Sangoma Technologies Corporation

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Technologies first quarter fiscal 2021 results 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 Mr. David Moore, Chief Financial Officer. Please go ahead, Mr. Moore.

Thank you, operator. Hello, everyone, and welcome to Sangoma's first investment call of our fiscal year 2021. We're recording the call and we'll make it available on our website tomorrow for anybody who is unable to join us today. I'm here with Bill Wignall, Sangoma's President and Chief Executive Officer, and John Tobiah, EBP Corporate Development, to take you through the results of the first quarter of our fiscal year 2021, which started on July 1st. We will discuss the press release that was distributed this afternoon, together with the company's unaudited interim financial statements and Q1 MD&A, which are available both on CDAR and our website at www.sangoma.com. As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS, and during the call, we may refer to a couple of terms, such as operating income, EBITDA and adjusted cash flow that are not IFRS measures, but which are defined in our MD&A. Also, please note that unless otherwise stated, all reference to dollars are to the Canadian dollar. While this is same as in past years, the growing percentage of costs and debt that's denominated in U.S. dollars has caused us to change the functional currency of the holding company and one of its subsidiaries to U.S. dollars. This means that as described in note two of our financial statements from July 1 of this year, all of the company's transactions are recorded in US dollars and then converted to Canadian dollars for our quarterly reporting and filings. Before we start, I'd like to remind you that the statements made during the course of this call that are not purely historical and which are therefore forward-looking statements regarding the company or management's intentions, hopes, beliefs, expectations, and strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results might differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in the accompanying MD&A, our annual information forms, and in the company's annual audited financial statements that are posted on CEDAW. With that, I'll hand the call over to Bill.

Thanks, David. Good afternoon, everyone, and thank you for joining us today. I've consciously kept my prepared remarks succinct because I provided a very extensive update on our year-end call just three weeks ago. As I mentioned then, this can be a rather confusing time in Sangoma's fiscal year for new investors. That's because of the timing of our Q4 results in October, followed so soon afterwards by our Q1 results in November, just a few weeks later. So if there is anyone on today's call that has not joined us before, I would encourage you to please listen to the October 20 recording of our fiscal 2020 results from our website, as that will give you a much fuller picture of Sangoma than you will get purely from my remarks here today. Okay, back to the shorter call for today. I have structured my prepared remarks into three sections. I will start by taking you through our Q1 results. Second, I will share a brief update on Sangoma's strategy. And finally, I will touch on our forward guidance for fiscal 21. You'll note that there's no additional year-to-date section, given we're here to discuss Q1 results. As always, I'll then wrap up with a brief summary and turn the call back over to David for our typical open Q&A session. With that, let's move to Section 1 on Q1. Sales for the quarter ended September 30, where $35.0 million, up 25% from the $28 million in the first quarter of fiscal 20. The increase in sales resulted from the continued growth and compounding of the company's services business, where the recurring revenue was generated, the acquisition of VoIP innovations, all partly offset by the slightly softer demand for one-time product sales. This modest softening in one-time product revenue was mostly due to the ongoing impact of COVID-19 as it impacts demand for these products, which are CapEx type decisions for our customers, and makes it more challenging for Sangoma's channel partners to get physically on site to do installations. More importantly for us is our focus on the continuing growth of our services business, which we have worked so hard to build the past several years. Overall services revenue as a percentage of total sales continues to increase at Sangoma and hit 56% in the first quarter this year. Gross profit for the first fiscal quarter of fiscal 21 was $23.2 million, 33% higher than the $17.5 million realized in the first quarter of last year. Gross margin for the quarter was 66% of revenue, 4% higher than the 62% in the same quarter a year ago. This results from the steady increase in the percentage of revenue from services as well as the positive impact of the VI acquisition on margin. Operating expenses for the first quarter this year were $19.6 million, versus 15.9 million in the same period last year. This was primarily driven by the additional OPEX that came with the acquisition of VI, our more general investment in R&D and marketing and sales to drive growth, all partly offset by COVID-related cost controls. EBITDA was a record $6.7 million in the first quarter, 83% or $3 million above last year, when Sangoma generated $3.7 million in Q1. This level of EBITDA is equivalent to about 19% of sales and as many of you will realize is slightly higher than our expectation for fiscal 21 as you can glean from our guidance for the year. This 19% figure as mentioned is partly the result of COVID related cost containment. So as customer demand continues to recover gradually as we anticipate it should We will begin to carefully open up spending again slowly but surely. This prudent gradual relaxation of the cost controls should bring EBITDA back closer to the range expected in our fiscal 21 guidance to around 17% of revenue. Net interest for the quarter ended September 30th with $0.5 million compared to $0.4 million in the same period last year. This slight increase is due to the additional debt taken on to finance the VI acquisition partly offset by the reduction in interest rates as shared in prior calls through the wise restructuring of our debt using an interest rate swap during fiscal 20. Med income for the first quarter was 2.2 million dollars compared to 0.9 million for the equivalent quarter last year. And for the final portion of my commentary on first quarter results I'd like to briefly touch on a couple of highlights from our balance sheet and cash flow. Let's start with the balance sheet, given there are significant changes there in Q1. Obviously, the biggest change was the result of our equity raise. As you will recall, shortly after fiscal year end in July, we raised the net $75 million from the sale of approximately 35 million shares. This was done in a bought deal by Cormark, Acumen, PI, CIBC, Infor, Beacon and Canaccord Genuity. The offering was oversubscribed and earmarked for possible future acquisitions, debt repayment and general corporate purposes. Accordingly, during Q1, we did indeed repay the operating lines that we'd drawn in April as the COVID outbreak was hitting. Back then, it wasn't quite clear what the impact of the pandemic might be, and whether there would be a liquidity crunch. So we drew on those lines simply to ensure the company was ready for anything. Once it was a bit more clear that the impact on Sangoma was manageable, we repaid the $10 million in full and those two operating lines remained fully available to us at any time. In addition to the more impactful topic of our capital raise, I'd like to now cover briefly two less significant balance sheet items of inventory and receivables. last year during fiscal 20 we undertook a significant supply chain project to consolidate some contract manufacturing as our services business began to dominate over our product segment that project involved moving some manufacturing and warehousing to simplify and reduce costs as i covered in a couple of our quarterly calls together these changes caused some temporary increase in inventory levels as we pre-built buffer stock We explained at the time that we expected this to stabilize around fiscal year end. Well, we exited fiscal 20 with about $12.6 million in inventory, and you now see that in Q1, our level of inventory was down just a bit from that figure at under $12 million, a level that should become fairly consistent over the next few quarters going forward. As I indicated in my Q4 commentary, we've been watching receivables carefully the past couple of quarters because some folks feared AR could become a higher risk for companies generally if customers were unable to pay or perhaps significantly delayed payments due to COVID-19. We have not seen this to any material degree amongst the Sangoma customer base, so that's good. And in fact, overall receivables declined slightly from Q4. This is partly a result of the growing fraction of revenue that comes from services where more customers pay via fairly automatic repeatable methods each month, rather than in our product business where many customers buy on terms. Nevertheless, we remain watchful and continue to maintain a higher AR provision than we would have done pre-pandemic just in case. As of December 31st, we had our receivables provision at about $350,000, and it's now around 600K, just to be careful. And finally, for a few remarks on cash flow. In Q1, we generated a solid adjusted cash flow from operations of $3.9 million, about $1 million above last year's first quarter. This measure of adjusted cash flow excludes the impact of acquisitions, financing, and other non-operating anomalies. For the first quarter, this level of adjusted cash flow was around 60% of EBITDA, a little lower than we average, primarily because our annual tax bill, now approaching $2 million per year with growing profitability, was paid in the quarter. It is quite normal for Sangoma's conversion of EBITDA to operating cash flow to fluctuate somewhat from quarter to quarter, as you've seen historically. And with that cash flow from operations, together with our starting cash position, the equity raise and our repayment of the operating lines, Sangam ended the quarter with almost $94 million on hand, positioning us very well to continue our growth trajectory in fiscal 21. This results in working in capital of $84 million. And of course, we've continued to make our principal and interest payments comfortably meeting all debt covenant ratios. This brings my comments on Q1 financial results to a close. And I'll now move to our section on strategy. In this section today, I plan to cover three topics for you. A short COVID update, a refresher on our customer or market-facing corporate strategy, and finally, a few remarks on M&A. So let's start with the COVID update. While I'd not plan to discuss this today, to be honest, given the lengthy treatment I gave it in our call just three weeks ago, I've actually had emails from two new investors asking me to do so. My compromise is that I will discuss COVID and Sangoma's response in a much abridged version than I did on our last call together, so as not to duplicate things too much. Again, for those of you unable to attend the year-end call just a few weeks back, may I suggest you listen to the replay on our website if you'd like more details on this topic. On that call, I discussed what we've been referring to as the three phases of COVID impact, first on supply chain, then on internal day-to-day operations, and finally on demand. I will not repeat that explanation today. Instead, I will focus solely on the reasons that we believe strongly Sangoma is well positioned to withstand this COVID pandemic and its impact on the global economy. Those reasons involve a lengthy list, one which includes the following key points. We have proven we can operate in a business as normal manner in spite of COVID. We have transitioned to a work from home model ahead of government requirements to do so and have been operating seamlessly since then. We have a long track record of adapting very successfully at Sangoma, whether it be transitioning from a single product company to a full portfolio, from hardware to software, from software to services, or from a domestic company to a global one, Your company is flexible and has the management depth to navigate this one too. We have a very large and diversified customer base. We have a broad portfolio of products that appeal to many different user needs from connectivity to premise-based UC to cloud, especially important these days. An ever-present focus on the customer that enables us to respond quickly with empathy towards our clients. Sangoma's supply chain and our operations team continue to build and ship around the world to fulfill all customer orders, just as we've always done. Ongoing investment in innovation and an ability to reprioritize roadmaps to quickly launch new products, including those in demand during this crisis, such as video meeting services. And last, but certainly not least, our proven financial strength, such as consistently growing our top line over many years. generating over half of our sales in services revenue, which is more insulated from economic shock, very healthy profitability, producing over $6 million in EBITDA these past two quarters, strongly cash flow positive, with over $10 million in adjusted operating cash flow during the two COVID-impacted quarters, and a well-capitalized balance sheet with over $90 million in cash to act on opportunities that we feel are a good strategic fit. For all these reasons, both financial and strategic, we believe strongly that Sangoma is unusually well positioned to weather the ongoing COVID storm. Second, in today's strategy section, I will cover our customer-facing corporate positioning and its competitive differentiation, one that we described using the phrase communications as a service, or CAS, building on the SAS terminology. This is the second call with shareholders in which we've referred to this term, as we seek to introduce the concept to our investors. For us, CAS is an overarching umbrella of cloud communications with a number of applications or individual cloud services under it. At Sangoma, cloud communications does not equal UCAS. Sure, the applications under this umbrella, of course, include UCAS for voice. But CAS also incorporates trunking as a service, or TAS, as well as CPaaS, and video meetings as a service, and collaborations as a service, etc. Sangoma's differentiated strategy is to offer all of these capabilities from a single cloud provider, us, integrated elegantly with one GUI, single sign-on, and a consistent user experience. We don't believe most normal companies want five different tools from five different vendors, such as video meetings from Zoom, or voice from Ring or CPaaS from Twilio or collaboration from Slack, et cetera. Sure, if you're a Fortune 100 company with enormous IT departments capable of integrating five different tools on your own, maybe that's practical. But in our view and that of our customers, it's not practical for most companies. And at Sangoma, we're indeed focused on most companies, not the biggest 100 in the world. This is where Sangoma is headed. We have UCAS, TAS, video meetings as a service, CPAS, fax as a service, et cetera, all under the CAS umbrella. We host these cloud services in our data centers, enabling us to provide monthly subscriptions for customers who prefer a cloud-based service. It's easier for them versus an on-premise model. It costs less, requires less distraction from the core business of running a courier or a florist business. Their software is always up to date. lessening the risks of security breaches and such things. This strategy commenced our rapidly growing services business, which you are now very familiar with and which has proven so successful. In fact, if you look back over the past few years, the trends are actually pretty amazing. In fiscal 18, we were generating about $5 million per quarter in services. In fiscal 19, that grew to about $10 million per quarter. Last year, it had expanded to about $15 million per quarter. And now, in fiscal 21, you see we are hitting almost $20 million per quarter in services revenue. Quite an impressive trend. Finally, I'd like to draw your attention to a modest change we've started in today's MD&A. In the upfront section of that document, the large one entitled Description of the Business, We have now rewritten it to capture the framework of a CAST company. That section had not been updated for some time in an hour view, was now too tilted towards our more mature product portfolio rather than our new or growing services business. For those investors who may be interested, we would encourage you to go through this new section of our MD&A to help familiarize yourself with the CAST concepts. For the final third portion of my remarks on strategy, I'd like to share a few comments on M&A. Many of you will have heard me say that Sangoma employs two approaches to scaling. One is organic growth and the other is prudent acquisitions to complement and accelerate that growth. We use these acquisitions either to get needed technology or get it faster than we'd be able to do in-house or to secure new customer segments or to access new paths to win such customers. Sometimes an acquisition gives us two or all three of those strategic attributes. We plan to continue on this path via our mix of organic growth and M&A while balancing growth and the investments that drive it with a desire for reasonable profitability and the financial stability that provides. As you have seen, we've used a mixture of debt and equity to accomplish this And after each acquisition, we've begun to pay down debt in order to reduce our debt to EBITDA ratio and advance up the next opportunity. This too will continue. As mentioned earlier, Sangoma raised approximately $80 million in our July equity raise, providing us over $75 million of net proceeds. That has left us with over $90 million of cash on our balance sheet at the end of Q1 and has put your company in a very strong position to fund future acquisitions as well as enabling future debt payments and general corporate usage. We are actively engaged in the M&A activity and while I'm not in a position to be able to share additional information with you today, I just wanted to reiterate that we're confident Sangoma will put the money that many of you folks on this call have entrusted us with to very good use. Finally, before I leave my update on strategy, I just wanted to share a bit of information about the escrows and equity lockups associated with the VI acquisition since a few of you have been asking. As we explained at the time of that deal, there was an escrow set up to cover some telecom taxes that Sangoma had identified at the time. All of these back taxes have now been paid and closed off with the U.S. Tax and Regulatory Agency and at zero cost to Sangoma. So the remaining balance of this escrow will be released to the sellers of VI this quarter. Also, the shares that the VI owners received as part of the consideration paid became free trading last month in October. I'm pleased to confirm that all of those shares were sold last week so that these shareholders have no ongoing ownership in Sangoma, removing any concern that some of you had regarding a possible overhang on share price. That concludes my comments on Sangoma's strategy, and I'll move on to forward guidance. On the last call, I shared our guidance for fiscal 21. That was for revenue of between 143 and $147 million, and for EBITDA of between 24 and 26 million. While many companies are not providing forward projections, and the pandemic continues to be an evolving concern for everyone, Sangoma was confident enough in our business to continue issuing guidance. We assessed the expected growth in our services business, the FX rate outlook, trends in Europe, Asia, North America and Cala, likely GDP growth, the COVID-19 pandemic, the ongoing decline of PSTN networks on our product sales. You have now seen our fiscal 21 results for this first quarter. and heard me describe today some color around those results. We are pleased with your company's performance in Q1 this year, and hence we remain comfortable with the guidance for fiscal 21 issued at the time we released fiscal 20 results. And with that, I'd now like to bring my short and prepared remarks to a close with a quick summary. Sangoma has grown from a very small nanocap company with about $10 million in sales, to a strong growing business with $140 million in revenue, a level we fully expect to continue adding on to, and the market cap of over $300 million. We have demonstrated proven top-line growth over an extended period, solid and expanding EBITDA, an increase in our services business where the recurring revenue is generated to over 50% of sales, positive cash flow, and an ability to cope with COVID headwinds. All in all, our recent acquisitions are bearing fruit as expected. Share price has been strengthening, albeit more slowly than I would like. We are cashed up on our balance sheet, and we are comfortable enough to provide guidance in spite of one of the worst economic disasters in our lives. We feel we are well positioned for a number of conceivable scenarios, including possible future acquisitions, and we plan to put the money that you invested in Sangoma to very good use during fiscal 21. Finally, before I close off my remarks, just a reminder that we have our annual general meeting coming up in a few weeks. It will take place on December 17th, but this year, in order to ensure the safety of our shareholders and the Sangoma team, we have decided to have a hybrid meeting. We will hold a meeting in our boardroom as we have in the past. However, to comply with COVID requirements and health department recommendations, This year, we will also broadcast it virtually in parallel at the same time. We simply do not have space here in the Sangoma offices or boardroom to provide adequate social distancing if many of you were to attend in person. We will be issuing the circular shortly with all of the details, but I just wanted to take a moment on this quarterly call to request two things when we're all together. First, that you please vote by proxy in advance this year. And second, to request that you also please join our AGM remotely, not in person, just for everyone's safety. You will be able to dial in so that you can listen to the formal matters and then participate in our regular Q&A afterwards. But you won't be able to vote virtually by phone in real time. And that's the request that you vote by proxy ahead of time. We hope you understand. We apologize for the inconvenience this year. since we always like seeing shareholders at our AGMs, which were getting larger and more crowded over recent years. But this is the prudent approach during the second wave of COVID. With that, I'll turn the call back over to David for questions.