Sangoma Technologies Corporation

Thank you for standing by. This is the conference operator. Welcome to the Sangoma Technologies Q2 fiscal year 2022 investor conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. I would now like to turn the conference over to David Moore, Chief Financial Officer. Please go ahead, Mr. Moore.

Thank you, operator. Good morning, everyone, and welcome to Sangoma's second investor call of our fiscal year 2022. We're recording the call and we'll make it available on our website for anyone who is unable to join us live. I'm here today with Bill Wignall, Sangoma's President and Chief Executive Officer, and Larry Stock, Chief Corporate Officer, to take you through the results of the second quarter of our fiscal year, which started on October of 21. We will discuss the press release that was distributed yesterday, together with the company's unaudited interim Q2 financial statements and MD&A, which are available both on CDAR and on our website. As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS, and during the call we may refer to a couple of terms such as operating income, adjusted EBITDA, and adjusted cash flow that are not IFRS measures but which are defined in our MD&A. Also, please note that unless otherwise stated, all reference to dollars are now to the U.S. dollar as we started reporting U.S. dollars for fiscal 22 and beyond. This includes all prior period comparisons which have been converted to U.S. dollars as described in note two of our financial statements and in our press release. Before we start, I'd like to remind you that the statements made during the course of this call that are not purely historical are forward-looking statements regarding the company or management's intentions, hopes, beliefs, expectations, and strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results might differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in the accompanying MD&A, our annual information form, and in the company's annual audited financial statements posted on CEDA. With that, I'll hand the call over to Bill.

Thanks, David. Good morning, everyone, and thank you for joining us today. I have structured my prepared remarks for this call into four sections. I will first focus on Q2, then move on to year-to-date results. In my third section, I will give a brief update on strategy. And finally, I will touch on our forward guidance for fiscal 22. As always, I'll then wrap up with a brief summary and turn the call back over to David for our typical open Q&A session. With that, let's move on to the first section covering our Q2 results. Sales for the quarter ended December 31st were a record $54.24 million, more than double the $27.09 million in the second quarter of fiscal 21. This increase in sales was driven by the Star to Star acquisition, as well as our existing services business continuing to grow and compound together with an uptick in our product sales. Sequentially, our Q2 revenue grew by approximately 3% from Q1. And our services revenue continues to expand very well right on strategy. In Q2, that services revenue came in at over $37 million. So while total revenue doubled, as you've just heard, or stated another way, grew about 100%, our services revenue is up by 140% year-over-year and represented over 70% of total sales for the quarter, consistent with our expectations for fiscal 22. As I did during one of our quarterly calls last year, I'd like to just take a step back in time for a moment and examine the longer-term trend in services revenue at Sangoma. In fiscal 18, we had services revenue of under $5 million per quarter, typically. In fiscal 19, that had grown to something like $10 million per quarter. By the year following, in fiscal 20, we were averaging around $15 million most quarters. Last year, Sangoma was about $20 million per quarter. And finally, this quarter, we're well over $37 million, hitting greater over $30 million, hitting greater than $37 million in Q2. We think this is a pretty impressive long-term trend and one that has been achieved without any of the more typical significant drops in total revenue as most other companies navigate the transition to recurring revenue normally encounter. Solid, consistent strengthening that is a testament to our strategy and vision for the company. Gross profit for the second fiscal quarter of 22 was $39.4 million, also more than double that of 17.9 million in Q2 of last year. Gross margin for the quarter was over 72% of revenue, up from 66% in the same quarter a year ago. This is driven principally by the steady increase in the percentage of revenue that comes from services, including the positive contribution from star to star on this metric. These levels of gross margin, amongst the very highest in our industry, are even more satisfying given that our cost of goods continues to feel pressure from the global supply chain disruptions. The Sangoma team continues to do a remarkable job in managing these challenging circumstances, and I will touch on this a bit more in my comments on inventory coming up. Operating expenses for the second quarter this year were $40.24 million versus $15.13 million in the same period last year. The higher operating expenses were primarily driven by the cost that came with the addition of Star to Star, the associated spending, and the non-cash intangible asset amortization arising from the acquisition. As I've done in prior quarters, I will offer some additional insight on the three individual OpEx buckets under IFRS, namely sales and marketing, R&D, and G&A. Regarding sales and marketing, you will notice the portion of our OpEx that is in the sales and marketing category has increased in the second quarter of this year versus Q2 of the prior year. This was primarily the result of the addition of the StartStar sales team the channel partner commissions, the incremental marketing staff, and the accompanying marketing program spent. You will notice that percentage of revenue spent on marketing and sales is up this fiscal year for those same reasons. With respect to R&D, the increase in the second quarter of fiscal 22 from the same quarter in the prior year is largely due to the addition of the Star to Star engineering teams and our continued investment in innovation. This follows our general approach to OPEX spending. As measured in absolute dollars, Sangoma continues to invest more money every year into marketing and sales for customer acquisition and into R&D for product development than we did in the prior year. But we seek to grow that spending in such a way that in general and over the long term, the percentage of revenue spent in these areas can gradually tick downwards as a fraction of revenue, and thus the operating leverage. You see that trend in R&D spend this quarter. And finally, the G&A expense also shows an increase from the prior year, driven in large part by the intangible amortization associated with the acquisition, as mentioned. As a reminder, this intangible amortization is a non-cash expense, so it does not affect our adjusted EBITDA or cash flow, but of course does appear as an expense in our income statements. Adjusted EBITDA was a record in the second quarter at $10.43 million, exceeding $10 million for the second consecutive quarter, and more than double the $5.14 million from the second quarter of the previous fiscal year. This level of adjusted EBITDA is equivalent to about 19% of sales and is in line with our expectation for this point in fiscal 22. Net income for the second quarter was negative $2.48 million, primarily the result of the non-cash intangible asset amortization following the Star-to-Star acquisition and the one-time expenses associated with the listing on the NASDAQ and TSX exchanges. That brings my commentary on our Q2E income statement to a close, and I'd now like to cover a few highlights from our balance sheet and cash flow. As you will see, our overall balance sheet remains very strong. Our cash balance at the end of the second quarter was $16.95 million, which is about $2 million lower than at September 30. This was driven primarily by an increase in accounts receivable and a buildup of inventory ahead of the Chinese New Year and to deal with the supply chain pressure. Trade receivables increased finishing the second quarter at $15.98 million as compared to the $14.07 million at September 30. The increase this quarter was in part due to the fact that December is often a month when some customers wish to use up their budget before their year end. This can lead to us getting some orders quite late in the quarter as such customers have naturally not yet been paid by December 31st. This is not unusual, not a problem for us, and as always, we continue to monitor receivables on an ongoing basis. Inventories were $14.34 million on December 31st, $1.65 million then at September 30th, reflecting the current supply chain pressure. This includes several factors that many, many companies around the world are contending with these things, such as component supply shortages, longer lead times and sometimes higher prices for such parts, extended manufacturing periods at our contract manufacturers, delays in shipping, and some increased shipping costs. Sangoma expects such challenges to continue for the next few quarters until the supply chain stabilizes. More importantly, the positive manner in which our supply chain operations and logistics teams have been dealing with such challenges has been just excellent, enabling us to ship most all customer orders and, in fact, at times becoming a competitive advantage when Sangoma had product in stock that our competitors did not. From a cash flow perspective during the second quarter, we generated adjusted cash flow from operations of $3.90 million. This measure of adjusted cash flow excludes the impact of acquisitions, financing, and other non-operating anomalies. I will touch on cash flow a bit more in my year-to-date remarks coming up next. That brings my comments on our Q2 financial results to a close, so let's now turn to those year-to-date results. Sales for the six months of fiscal 22 were $106.71 million, double that of the $53.3 million in the same period of fiscal 21. The increase in sales was due to the same factors I covered in Q1, namely the star-to-star acquisition, the continued growth and compounding of the company's services business, and an uptick in the product business. As a percentage of total sales, our services revenue increased is 70% for the first six months of fiscal 22, a solid increase from the 56% in the same period last year. Gross profit for the six months of 2022 was $77.26 million, more than double the $35.24 million realized last year. Gross margin was over 72% of sales on a year-to-date basis, up from 66% in the same period of 21. It's especially gratifying during a much tighter global supply chain to see Sangoma at these levels of gross margin, a level at or near the very top of our industry. Operating expense for the first six months of fiscal 22 was $78.95 million as compared to $29.9 million during the same period last year. This was expected with the incremental expense associated with the addition of Star to Star and the company's continuing investments to drive growth. EBITDA was $20.52 million for the year so far, and is more than double the $10.09 million of the same period last year. This is equivalent to about 19% of sales for the first six months, which was similar to the prior year. Finally, year-to-date net income is negative $4.78 million, which, as noted earlier, is primarily the result of the non-cash intangible asset amortization following the start of star acquisition. And that brings my commentary on our year-to-date income statement to a close. We've already covered the balance sheet in my Q2 remarks, so I'd like to just touch briefly on cash flow. For the first six months of fiscal 22, we have generated adjusted cash flow of just over $9 million compared to just over 7.8 in the same year-to-date period of the prior year. This figure is always lower in the first half of our fiscal year, with cash flow expected to be materially higher in the second half, of course, and is a bit lower year-to-date than it would otherwise be as a result of our spending in response to the supply chain pressures. Finally, as was the case with prior quarters, we are, of course, comfortably within the debt covenants and our overall balance sheet remains strong. This brings my comments on our fiscal results to a close. Let's now move to our third section today on strategy. I will touch on three things in this section, competitive differentiation and positioning first, then M&A, and finally, investor relations work this quarter including Sangoma's graduation from the Venture Exchange. So let's start with competitive differentiation. The cloud communication space, or what is sometimes just called UCAS, a significant oversimplification in our view, is competitive. It's this way precisely because it's exciting, transforming a rather old-stage telecom industry, growing well with a huge total addressable market. In that competitive space, it's important for any player, especially the key players in the upper echelon like Sangoma, to have a competitive distinction. We are clear about what makes us stand out, and we work hard to ensure our customer-facing teams communicate this consistently to customers, prospects, and partners. You can imagine that in a technically advanced specialty, that can sometimes be challenging, but I think we're quite good at this. Those of you who have joined us on other calls may have heard me talk about the first three, the most important three, unique selling points. They are, Sangoma has the widest set of cloud communication services in the industry. This has been a very conscious goal for some time, and the start of our acquisition has helped us round out this broad set. We now offer UCAS, trunking as a service, contact center as a service, video meetings as a service, collaboration as a service, CPaaS, desktop as a service, access controllers, et cetera. Sangoma fundamentally believes that most customers do not want to go to one company for video meetings, another supplier for contact center, another vendor for voice, another for collaboration, et cetera. They prefer a single solution from one vendor that they trust one bill each month, all nicely integrated together. Secondly, Sangoma is the only real cloud communication player with an equally strong on-premise offering. We know that most companies around the globe still use on-premise communications. We wish to be able to tell the world that we want you as a customer, whether you're ready for all cloud right now, still need on-prem, or prefer a hybrid solution. It is not uncommon for a company with multiple offices to start some locations in the cloud and then do the others a bit later. For instance, they might say our IT competency is strongest at our corporate headquarters. So please upgrade this location to cloud first. We'll get comfortable with that and then do our other locations. And we also hear the opposite. Our headquarters location is not our testing ground, so go upgrade all of our satellite offices this year, get us comfortable with that, and then we'll do our headquarters next year. And our third critical unique selling point is our suite of cloud services is complemented by our own set of built in-house products that round out the offering and allow Sangoma to offer the industry's only true full end-to-end solutions. That means we don't need to rely upon some third-party vendor for phones, or if you want a session border controller to secure your voice network, like you would use a firewall to secure your data network, we don't send you to someone else. We do it all, and you as a customer have one number to call, one throat to choke, a common and somewhat unpleasant phrase that often one hears for such capabilities. And not only are these three things so critical to Sangoma's success in getting ourselves into the top tier of a growing cloud communications industry and driving your SaaS and recurring revenue model, they are also resonating with customers. As an example, we recently put a customer onto our CCaaS or contact center as a service product. Sangoma is no longer just a UCaaS company. This customer, a last mile logistics provider, had previously used a competitor's solution and switched to our CCAS service for its enhanced capabilities. Taking upwards of 90,000 calls per month, the customer was able to realize significant savings in labor and license costs while getting a fully integrated solution. Or an automotive dealership company with dozens of locations in Texas and surrounding states. This was an example of a company that was originally an on-premise customer for us and migrated their hundreds of seats to our cloud offerings in a simple, elegant upgrade. The second part of my strategy section today is a very short update on M&A. We are starting to get more frequent questions from investors these days that all go something like, what or when is your next acquisition? I know that you know, I'm unable to be very precise about those kinds of topics until we have something quite specific to announce. Suffice to say for today that given the integration of Star to Star has gone well, and we are most of the way through that, we are now once again very active working on prospects for the next acquisition. There are absolutely good opportunities in front of us. Sangoma is well respected as a proven buyer who does what we say we will do, and we are financially well positioned to act. I'm afraid I can't say a whole lot more on this today, as you'll understand, and I fully realize that's not wholly satisfying. Please just stay tuned. And my third part of today's strategy update is on our investor relations activity. I'm not completely sure this is the optimal title for what I wanted to share in this section, but I really just wanted to speak for a moment about the activities your company is taking to raise our profile in the public equities market given our really solid operating and financial performance. Your board of directors continues to believe strongly that our stock is very dramatically undervalued, a viewpoint that I know most of you will undoubtedly share, even more so given what has happened with share price the past several months. And while Sangoma may have fared better than many of our peers, that's no consolation. So we've been actively working on multiple initiatives in this area and I'd like to take you through two of them. First, as previously announced, of course, we successfully graduated from the Venture Exchange to the Toronto Stock Exchange. We also announced our cross-listing to NASDAQ in December, trading under the symbol S-A-N-G or SANG. This is obviously a major milestone for our company, a testament to our continued progress, and an important step in our growth. And just a quick reminder of the reverse stock split we also undertook in Q2 using a 7 to 1 consolidation ratio. Secondly, we've been focused on increasing our research coverage. I'm pleased to point out that over the past few months, we've added coverage from three excellent analysts at each of TD, BMO, and most recently Canaccord just this week. Really good progress. So while the cloud communication sector has seen share prices decline sharply from their highs of one year ago, and of course, Angoma is not fully immune to this trend in spite of our share price somewhat outperforming our peers, we remain optimistic that completing major steps such as these should help trading volumes and our share price as well. That concludes my comments on strategy, and I'll now move on to my fourth and final section today, about guidance for fiscal 22. On the last call at the end of our first quarter, I reiterated our fiscal 22 guidance. At the time, we reconfirmed expected revenue of between 209 and 213 million US dollars and adjusted EBITDA in a range of 41 to 43 million. With our performance through two quarters, we have now increased guidance for this year, as you may have seen yesterday. We now expect revenue to be between 215 and $219 million for fiscal 22 and adjusted EBITDA of 42 to 43 million. This increase in guidance factors in many considerations as outlined more fully in our press release, but includes assumptions regarding revenue continuing along on the trends we've experienced year to date, demand and subscriber growth for our products and services, no additional material impact on our supply chain, and the increased costs associated with our NASDAQ listing, such as much higher D&O insurance premiums. With that, I'd now like to bring my prepared remarks to a close with a quick summary. Your team here continues to do a remarkable job across the company, which is evidenced by another solid quarter. We have demonstrated proven top-line growth over an extended period, solid and expanding EBITDA, a consistent increase in our services business where the recurring revenue is generated, the successful integration of our largest acquisition to date, and an adept handling of the global supply chain crisis, a challenge that has snookered many, many other companies. An exceptional job all around while continuing to exceed our customers' expectations during uncertain times and on a competitive playing field. So a special thank you to everyone at Sangoma for all your hard work. I'd also like to highlight our capital markets maturation, in addition to delivering solid operational and corporate development success. Our listings with the premier exchanges in the market, namely the TSX and NASDAQ, along with expanding research coverage from three excellent banks recently, bode well for Sangoma as we seek to get our story and our track record out to more investors in Canada and the U.S. Our long-term strategy of transforming your company from a sneaky little hardware company with one product, no recurring revenue, and a nano-cap stock into a cloud communications powerhouse with a SaaS business model is remarkable for both its boldness and its success. Sangoma is very well positioned to take advantage of a growing industry and the macro trend of moving to the cloud. Finally, throughout my prepared remarks, both today and on prior calls, You've heard me emphasize growth. Sangoma utilizes what we call a total growth model, which I have described as a combination of organic growth with prudent, disciplined M&A activity. We believe this strategy of organic and growth via acquisition serves us particularly well in today's consolidating industry. These recent achievements have me excited about the future of Sangoma and the path we are on as a company. I'd like to thank you, our shareholders, for your continued support. And with that, I'll turn the call back over to David for questions.