Sangoma Technologies Corporation

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Investor Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. I would now like to turn the conference over to Larry Stock, Chief Financial Officer. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Sangoma's first quarter fiscal 2023 investor call. We are recording this call and we will 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 Samantha Reburn, General Counsel, to take you through the results of the first quarter of fiscal year 2023, which ended on September 30, 2022. We will discuss the press release that was distributed yesterday, together with the company's unaudited interim financial statements and MD&A, which are available on CDARC, EDGAR, and 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 non-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 have started reporting in U.S. dollars now for FY22 and beyond. This includes all prior period comparisons, which have been converted to USD 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 or management's intentions, estimates, plans, expectations, and strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results 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 CDAR and EDGAR. And with that, I'll hand the call over to Bill.

Thank you, Larry. Good morning, everyone, and thanks for joining us today. I typically keep my prepared remarks a little shorter for our Q1 calls together, and this one is no exception. If there is anyone joining us on these calls for the first time today, I would invite you to listen to the recording of our Q4 fiscal 22 results from September 30, just a few weeks ago, which is available on our website. On that year-end call, I provided a very extensive update on our business, and that call would also give you a more detailed explanation of adjustments made in Q4 that have some impact on certain year-over-year comparisons. Okay, so I've structured my prepared remarks for this call into three sections. I will first discuss our first quarter operating results, and then I'll add some commentary on a few strategic topics. And finally, I will review forward guidance for fiscal 23. As always, I'll then wrap up with a brief summary and turn the call back over to Larry for our typical open Q&A session. So let's get started with Q1 results. In this first section on operating results, I'll cover highlights from our first quarter. I'll skip my normal year-to-date remarks, of course, given it's Q1, and I'll conclude with a few comments on the balance sheet and cash flow. Sales for the first quarter of fiscal 23 were $64.1 million, which is up 24% when compared to the same period in fiscal 22. This substantial year-over-year increase is driven primarily by the growth in compounding in our services business, where the recurring revenue is generated, which I'll discuss a bit more in a moment, and also, of course, by the acquisition of Net Fortress. And this $64.1 million for Q1 is down 3% from the $66.3 million in the immediately preceding fourth quarter of fiscal 22. It's not surprising for us to see our first quarter dip slightly from Q4 of the prior year as Sangoma has indeed felt the impact of seasonality in most years. That doesn't always show up because in some years it can be masked a bit depending upon the timing of certain acquisitions. But in general, Q4 has been our strongest quarter and the summer months have always been a bit weaker, especially in the European markets where summer holidays impact order flow, causing that small dip from Q4 to Q1. Such trends naturally affect our capital P product business, more so than our services business, given the product revenue is lumpier and not recurring. In addition to seasonality, we've also seen this quarter that sales of our product business were impacted by some of the macro effects we all see out there these days. General economic headwinds have a more noticeable effect on product sales than on services, because such purchases are usually seen as capex purchases by our customers. whereas our service subscriptions are OPEX, of course. And if those economic headwinds are a second-order effect, then outside of North America, we also see a smaller third-order effect from FX rates. I just want to be a little bit careful as I explain this one. In calls like these a few years ago, we'd often talk about the effects of FX on the top line and in the middle of our income statement because we reported in Canadian dollars. The top line due to the sale of a widget for 100 US dollars converting to 130 Canadian or 110 Canadian depending upon prevailing rates at the time. And in the middle of our P&L from the revaluation of balance sheet items like inventory or receivables as their value in Canadian dollars fluctuated with the US dollar rate. All that is gone now given we've been reporting in US dollars as Larry just mentioned. So that is not what I'm referring to, and given several of our analysts wrote about this extensively in the past, I just wanted to clarify. What we're referring to today is the effect on a possible customer in Europe or Asia or Latin America from the strong US dollar recently. That is, given we sell almost exclusively in US dollars around the globe, the perceived cost in most local currencies has gone up. For example, When we sell a Sangoma widget for 100 US dollars in the UK, the product was seen by a local buyer as costing them about 65 pounds a few years ago, and it would cost them about 85 pounds today, purely due to the strong dollar and weaker pound. And that's not unique to the UK, of course. If the buyer were in India, that same $100 widget, which cost them 6,300 rupees a few years ago, would cost them over 8,000 rupees today. And such trends have an impact on purchases of our capital P products abroad. So the cumulative effects of seasonality, general economic headwinds, and effects on the sales of our products caused the product revenue to dip by about 9% this quarter from Q4. And that's what drove the overall drop in total sales sequentially. While our product sales dropped a bit, given all that's going on in the world, our services business held up pretty well, and that's good. It makes sense, and it's what we expect, given it's the services business which is the driver of Sangoma's growth, not our product side. So let's look a little deeper, too, at our services revenue. The long-term trend as Sangoma has successfully evolved their business to a SaaS model continues to produce success. Not only was our total revenue up 24% year over year in the quarter, but our services revenue more specifically was up 35% as compared to the same period in fiscal 22. And just as importantly, our services revenue as a fraction of total sales crossed 75% for the first time. This is a big accomplishment and an indicator that our long-term strategy is working just as intended. More on that in the strategy section coming up. Our cost of goods sold came in at 32.3% of revenue, which is down slightly from the 32.9% in the most recently completed Q4 of fiscal 22. Supply chain disruptions remain an impact on cost of goods, as I've discussed at length on recent calls, so I won't go into it again on this one. Suffice to say that Sangoma does a really good job in this area, producing some of the highest gross margins in the industry, while we continue to be able to fill most orders without the other stock issues that many of our competitors have been contending with. Gross profit for the first quarter was $43.3 million, up 18% from the $36.9 million in Q4 of last year. Gross margin for the quarter was approximately 68% of revenue, which is up slightly from the 67% last quarter. As we previously indicated, this is generally in line with our expectations for fiscal 23. Operating expenses for the first quarter were $44.4 million versus $45.7 million in the most recent fourth quarter. The reduction from the prior quarter by another $1 million per quarter is the result of the second and final stage of the net fortress integration and restructuring. Adjusted EBITDA on the first quarter of fiscal 23 came in at $10.7 million, an increase of 6% from the first quarter of the previous fiscal year, and a decrease of 3% from the immediately preceding Q4 consistent with the 3% sequential revenue dip already covered. This EBITDA result translates to 17% of sales for the first quarter of fiscal 23. With the net fortress integration and restructuring now in place, we expect EBITDA margins to continue in that range. And as mentioned in our press release from last night, we've built a resilient business with the inherent flexibility that enables us to adjust OPEX if it were necessary in order to protect profitability. Net loss for the first quarter of fiscal 23 was $1.98 million versus a net loss of $2.3 million in the same period last year. That completes my remarks on our P&L results and I now like to turn to a few comments on our balance sheet and cash flow. Our cash balance at the end of the first quarter was $8.3 million down from the prior quarter as we continue to pay down debt each quarter. In fact, I'd like to pause here for a moment just to definitively reassure Sangoma shareholders regarding our debt levels and debt service. I hear a lot of questions these days from investors and other companies, questions that make perfect sense and the debt levels in some other companies' businesses. Please know that Sangoma has always taken a prudent approach to managing our business, our P&L, and our balance sheet. We have believed in a balanced growth approach, not growth at any cost, and have done so from the very beginning since I took over, not in a reactive response to some recently changed market sentiment by those who have now somehow seen the light. That means we prioritize profitable growth above maximum possible growth. That means we prioritize prudent use of debt to help manage dilution, but not exposing your company to undue leverage. And that means we now have a company in which we repay almost $4.5 million of principal each quarter, an approach we feel makes more sense now than ever, delivering assertively during increasing uncertain economic times. Our gross debt level is now sitting at about $100 million, and with EBITDA guidance of about $50 million at the midpoint of the range, you can do the math. As a result, our balance sheet continues to remain strong. Our debt load is reasonably modest given EBITDA levels. We have the resilient business model I touched on earlier that enables us to adjust op-ex, if required, to protect profitability during these unpredictable economic times, and we are de-levering, as I just mentioned. Finally, of course, we are also comfortably within all of our debt covenants, and I hope those comments are sufficiently reassuring to you so that you do not need to worry about Sangoma's debt servicing. Moving on with other items on the balance sheet, trade receivables ended the first quarter at $17.2 million, as compared to $14.1 million for the same period last year, and $16.1 million for the end of the prior quarter. The growth in receivables year over year at 22% aligns appropriately with our revenue growth of 24%. inventory balances at the end of the first quarter were 19.1 million dollars compared to 12.7 million in the same period last year and up slightly from the 17.4 million in the immediately preceding fourth quarter of fiscal 22. as we have discussed previously the increase in inventory is driven in part by strategic purchases to combat supply chain challenges and specifically in q1 we had some larger purchases to get the new line of P Series desk phones in stock, a product line we're all very excited about. And finally, I'd like to offer a short comment on adjusted cash flow. This quarter, we generated adjusted cash flow of $3.2 million. Historically, during the first part of the year, net cash from operating activities has run a bit lower than in the latter parts of the year. During this first quarter, That number came in at $3.6 million as compared to an average of $3.3 million for the first two quarters of fiscal 22. It has been common that the timing of some payments has occurred early in the year, and for instance, in this quarter, we saw a bump in audit-related fees as we transitioned to a larger audit firm, slightly higher professional fees, and a significant income tax payment all having an impact on adjusted cash flow in Q1. That brings my commentary on our first quarter financial results to a close, and I'll move to my second section, the strategic topics for today. In this part of today's call, I will touch on Sangoma's competitive differentiation strategy in the industry, our positioning to the public equity markets, a quick update on the integration of Net Fortress, I'll offer a comment on our share price and finally a word or two about M&A in this climate. Okay, let's start with a reminder of our competitive differentiation. As Sangoma has rounded out its product portfolio over the past few years, via good solid in-house engineering augmented by strategic M&A, the breadth of our product suite has grown. This was entirely conscious, of course, as we sought to build out our cloud services to deliver on our stated strategy. That strategy involved getting Sangoma to the point where we had all the pieces of a cloud communication solution that would enable a customer to buy everything from us in a one-stop shopping experience. As we hear time and time again, businesses of all sizes are looking for a single vendor to provide most of their communications needs instead of needing to buy five different products from five different vendors with five different bake-offs five different contracts, five different invoices each month, five different tech support lines to call, and five different products that they then need to integrate. We now have that capability and we leverage it every day when describing our three key points of competitive differentiation to a customer. One, Sangoma has the widest suite of cloud communication services in the industry. UCAS, trunking as a service, contact center as a service, video meetings as a service, collaboration as a service, CPaaS, managed SD-WAN, et cetera. Sangoma has solutions for cloud, on-prem, and hybrid. We find the path to yes, no matter which deployment option the customer prefers, something that no cloud or on-prem competitor can match. And third, Sangoma makes all of its own products right down to the desk phones. Better functionality, better network uptime, better engineering velocity, better supply chain, better integration, one throat to choke. Second, I'd like to touch on our positioning to the public equity markets. That positioning includes our total growth model, in which organic growth is augmented with strategic M&A, a commitment to growth with profitability, not growth at any cost, which so many of our competitors tried, tapping into the enormous TAM that remains very under-penetrated all backed by the clear, competitively differentiated strategy in our industry that I just covered. Sangoma is now large enough to be disruptive with about 750 staff and nimble enough to pivot quickly and is becoming a destination employer as our growth provides career opportunities for our valued staff and underpinning all of this, a company that customers and channel partners want to do business with. Third, I'd like to offer a quick update on the integration of NetFortress. On our last call together, I explained in some detail the integration plan and that much of it was completed during Q4. There were two primary pieces remaining that I mentioned, the integration of the sales organization as well as the second and final stages of restructuring. I'm pleased to report that both are now complete, full stop. Further, that sales team has recently landed a couple of really interesting orders from enterprise customers with many locations each. Each of these orders deliver us over $100,000 in MRR, which is a large order for any company in the industry, including our new MSP offerings, further evidence of the strategic rationale behind our Net Fortress acquisition. This comment today on the integration of Net Fortress will be my last, as it is now fully integrated. So no more net fortress, one team, one Sangoma. Next, at the risk of stating the obvious, I'd just like to confirm that Sangoma's share price is absolutely front and center in the minds of your board of directors and every single member of the senior executive team here. We know it's upsetting for you to see Sangoma trading at these prices, and please know it's equally disturbing to us seeing Sangoma dramatically undervalued like this on almost any metric. For instance, one of the trends we monitor closely is the progress we seek to derive more and more of our revenue from recurring services. And it's actually a really impressive story. Growing from zero historically to reach 25% of sales in fiscal 18, to 33% in fiscal 19, to 49% in 20, to 62% in 21, to 71% last year, and now crossing the 75% threshold this quarter for the first time. My point is not that the figure in any one quarter has not fluctuated a bit, or even the precise figure in a particular year, but that long-term trend is exactly where we want to see it, and that's but one way to see our share price is so obviously undervalued in today's market conditions. We are doing everything we can, though as I realize many of the people on this call know even better than me, many institutional investors have pulled back from small cap these days. And my last comment in the strategic topics section today is on M&A. We've had a few calls from shareholders about this, asking whether acquisitions are still on the table in this situation, so I just wanted to answer it officially for everyone to hear. And that answer is yes. Sangoma is still interested in and working on possible acquisition opportunities. However, I think it goes without saying that we need to be highly selective right now, even more than ever before as we consider any possible deals. We are very cognizant of share price, keenly aware of everyone's sensitivity to dilution at these prices. We realize that our use of debt should factor in the uncertainties in the macro environment, and will thus only consider opportunities that are accretive. In the meantime, we are fully committed to running your company prudently, as we always have, with a heightened sense of caution these days. So now let's move to my third and final section today on fiscal 23 guidance. As you recall, the last time we were all together in late September, we provided fiscal 23 guidance for the first time in keeping with our traditional policy of issuing guidance for the new year as we release results for the year that has just closed. As a reminder that guidance forecasted revenue to be between $275 and $285 million and adjusted EBITDA in the $48 to $52 million range. Based upon Q1 results and what we see out there so far today, we are maintaining those ranges for revenue and adjusted EBITDA in fiscal 23. This guidance reflects our best assessment of many challenging factors in an increasingly uncertain world, including but not limited to the macroeconomic considerations such as historic inflation and hawkish monetary policy in many countries around the world, as well as trends in FX rates, the potential impacts thereof on demand, the continuing supply chain, challenges, our ability to retain and attract talent, international conflict, lingering effects of the pandemic, and the growing risk of global recession. As such, visibility and forecasting has become more difficult for everyone and Sangoma is not immune. We will therefore be monitoring such trends very carefully over the next few months. And with that, I'd like to bring my prepared remarks for today to a close with a quick summary. Overall, I'm very pleased with another quarter of solid financial results for Sangoma and what we've accomplished. We continue to see our well-defined, competitively differentiated strategy yield success and are pursuing attractive organic growth by investing in sales and marketing, R&D, and customer expansion. We also remain uniquely positioned to augment that organic growth with deliberate, prudent, highly selective M&A, using a very disciplined approach that reflects an astute awareness of share price, ensuring Sangoma would only consider acquisitions in this climate if they are accretive. We have built your company with a core belief in growth with profitability, even when it was out of fashion, and we, of course, hold that belief even more strongly today. Further, we have a resilient business and financial model, one that allows us to protect our profitability even if faced with the kind of uncertainty we all see these days. We've utilized debt conservatively, maintaining modest debt to EBITDA ratios, and avoiding over-laboring, even when others encouraged us to take on more debt. That commitment to using debt cautiously has served us well, and we will maintain that approach as we continue to delever and pay down debt. Finally, I will close off my prepared remarks today by saying that you have a team here at Sangoma that works extremely hard for you every day and that is determined to continue that work to improve share price and create shareholder value. And with that, Larry, I think we're ready to take questions now. Thank you, Bill.

Before we pause and accumulate questions, one question that has come up that we should answer now is why is services revenue down from last quarter?

Oh, okay. Well, I guess it's important to remember from my commentary in the prepared remarks that the sequential decline from 66 to 64 million is really driven not by the services piece, but by the product category. That's a non-recurring revenue. As you heard, that was due to a few overlapping factors Seasonality, FX impacts, the macro environment affecting capex purchases, et cetera. In our services category, the recurring revenue part of our business, our revenue was up 35% year over year in Q1, which is the signal we're focused on. That's why I walked through on the call that long-term trend that showed this figure consistently ticking up year over year nicely. And it's the trend that got services to over 75% of total sales this quarter. So there's truly not a structural problem in services revenue for us to be concerned about. But yeah, sure, there can be minor fluctuations from quarter to quarter sequentially. That's right. And that's what we saw this quarter when Q1 took a small dip from Q4. I think it was about 2%. We're not worried about that at all. I expect it will bounce back next quarter. This can happen in the services business for a number of possible reasons. Most of those don't normally coincide in one quarter, but that's indeed what happened this quarter. It just happened to occur at the same time. Things like in the product side, but to a much, much smaller degree, of course, given our services are recurring. There can be seasonality impacts, and our services category is mostly all cloud revenue, as you know, but there's still a very small part that is indeed recurring but left over from the more traditional parts of our business when we sell products in the capital P cents. And the customers are sometimes purchasing maintenance or have in the past. It's very small now. and declining over time, as you would expect. But it is recurring, so it needs to get captured inside the services bucket. And during times of economic pressure, there's increased scrutiny on those kinds of maintenance purchases by customers, which is what we saw. What else? Those same macro factors can have an impact on usage. In one of our cloud services, like our TAS offering, there's a small usage component to the pricing model, like for all of our competitors. And that usage was down a touch with the macro factors. What else, Larry? And, you know, we lost one midsize customer this quarter when they were acquired and the new parent company parachuted in, you know, their existing IT systems to the newly acquired company. That's normal. That happens. So, you know, I hope you can see that this minor gap I don't know, blip is not some systemic issue in our cloud business, and we'd fully expect it to be back up next quarter. Surprisingly, given the question you got, Q1 was our best cloud bookings quarter in a really long time. We had one of the highest levels of gross ad MRR bookings ever this quarter. We had... the strongest quarter of net ad MRR in a long time too. As most of you recall when we use terms like net ad MRR, it's just the difference between the gross ad bookings that we bring in and the churned MRR. It's the way our competitors describe it too. It's the standard SAS model. You even heard me reference two enterprise orders we won recently. It's over $100,000 in MRR, which You know, by any standard, it's a big cloud order being over a million dollars a year. So, you know, of course, all bookings are orders in a cloud business. You know, they then need to go through the onboarding or activation stage, I realize. So there's a natural time lag in the book-to-bill step before it turns into revenue. Yeah, I guess that's my thought on that one, Larry.

Excellent. Okay. Thanks, Bill. Operator, we are ready to take questions. Would you please go over the instructions again and accumulate that for us?

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 2. We'll pause for a moment as callers join the queue. The first question is from Mike Lattimore from Northland Capital Markets. Please go ahead.

Great. Thanks a lot. Good morning, everybody. So I guess just picking up on that last comment, you said you had your best cloud bookings quarter in a long time. Can you kind of sync that up with, you know, just comments around macro uncertainty? I would think you wouldn't have a record bookings quarter if the macro was having that big of an impact, but maybe just sync those two sort of Different comments up here.

Yeah, sure. Totally get why one would make that assumption, Mike, and we've had this debate internally many, many times. I think there's a couple of things going on there. One is the types of macro pressures that you're asking about and that I referred to are also the same kinds of things that push customers to OPEX decisions versus CAPEX decisions. So I think that's the first one. And then secondly, when you ask about, and I refer to large orders of enterprise customers, I realize you know this well, but for the group, those are the kinds of sales opportunities that have really long sales cycles. If a normal customer with 100 seats is going to spend $1,000 or $2,000 a month with us, It's a 30-day or a 60-day sales cycle. Big ones like that with hundreds of locations and a million dollars a year of MRR are six months or a year, right? So the fact that the macro trends might be working against that, of course, come into play. but the decision process by the customer was started, like, whatever, you know what I'm saying, a year ago or something, right? So I think that's the explanation, Mike.

Okay, thanks, John. Can you tackle, it sounds like you've had some good wins with the MSP offering from NetFortress. Can you talk just a little bit about what you're seeing in the pipeline there, you know, interest in, interest among kind of new logos or into the Sangoma base, and then also just kind of the latest on your go-to-market efforts to really push that out more broadly?

Maybe I'll tackle the second part because that's the more general case and then tell you how it's working. The go-to-market approach is exactly the one that you would intuit it to be. The go-to-market is put the MSP offerings together with the rest of the over-the-top cloud services and position it as a single suite. That's it. We talk about it every quarter together. You and I have had the discussion one-on-one. So that's the same positioning, whether it's to a new logo or an existing customer. So if it's the part of the sales organization that's hunting, then when they're going out and talking to a customer about cloud service X, we really need, I don't know, CCaaS or UCaaS, they've been taught that the job is to explain You know, we have all these other things, including managed security or managed SD-WAN or managed access and vice versa. If the sales process begins by somebody calling and saying, you know, I need managed security or I need managed access, they've been taught, then we have to ask, what are you doing for UCAS? What are you doing for CCAS? Do you have some already? Do you not have it? If you have it, when's the contract expire? So all of those play together. In terms of the pipeline and how that's working, I would say that from the hunting point of view, and then I'll come back to the farming of the existing customer base, from the hunting side, we're starting to see signs of that working. I've mentioned a couple of big orders. In orders above a certain size, Sangoma has the same kind of a process that almost all normal firms like us have in which you know, the opportunity gets reviewed and approved and pricing gets looked at and are there any particular pieces of functionality the customer needs that are not part of the normal suite, et cetera, et cetera, et cetera. And every one of those leads to a conversation about, oh, great, you're selling, you know, cloud service one, two, and four. What about MSP services? Or you're selling, you know, managed access and managed SD-WAN. What about CCaaS and UCaaS? So it's a normal part of the process now, Mike. It's a new process. part of that normal process. So it's still the exception, not the norm, but it's becoming less and less an exception and more and more normal. I just sat through one of those meetings two weeks ago about a significant opportunity with a large chain of auto dealerships that started in the cloud communications way and is evolving to be cloud plus MSP. And we have lots of deals that started as MSP and adding cloud, so That's how it's working. With the installed base, it's a little bit different. With the installed base, they already have one or the other. For instance, already a cloud communications customer, and then the exercise is as part of the normal touch base, stay in contact with your customers, ask them, are we meeting your needs? We introduce this other new thing. And that's true whether they start as a cloud communications customer or start as an MSP customer. And that's starting to get traction too, although they often have something else already. And so a normal reaction in that situation is, okay, happy to talk about it. We are interested. But by the way, if we're, I don't know, A managed access customer, our UCAS contract doesn't expire until February of 23. Let's start talking about it now, but please know we can't make the switch until then. So I don't know, Mike, maybe that was too much, but that's what's on it.

No, no, perfect. Thanks. One final real quick question. You mentioned there's still maintenance left in the service line. It's very small, you said, but can you quantify that a little bit more?

Oh, I wouldn't have that number off the top of my head, Mike. Like the cloud stuff is almost all of it, well over 90%, whatever that would be. Yeah. Okay. Thanks very much. Okay.

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

Yeah, I was just curious to know, given the – you cited the economic headwinds. You know, I would think that back the end of September, you were, you know, you had a pretty good feel for those economic headwinds. Did you see any change in customer buying behavior just in the month of October or sort of month-to-date November?

Yeah, it's a fair question, Eric. I think it's less was there a sudden change or a step function and more a matter of degree is how I would answer it. For sure, you're right. Of course, we saw some of that, you know, as I guess most people did. But, you know, we saw more of it in September than we did in August and more in August than we did July and for sure more in October than we did September, and it's continuing in November. So I don't – I wouldn't want to pretend something, though. It isn't this shocking thing to us. It's just more pronounced there.

Mm-hmm. You did talk regarding the Q4 results. You said you had, you know, there were a couple of deals, a couple of projects that fell out of Q4 and into Q1. A, did those close in Q1? And then, B, did you have the similar situation where something you thought was going to close in Q1 pushed and now pushing into Q2? Yep.

So one of the large orders that I referenced that closed in Q1 was one of those orders that you just asked about from Q4, so the answer is yes. In general, I would say as the company gets into more and more mid-market, especially the higher end of the mid-market, and starts to see more enterprise customers, I think we'll just get better at more fully appreciating the elongated sales cycles. What I said about Q4 was completely true, but as we see more of it, maybe it'll catch us less by surprise. In that case, we thought it would close in Q4, and if I'm being brutally honest, Eric, looking back, we probably should have realized it might not. It was a big deal. It was a complicated negotiation. We were right down to the 11th hour. It looked like it was going to finish, but that last little bit, it's still a lot, right? And so like most companies in the SaaS business that start in the S of SMB, we're still getting better and better at looking at the sales funnel, understanding which pieces or tiers of the sales funnel are behave which way, and so I'm hoping we're getting more confident that I won't have to say that as much. Not because things get done faster, that's not my point, just that we get more used to it and accustomed to it, and the slightly longer sales cycle doesn't catch us as much by surprise. Gotcha.

Regarding the Q2 outlook, I know you're just commenting on the full year, but Historically, we would see a 6% to 8% sequential increase Q1 versus Q2. Any reason to not assume that same historical behavior for those of us modeling?

No, I don't think there's any reason to not. I wouldn't want to be too precise in my answer here because we've not, as you just said, given quarterly guidance. But that is right. We would fully expect Q2 to be up from Q1. And there's nothing special about the quarter-by-quarter trends that should affect fiscal 23 that are hugely different than fiscal 22 or fiscal 21. So I don't want to, you know, get into, I can't remember the number you used, six or whatever it was percent. But generally, I think you're on track.

Okay. Well, just I'll close with a comment. It's good to see that 75% recurring REPS number. I know that's been a long-term goal and good to see it finally achieved. Onwards and upwards from here, right?

Yeah. Thank you. Exactly, Eric. Appreciate that very much.

The next question is from James Breen from William Blair. Please go ahead.

Thanks for taking the question. Just a couple. Could you talk about the growth you're seeing and, you know, how it sort of mixes between sort of larger enterprise, you know, mid-small, And then also within that, you know, is the growth coming from new customers or existing, taking more products? And just, you know, talk a little bit about the cross-sell opportunity, you know, given the recent M&A. Thanks. Yeah.

Yeah, good question. Thank you, Jim. So I guess it's not one or the other, right? You won't be surprised to hear me say it's both. We're getting more and more what I would call deliberate about how we handle that. So as an example, and then I'll come to the you know, the breakdown, we had traditionally had one team that serviced existing customers. And the role of that team was both taking care of the customer, checking in, making sure they were happy with the service, answering any questions, understanding how their business was evolving, and selling more to them. And what we found was that wasn't working so great. the part of the conversation that falls into the first of those two buckets feels different, is received by the customer differently, involves different skills by our employee than the second part. So going into fiscal 23, we've teased those apart into two entirely different sales teams, one that does the servicing and one that does the upselling. And so we're getting better and better visibility to this The part of the new MRR, the gross ad, which comes from new logos and the part which comes from existing customers are equally important. In any one month, you know, the new logo revenue might be a little, bookings might be a little bit higher than the existing customer expansion. And in the next month, it might reverse the other way. But it's not the case that one of those is 80% and the other one's 20%. You know, they're, you know, both pretty similar in the middle. Typically, the new logos are a little bit more new booking MRR than the expansion, but not always. And then the other portion of your question, if I got it right, is, you know, just the market segmentation, how much of the business in S, how much in M, and how much in enterprise. Yes. Okay. The portion of the installed base, and I realize you know this, Jim, I'm just answering it for the group, that falls into those buckets is different than the portion of the new bookings. So the installed base, like most SaaS companies, started S and then finally started to get some M and has more recently been into the enterprise. So on a peg count basis, the number of customers, the vast majority of customers are more S, and then less M, and of course, fewer enterprise. On the new MRR, you know, we had very, very few orders in the past, like we're starting to see now in that enterprise market. Like, you know, we just didn't get $100,000 MRR orders before. And, you know, now we do. And not like once. We get them pretty regularly. It's still not the norm. You know, if we closed... hundred orders in a quarter you can still count the big ones on one hand like that but it's not one and it's not one quarter out of four we get them regularly one of those is probably going to be more than two hundred thousand dollars a quarter you know you never exactly know until it's finished implementing so you know enterprise is important it's it's growing all of our competitors say the same thing there's no reason we would be any different I would say The amount of time and attention we spent on the very small S has gone down, and the fraction of revenue that comes from the very small S has gone down as well. So if four or five years ago it was normal to get a cloud customer with 10 seats, that's not the norm anymore. So S for us is bigger. There's much more in the medium bucket, and we're starting to get consistent enterprise traction.

That's great. Thank you. Okay, sure, sure.

The next question is from Deepak Kaushal from BMO Capital Markets. Please go ahead.

Oh, hi, guys. Good morning. I've got a couple questions. First, you know, Bill, you mentioned earlier the macro is causing a pause on CapEx spending, and that could, you know, bolster the case for a shift to kind of SaaS and OpEx spending. Are you seeing that transition now, or is this just still a theoretical and we're just in the pause phase on CapEx? Because there's already a general shift to cloud from an OpEx spending versus CapEx. But are you seeing an acceleration?

Yeah, it's a perfectly fair question, and I can give you an answer that I guess is at risk of sounding like I'm obfuscating, which is not my objective, Deepak. You know, when you're in the middle of something like that, it's very hard to know in the middle of a trend if it's a trend or not, right? And so we do see a bit more of it right now. As you said, it was already in place. It's one of the primary drivers of on-prem to cloud transition that's been happening for years. But there's just a bit more. And when I see more, I see up in one and down in the other. So the more means a little bit more op extraction and a little bit less cap extraction. And that's the transition I referred to. It's very hard to know whether that's a one-quarter thing or it's going to be in place for a while. And it's hard to know if it accelerates based upon what happens with the economy and what's the Fed going to do with interest rates. And are we almost through that? And there's some encouraging sign that Maybe inflation's peaked and it's starting to come down a little bit. And, you know, honestly, Deepak, I think everybody's having trouble forecasting right now. Our crystal ball's no better than the next guy's. I have no bloody idea what the Bank of Canada or the Fed's going to do. We all hold our own opinions. You know, certainly what we call the hawkish policy has been more hawkish than we at Sangoma probably thought it would be. But, you know, it is, and I just don't want to pretend that we know that answer more definitively than we really do.

Okay, got it. The second question here, on the services side of the business, are you able to give us kind of a baseline of how that breaks down between managed services and, you know, non-managed services services? just so we can kind of have baseline and monitor the growth rate going forward. Obviously, they have a different gross margin profile as well. I don't know if you're willing to give that as well, but just to help us kind of see how that trend might impact, relative trend might impact gross margins going forward.

Yeah, I don't think so, Deepak. It's the same kind of question we've had once or twice over the last, I don't know, six of these meetings. Sometimes it's about MSP versus cloud or UCAS versus CCAS or you know, managed SD-WAN versus managed security. For us, you know, we're trying whenever possible to sell in bundles, right? So the customer's getting a quote for UCAS plus CCAS plus video meetings plus collaboration plus managed access plus managed security and it's, you know, whatever the number works out to be, right, $57.49 per seat. And we don't break it out by product line. We can't track it by product line that way. We don't take the per seat price and allocate it into product. When you and I were first meeting each other, I remember sharing with you that one of the things Sangoma had to do when plotting its SaaS strategy was figure out what the competitive differentiation was going to be. You know, we weren't going to be Zoom at video meetings, right? We weren't going to be, I don't know, Twilio at CPAP. And so the strategy became we have to be the company that's really good at having the full suite and meeting the customer's full needs in that one-stop shopping. And so if that's going to be our strategy, then we have to sell that way. So, you know, we sell that suite of services as a suite, as a bundle, not as how much of it was MSP versus how much of it is UCAS versus how much of it is CCAS. That's how we do it. It's competitively differentiated. It's the thing that makes us unique, but it means we can't say for a customer that's paying us $20,000 a month how much of that is for UCAS or how much is for CCAS or how much is for MSP or how much is for CPAS. It's all just the splendid price.

Got it. I totally respect that. I guess what I was just trying to gather was how much of your services are you managing on behalf of your customers versus how much are they managing themselves? And if that's not something you can give today, then I'll probably ask the question again in the future. That's kind of what I was getting at, at a high level.

Yeah. Well, I think, you know, it's a bit hard to know exactly what you mean by that, but in general, we manage the service for the customer, right? Everywhere. Now, Customers, of course, have the ability to go in and do things for themselves, as you would expect any IT administrator to do, and some of them choose to do that and some don't. Some of them choose to delegate that to the channel partner. But, you know, they're not the UCAS expert. They're not the CPAS expert. We are. If we're talking to, you know, a school for the deaf and blind who needs us to do something to make a 911 call using our CPAS app connect into strobe lights. They can't do that stuff, right? That's us. And yet, if a normal IT administrator is running the system and they're doing typical routine things, I don't know, Deepak, that's probably too abstract. They're hiring three new employees.

they don't need to come to us to add three new employees to their system right that that's what i wanted you to get a feel for okay that's very helpful caller i do appreciate it and uh respect that you know um you guys sell everything together so so appreciate it thanks the next question is from gavin fairweather from coremark please go ahead

Oh, hey, good morning. I wanted to start out on new logo ARPU. In the past, you've talked about how that's been kind of rising as you've been attaching things like contact center and some of your other services. Curious how that's kind of working in conjunction with kind of the move to larger customers and then maybe giving the macro some smaller initial deal sizes. Like where is that all kind of netting out on that metric right now?

Yeah. It's all over the place, right, Gavin? You're completely right. There's all these competing factors that are pushing ARPU up and down in their own independent ways. So I think the starting point before the specific causation you asked about, like bundling or whatever, is what's just the general trend in price in the industry? And like any technology industry and product, the The trend over time is price goes down, not up. It's not unique to us. It's not unique to our industry. It's the way everything works in tech. So for a product which has been around a longer time, like UCAS, that's a bit more mature, the general trend in price for exactly the same thing delivered now versus four years ago would be a little bit lower. And what the companies who are best at managing this are doing is is not pretending that the price trends are not down. They're combating a downward price trend by adding more things into the product solution. And, you know, as you're asking about the arithmetic sum of those, which is so important. So we have customers where when they renew products, The price goes down a little bit, and they were paying whatever it was, right, $28 a seat, and now it's $26 a seat. And we have some that were paying $20 a seat, and it goes to, you know, $45 a seat. It's a little bit harder to figure that all out right now, just one or two quarters after the Net Fortress acquisition, because now there's a bunch of new services going in there as well. And as you just said, now we have these other macro effects, which is there was a general downward trend in price that everybody expects in every technology industry. And now, you know, customers are under price pressure. And for us, that should be a positive, competitively differentiated opportunity. If the customers worried about spending because of the macro environment, being able to get more things from the same vendor should lead to a lower total price than having to go buy UCAS from one place and CCAS from another place and CPAS from another place and broadband internet access from another place and manage that. So in general, that has been working in our favor. It's absolutely the strategy and one of our competitively differentiated strengths. You know how that is all playing out and adding together Gavin is you know it's just such an uncertain time and. Whether that that price pressure from the macro environment is going to last one quarter or three and what we all feel about whether the word will tip into a recession and. You know how that is affected by foreign exchange rates and oh in the UK, everybody was fine paying you know, whatever it was $18 a seat, but now the pound has moved and. you know, in pounds that changes and now $18 US a seat seems like too much in pounds. So, you know, there's just a lot going on in the world. And as I said earlier, in answer to a different question, I just don't think we want to get to the position where we're saying it's, you know, it's gone up by $2 or down by $1.50 and then those trends, you know, accelerate or subside. And I told you $2 and it turned out to be $1 or something, right?

I appreciate the color. It was something I was thinking about and struggling to come to an answer on, too. Well, it's hard.

It's really hard.

Maybe just on operating expenses, you know, we obviously saw those come down given the NetFortress integration is now complete. How are you thinking about that, you know, investment lever and kind of the decisions between, you know, kind of, growth and supporting that versus driving kind of further cash flow, given some of the uncertainty?

I mean, that's obviously an easier question to answer, right? Because it's asking about stuff that's within our control as opposed to guessing about the impacts from things that are outside our control. So I could do a much more definitive job of that one. Thank you for giving me an easy one. You know, right now, I think we're content where our OPEX spending is. We don't expect to change it materially. this quarter versus next quarter. However, I did refer in my prepared remarks to this idea of having built in this inherent flexibility in the business model. It's one of the advantages of having high gross margin and high EBITDA margins. If things start to happen that would make the level of OPEC spending we're at look a little bit off, we have lots of flexibility to move that. Those are the conditions under which we would consider adjusting it, Gavin. I don't see it going up for the next quarter or two, given what's going on in the world out there. But if demand were to soften a little bit, then we have lots of places to adjust, whether it's traveling to see customers or how much marketing you do or how many trade shows you go to. So I feel really good about that. But the thing I'm feeling good about is the control over it that we have because of the financial model at Sangoma more so than knowing whether we will or won't have to adjust it a quarter or three from now.

Got it. Very clear. Thanks so much for your answers.

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

Good morning, guys. Bill, I appreciate the color you provided on the services revenue and the sequential decline there. It's just, I think, something we haven't seen, I think, since the start of the pandemic, which would be probably quite understandable, I think, at the time in particular. I had some concerns about where the SIP trunking revenues would have gone. I guess related to that, though, is maybe just trying to get a better understanding of that services revenue line. You know, kind of how much is really coming from more traditional kind of seat-driven SaaS revenue, whether it's UCaaS, CCaaS, managed services, maybe, versus maybe some of the more variable types like SIP trunking or CPaaS?

Yeah, sure.

I don't have that mirror off the top of my head, David, but the vast, vast majority is the subscription-based SaaS revenue. Only the CAS product line in the suite of cloud services has this usage component. It's only in part of the TAS product line. We sell TAS both retail and wholesale. The retail does not have a usage-based component. It's only the wholesale. In the wholesale, there's two parts to the pricing model. There's the fixed part and the variable usage-based part. So, you know, once you put scope down like that, David, if you're thinking about it the way I just tried to describe it, right, you have all of our revenue, and then that total revenue breaks into product and service, and then in the service, the service breaks into cloud and that little tiny bit of leftover stuff that I described earlier, like, I don't know, man, like the maintenance on, I don't know, some on-premise system or a gateway, and then the cloud breaks into all of the different cloud services Products, right? The UCAS and the TAS and the CPAS and the contact center. And then inside that, it's only trunking. And then inside trunking, it's only the wholesale, not the retail. And then inside the wholesale, it's not the fixed part. Once you go through all of that telescoping down, it's a very small part, very small. But I don't have the exact figure. And that's why when I was answering the question that Barry was saying came in, even before the call, I must have went through three or four ways of explaining the factors that overlap and the usage component of trunking as a service that you asked about was only one of those three or four. You saw me telescope down five or six levels to get to that one and then say that one is only one of the three or four factors. I mean, without being able to quantify it off the top of my head, I think you get the idea. It's very small.

Well, I hope that really does help. And I think maybe Larry might have preempted the Q&A. It's definitely something that I had written on my notes, so maybe he read that beforehand. Moving on to the margin side, do you think the Q1 is kind of the trough here for EBITDA margins? given your comments about the integration and net fortress now being complete, and from a revenue perspective, expecting to see that rebound here in Q2?

I don't think so, David. Back to my comment about the CRISPR ball, if there was A trend, I would point out, it wouldn't be we know the trend. It would be we know the trend less well now than last quarter and less last quarter than the quarter before. Uncertainty is increasing. The world is more uncertain right now. So there is no reason for me right now to believe that that 17% EBITDA margin in the quarter is what you call the trough. I don't think next quarter it's jumping to 19 and the quarter after that it's going to come 22 on its own. I think that's the right level for us to be managing the business to given everything else that's going on. But I'm just trying to acknowledge to everyone so that, you know, you feel the sense of transparency that it's harder to know exactly this quarter than it was last year. And so, I don't want you to build into your model, you know, 17% EBITDA margins is the trough or the low, and it's about, you know, to shoot through the roof after this. I think it's more likely that it'll look like 17% next quarter. But let's see, and if that feels like it's starting to change, you know, of course, we'll tell you guys.

Yeah, I wasn't, you know, expecting the margins to get back to, you know, the pre-acquisition levels closer to 20% in Q2 or even Q3 or Q4, but just wondering, you know, we've seen the margins effectively flat sequentially, but to what extent we might see it, you know, a bit of a rebound from the 16, seven this quarter up to, you know, maybe closer to the 17% level in Q2, hopefully, you know, higher than that in the second half of the year, just wondering how realistic or reasonable that is from your, your vantage point.

I don't think I have a better, more precise answer to, you know, If you've already accepted the premise that it's not going to go from 17 to 20 to 23, then I think we all have to agree that we don't have the ability to be so precise that I could tell you is it going to go from 17 to 18. We can't pretend that our ability to forecast has that much resolution attached to it. given the uncertainty in the world. I've tried to share with you in my answer that I would not suggest you build in some ramp, but I think where we are now is a good level. But is it conceivable that it could go up a point? Of course, absolutely. But to refine a forecast to one extra point of EBITDA margin is just something that I don't think we have the ability to do right now.

Okay, I appreciate that. I guess the last question I've got is just on capital allocation. How would you rank say M&A versus debt repayments versus share buybacks right now, especially where the share price evaluation is?

Well, I think there's no doubt in our mind that paying down debt is a no-brainer and we're going to keep paying down debt and that seems like a good idea at the best of times, and it's exactly what Sangoma has done historically, and these aren't the best of times, so we're going to keep paying down. On the share buyback thing, you know, we're just constrained by the trading volume and the windows during which we can buy and during the windows in which we can only buy on some kind of a pre-built, predetermined schedule, and so we're buying what we can, We're very unhappy with where share price is, so there's no better acquisition in the world than buying Sangoma right now, so we're continuing to do that. And then the third bucket you asked about in terms of capital allocation of M&A, I guess my answer to that, David, is I personally don't quite think of it that way right now. I don't think we would say, you know, if we had $100, you know, would we put a third into... you know, debt and a third into share buybacks and a third into M&A, it might be zero into M&A and it might be something else because it just depends entirely on our ability to find an acquisition that now meets tighter restrictions given where our share price is. So I mentioned on the call that we continue to be very active in that area. We've built a team around it now. to treat it more rigorously, but our degrees of freedom on acquisitions has been reduced, and we just have to be much more careful and selective, and so maybe there'll be some capital allocation to it, but we just can't say definitively right now.

I appreciate the comment. Thanks, Phil.

Okay, sure, sure, Dave.

The last question today is from Robert Young from Canaccord Genuity. Please go ahead.

Hi. Just a high-level question, I think, around the decision to reiterate the guidance. I'm just trying to parse some of the comments on the call around seeing the buying behavior worse than month over month in September, October, November. I think you said cloud booking, however, was strong and supply chains improving. And so what leaves you here at this point in time confident that that guidance for the full year is reiterated versus maybe weakened or brought down a little bit given the outlook for, you know, the macro outlook seems so clouded right now.

Yeah, perfectly fair question, Rob. Thank you. Well, I think the answer sounds a little bit like the way I described the answer to please explain why services went down a little bit. And there's no one answer as this combination of three or four factors and Usually the three or four factors don't happen at one time, and here they do. I think we just have to acknowledge to the street that given we see uncertainty is higher, as you've heard me say twice in answer to two separate questions, that the combination of these competing factors is why we've not changed guidance. It's not that every factor is positive, nor is it that every factor is negative. You heard us say that bookings are up, and bookings are up. It's really good. And the bookings are up not by a bit, but to the highest they've been in quite a long time. And we've got some really large orders, and it's not just on a gross basis, but on a net basis. And so there's several factors that would suggest things look encouraging. And yet you also heard me talk about several factors that look the other way, right? We've seen product revenue dip by 9% as you just asked me about the macro factors are kind of, you know, a little bit more risky now than they were in the past. And those are not within our control. We're not sure how to predict them. And so you add all that stuff together, you know, in some subjectively evaluated opinion when we acknowledge to each other we don't know the real final numbers. And in our minds, there's nothing there that would suggest we should change guidance right now based upon how all of that sums together. But that's not to say, Rob, that, you know, Everything is locked in and 100% and all of the factors are positive. I hope you heard that from my comments and that we've tried to be balanced and candid with you guys and acknowledged the stuff we do know and the stuff we can't know. I've answered the stuff we can know definitively. I've tried to explain the factors that affect the things we can't know definitively. And, you know, we've done the best we can as a bunch of human beings who care about this immensely to figure out how all of that lumps together, and we haven't changed guidance. And if things change down the road, of course, you know, we would tell you guys that. But that's, I realize, not a very satisfying answer, but it's the truthful answer.

Thanks a lot. That's it for me.

Okay. Thanks, Rob.

This concludes the question and answer session. I'll now turn the call back over to Larry Stock for any closing remarks.

Thank you. Thank you, everyone, for joining us today. This concludes our conference call today, a recording of which will be available on our website shortly. Have a wonderful day. Thank you, everyone.

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