in that mid-market and we're starting to get some penetration in the enterprise side we now have many customers spending you know a hundred thousand dollars plus a month i think we probably had zero of that three years ago. And it's those kinds of customers where the decision-making can just slow down a bit, you know, given what's going on out there. So that's how I would describe it, Jim.
spk02: Okay. And then just one final question, just in the guidance, I think you said 70% revenue with services this quarter. Is that sort of the same ratio you'd expect for your fiscal 23? And then just, you know, of that, the guidance you gave, the 280 sort of midpoint, Is there any M&A in that, unannounced M&A in that, or is that basically based on the run rate numbers coming out of this most recent quarter?
spk07: Yeah, thank you. So to answer the first part, I would say the range that we're comfortable forecasting as part of our guidance, we've never done this before, is 70 to 75% of the revenue in services. So not just 70. And then on the second part of your question, does fiscal 23 revenue guidance include any M&A? The answer is no.
spk02: Great. Thanks. Okay, Jim.
spk01: The next question is from Deepak Kaushal with DMO. Please go ahead.
spk04: Oh, hi. Good morning, guys. Thanks for taking my questions. Bill, just wondering if, I know it's hard to do once you're well underway in integrating, but parsing out a bit of NetFortress I think when you acquired the business, you said it had a $45 million recurring revenue base. Can you give me a sense of churn since you guys acquired it and what the underlying growth rate for the managed service part of the business is and how that's contributing to your guidance in the coming year?
spk07: Yeah. So let's talk about churn and then growth rate. On churn, we typically... You know, haven't disclosed that publicly yet. We're getting some questions about that from more analysts. I think we're going to have to do that in fiscal 23. All I would say at this stage, Deepak, is that the churn inside NetFortress, and this applies both to the cloud services piece as well as the MSP part, you know, tends to be in and around the 1% a month kind of industry norms. Some months it's up a little bit above, some months it's down a little bit below. The month we're in happens to be a really good one for churn. But that's a number you can use in your models. It's pretty safe. I think we'll actually do a little bit better than that. Maybe we'll come in just under 1%. And Net Fortress doesn't have this large deviation from the churn rates inside the rest of Sancoma. And then on, what was your other question? The growth rates, right? Inside Net Fortress, yeah? So, I would say that Net Fortress has kind of rekindled the growth that was missing from the past prior years. There was a lot of change happening inside that organization as we were doing due diligence, and that's been kind of solidified under Sangoma's ownership. That's starting to show really good encouraging signs. not something that I think we would be able to break out in terms of a growth rate in that fortress versus a growth rate inside the rest of Sangoma. Actually, I'm not sure if you ever heard me say this because you're a little bit newer to the story. Just this idea that we really do not separate out revenue between the revenue from the part of Sangoma that existed prior to the last acquisition versus the revenue inside Sangoma. a company that we acquired, right? As you said in your question, once we start integrating it, it really doesn't exist separately like that. So if you take the example I used when answering prior questions, if we, I don't know, if we put video meetings as a service inside the Net Fortress suite and then Net Fortress sells that suite to a customer, does the video meetings revenue count as Net Fortress or Sangoma? We don't care. We don't think of it that way, or vice versa. We're having good success attaching MSP services to Sangoma Quotes. We just sat through what we call a pre-submission meeting or a quote review for a large chain of automotive dealerships maybe two weeks ago. And that's a $40,000 a month quote for pure cloud services that jumps to $57,000 a month when you add MSP services to it. If we get that order, we won't separate or try to figure out how much of that revenue should count towards Net Fortress because they had the MSP services versus how much should count to Sangoma because Sangoma had the other services or the customer relationship. We just don't do that. It's all one integrated company. So it's really hard for me to try and tell you the growth of one individual piece. You just have to look at it on the blended basis.
spk04: Got it. That makes sense. Very helpful. And just my one follow-up to that. On the gross margin side, you know, the mid-60s, we were looking for 70s. How much of that delta is from the accounting change? How much of it's supply chain? And kind of what's the path to get back to that 70%? You mentioned some infrastructure integration as well. How should we think about that?
spk07: Yeah, perfectly fair question, Deepak. So it was 65% last quarter, but it was really 67% if you factor out the reclassification. And that's how we feel about the fiscal 23-year going forward. We don't do guidance at the gross profit level, but it's okay to talk about it, right? The factors that have influenced it are, as you said, mostly the global supply chain issues, which are continuing, and which Sengoma... you know, I think rightfully now looking back, it was really a good decision that served us well, made very conscious decisions about using a little bit of our capital to manage that supply chain differently. We chose to invest in inventory that might be buying product earlier and having on the shelf or pre-buying raw material that go into the, I don't know, manufacturing of a phone or buying it earlier so we have it, et cetera, et cetera, et cetera. And that's pulled it down a couple of points for sure. The other big factor is not net fortress generally, but the managed services part of net fortress comes with slightly lower margins. And we knew that going into the deal. And so it's those two things together that suggests, you know, maybe 67, 68% for the fiscal 23 year. And over time, that will again ratchet back up towards 70 as the fraction of revenue that comes from services grows. and that just needs a little bit of time to unfold. It would also improve if the supply chain pressures abate, but, you know, it's just kind of a fool's game to try and forecast that right now. No one thought it would last this long, Deepak.
spk04: Okay. Well, that's very helpful, caller. I appreciate that, and I will pass the line. Thanks again.
spk07: Okay. Thanks.
spk01: The next question is from David Kwan with TD Securities. Please go ahead.
spk03: Hey, guys. Bill, you mentioned, I think in the MD&A, but also in your commentary, that a few projects getting slightly delayed that hit the Q4 revenue, I think, pushing a few of them into Q1. It seems like those are mostly isolated instances, and maybe you're seeing a little bit more in terms of kind of sales cycles, is that a fair statement?
spk07: Yes, I think it is fair. It really does feel like isolated instances. incidents, using your terminology, David, they were for very, very unique, specific reasons, you know, that I cited that differently than, you know, just the general impact on decision making from, you know, just nervousness about the economy. Those are two quite different things. So we see a little bit of, you know, customers being slightly more nervous given what's going on in the world. And, you know, I think that's understandable. And that's totally distinct from a couple of projects that were slated for the quarter that slipped into the beginning of the next quarter. That's why in the write-ups as well as my comments, I talked about them separately.
spk03: That's helpful, Bill. As it relates to capital allocation, can you talk about how you look at it now? How much of a focus is building up cash for future acquisitions? How does that rank versus, say, shared buybacks, particularly given where the share price is right now?
spk07: Yeah, you know, I think the whole question about acquisitions is a tough one under these circumstances because, you know, it is legitimately difficult to find accretive acquisitions when our share price is where it is. So we're just going to have to be super careful about that. We've got to be really selective, look for just the right kind of companies if there is a way to do it. they probably wouldn't be big, large ones. We're not going to go and, you know, raise hundreds of millions of dollars of capital when the share price is under $10 Canadian share. Um, um, and you know, whether whatever capital we might need for that comes from cash generated from the business or, you know, a little bit of extra leverage, yeah, interest rates are up a little bit, but they're still at pretty low levels and we're delivering quickly as we pay down debt. Um, You know, it's hard to answer in a, you know, super abstract hypothetical way. On the other part of your question about share buybacks, we are buying back shares. We've continued to buy back through the entire blackout period. You know, the timing of when we launched the NCIB was pretty weird, David. I don't know if you guys noticed that, but As we were launching it, it was coming up towards the end of June. So we had a few days to buy towards the end of the month and the end of the fiscal year. And then we were in blackout and had to go into the automated share purchase plan, ASPP, which has these preset parameters in it. So you're not even able to make decisions day by day. It's preset. We'll be back out of that on, help me Sam, Thursday. Yeah. And so we'll be able to buy again in a normal way, but that's only going to last for a few days again before we're back into blackout at the end of September. So, you know, we are using it. We've been buying shares, you know, under the parameters of that ASPP as permitted and approved by our board every single day it was possible. You know, the shares are a screaming buy, so we're going to continue to do that. But we just have the quirkiness of that timing that we just have to contend with, David.
spk03: That's helpful, Bill. And maybe one question for David, or maybe you. Just on the balance sheet, it looks like the short-term portion of the consideration payable was essentially a change from last quarter. So is it fair to say that Net Fortress, it looks like they may be on track to hit their net booking target, which I think was a key driver for that number?
spk07: Do I start? You want me to start? Yeah, so it's a little bit too early to know that, Dave. We're only one quarter in. I've shared with you that the sales team is performing well, and so there is certainly the possibility that they'll be hitting some of the earn out. We think it's clear that they are going to get some. How much of that remains to be seen and not something that I would choose to comment on quantitatively on this call after only three months into a 12-month earn out. But having said that, you know, like, earn outs are structured that way for a reason, right? You know, sure, everybody who buys companies would like to end up paying less for the company they buy, but we also want the companies we buy to perform well. So if they make their targets and we pay out the full earn out, that's just fine. You know, in some ways, that's what you want, right? But I don't think we want to be too specific about how that's likely to unfold. If I had to guess, I would say it's not likely to be all or nothing. It's going to be some in some quarters and maybe not some or not all in others. But let us keep you posted as the year unfolds. David, do you want to add any color to that?
spk00: No, I think that's spot on, Bill. We've got a little more than half put into the numbers, David, which, you know, gives you some indication. But as you say, we don't control all those matters at this point. And so it's a forecast and may change as the year progresses.
spk05: Not sure. Thanks, guys. Okay, David. Thank you.
spk01: The next question is from Mike Lattimore with Northland Capital Markets. Please go ahead.
spk05: Great. Yeah, good morning. Hi, Mike. Hey, morning, Bill. On the NetFortress managed service opportunity, You know, you've had it for a quarter now. I guess, can you give us just an update on what you're seeing in the pipeline? You know, how many customers or what percent of customers are really interested in having kind of the managed service provider and the UCAS together? Any kind of new info there?
spk07: Yeah. Well, I would say, Mike, you know, in full candor, it's still a small minority, right? It's new enough that... You know, certainly it's much less than half still, but it's up from zero, right? So for sure, it's interesting. I just gave the example of the one we went through, you know, that thing that I told you we call a pre-submission meeting where, you know, it starts as one and then adds on the other. And that's what I would say we can comment on more definitively rather than what percent is it. The trend that seems to be emerging is it starts with one. the customer often not realizing we have the other. And then it's partway through a sales cycle where the sales team's doing their normal job and telling the customer about the full suite and, oh, I see. And by the way, it can start in the other direction, too. We have lots of customers now who start as MSP customers. They came to us for whatever, added security or managed access or something, and then find that, oh, you guys also do UCAS, but not just UCAS. We do CCAS and CPAS and video meetings and collaboration, and then what we'll hear is, oh, that's interesting. We can't do that now, but our UCAS contract with our current provider is up in, you know, whatever, right, March of next year, which has been a very common comment for us to hear in the other direction. So I'm quite encouraged by this. I would say it's too early to be quantitative. But for sure, this looks like it's playing out as we hoped it would as the thesis for the acquisition. And some of them have been quite large, not $3,000 a month going to $5,000, but $30,000 a month going to $50,000 or $100,000 a month going to $150,000. So it's too early to be specific, but this looks pretty encouraging early on.
spk05: Bill, earlier you talked a little bit about churn and the net fortress business. How about just the overall company? Have you seen any change in customer revenue retention rates the last three or four months here? Nope, not in any significant way, Mike.
spk07: You know, we have differing levels of churn in slightly different parts of the business. You know, the wholesale trunking business versus the UCAS business versus the CCAS business versus the MSP business. But it all kind of averages out to the, you know, just under 1% a month number. None of them have moved up or down materially. I will say that when one of your colleagues at one of the other banks asked, I think it was Eric, why is the 18% not going up to 19% even to margin or a 19% going up to 20%? And I said, you know, we're going to invest in a couple of initiatives this year. The thing you just asked about is one of them, Mike. We've... Hired a new executive to run this kind of a group. We're going to build it and focus a whole team on it that does nothing but that and get better at this rather than have it as part of something. So more to come on that as that builds out. I'll talk to you guys more about it. But I do think there's an opportunity there, even though the literal answer to your literal question is it's not moved very much at all in the last three or four or five months.
spk05: Okay. Makes sense. And you talked a little bit about a couple delays of projects in this quarter. Were those on the product side, I assume, as opposed to the services side?
spk07: Well, it was a services customer that needed some product installed at their site, which is very common with a cloud service, right? You know that, of course. And getting that stuff installed at the customer's site was going slower than we anticipated and they thought. And that, of course, then means that the services part is not activated as soon.
spk05: Okay, that makes sense. Great. All right, thank you.
spk01: This concludes the question and answer session. I would like to turn the conference back over to David Moore for any closing remarks.
spk00: Ladies and gentlemen, thank you very much for joining us today. This concludes today's conference call, a recording of which will be available on our website shortly. Thank you for participating today and have a very pleasant rest of your day.
spk07: Thank you, everyone. Goodbye.
spk01: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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