Sangoma Technologies Corporation

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

Thank you, operator. Hello, everyone, and welcome to Sangoma's fourth quarter and year-end fiscal 22 investor call. We're recording the call and we'll make it available on our website for anyone who is unable to join us live. I'm here today with Bill Wignall, Sangoma's president and chief executive officer, Larry Stock, chief corporate officer, and Samantha Reburn, general counsel, to take you through the results of the fourth quarter, which ended on June 30th, 2022, and as well as the full fiscal year. We will discuss the press release that was distributed yesterday, together with the company's audited financial statements and MD&A, which are available on CEDAR, EDGAR, and on our website. As a reminder, Sangoma reports under International Financial Reporting Standards, IFRS, and during the call, we may refer to terms such as adjusted operating income, adjusted EBITDA, and adjusted cash flow that are not IFRS measures but which are defined in our MD&A. Also, please note that unless otherwise stated, all references to dollars are to the U.S. dollar, as we started reporting U.S. dollars at the beginning of fiscal 22 and will continue to do so. This includes all prior period comparisons which have been converted to U.S. dollars as described in Note 2 of our financial statements. Before we start, I'd like to remind you that the statements made during the course of this call that are not purely historical are forward-looking statements regarding the company's or management's intentions, hopes, beliefs, expectations, and strategies for the future. Because such statements deal with future events, they're subject to various risks and uncertainties, and actual results might differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in the accompanying MD&A, our annual information form, and in the company's annual audited financial statements posted on CEDAW. With that, I'll hand the call over to Bill.

Thanks, David. Good morning, everyone, and thank you for joining us today. I have structured my prepared remarks for this call into five sections. I will first discuss our fourth quarter and then move on to cover our full year results. In my third section, I will share with you an update on the recent Net Fortress acquisition. And on that topic, just a quick reminder that since the acquisition closed on March 28th, this is the first full quarter in which we see the impact of the acquisition on our income statement. Fourth, I will provide a year-end look back on your company and our progress this year. And finally, I will review forward guidance for fiscal 23. As always, we'll then wrap up with a brief summary and turn the call back over to David for our typical open Q&A session. But just before I begin today, I simply wanted to start with an acknowledgement. The team here at Sangoma has worked really hard over many years to build a relationship with the street. A relationship that I hope you'd agree involves credibility, transparency, and a clean company. So I just wanted to acknowledge that this is the first quarter in many years where there is admittedly a bit of messiness with the goodwill impairment and accounting reclassification. Two points that I'll address head on in my comments today to ensure you understand them and are not unduly concerned. I guess I just wanted to declare that upfront and face it straight on as I think many of you would have come to expect from us. So let's get started with our Q4 results. Patrick Corbett- sales for the fourth quarter or a record $66.3 million or 62.5 million following the accounting reclassification from the first three quarters that many of you will have noted in our press release. Patrick Corbett- As always, we attempted to be quite clear in our mdna with describing this accounting reclassification, but it is indeed a little confusing so while this reclassification has no impact on adjusted EBITDA. no impact on prior year's results and reflects no change in the underlying operation of our business, I'd like to just take a moment now to explain it to ensure everyone was able to follow. Please bear with me for a minute as I walk you through it. During the first three quarters of fiscal 22, we classified certain amounts from legacy Star to Star customer contracts as revenue in accordance with the company's accounting policies. During the fourth quarter, we determined that due to contractual differences, in the former Star to Star contracts, certain amounts relating to such contracts should be reclassified from gross to net revenue. This resulted in a total reduction in revenue of approximately $3.79 million when summed across the first three quarters of fiscal 22. Because this reclassification did not have a material impact on revenue in the first three quarters of the year, we recorded the entire reclassification in the fourth quarter and here's where it can get a little bit confusing if you notice the use of both the 3.79 million dollar figure and the 5.5 million dollar figure the 3.79 million is the amount of the reclassification from q1 to q3 and the 5.5 million is the amount the reclassification would have been for all four quarters that is the 3.79 plus 1.8 million for q4 that's why we explained that q4 revenue was 66.3 million dollars without the reclassification from q1 to q2 which is the 62.5 million plus the 3.79 it's also why without the reclassification at all our q4 revenue would have come in at about 68 million dollars which is the 62.5 plus the 5.5 million And finally, that's why we explained that the effect of the reclassification was to reduce our expected fourth quarter revenue of $68 million by approximately $5.5 million, where that expected value came from our guidance on May 12th, which contained full-year guidance and our Q3 year-to-date results. As we report fiscal 23 results and compare back to fiscal 22, we will use these reclassified revenue numbers, which are in a simple table for you in our MD&A. And finally, before we move on and return to results, just a reminder that this reclassification has no impact on EBITDA or earnings because of the offsetting expense that we also removed from marketing and sales, which I'll touch on shortly in the OpEx section of my comments. Okay, so with that rather long explanation, now back to the Q4 results themselves. Using the $62.5 million in reported sales, our revenue was up 25% from the fourth quarter of fiscal 21. Or looked at another way, referring you to the table we provided in the MD&A, Q4 revenue without the impact of the reclassification was $66.3 million, a 32% increase year over year. The increase in sales was primarily driven by the acquisition of Net Fortress, the continued growth and compounding in our existing services business, and by an uptick in our product sales. Our recurring revenue through our services business continues to be our strategic focus, and we've seen significant growth year over year. In Q4, our services revenue came in at approximately $45 million this year, a 29% increase from the $35 million from the same quarter last year. This $45 million represents 72% of total sales for the quarter. As discussed on previous calls, our long-term trend of strengthening services revenue from under $5 million per quarter in fiscal 18 to about $45 million this past quarter has truly been a milestone achievement in your company, analogous to going from what would be $20 million annually up to $180 million per year in services. Gross profit for the fourth quarter was $40.7 million, up 13% from the $35.8 million in Q4 of last year. Gross margin for the quarter was approximately 65% of revenue as reported, or using the figures from the table in the MD&A updated for the reclassification, would have been 67%. This gross margin is slightly lower than the same quarter last year due to the impact of the revenue reclassification, the global supply chain pressures, and the slightly lower average margin from the managed services part of the net fortress portfolio. Operating expenses for the fourth quarter this year were $41.9 million versus $37.8 million in the same period last year. The higher operating expenses were primarily driven by the cost that came with the addition of Net Fortress. As I've done in recent quarters, I will offer some additional insight on the three individual OPEX buckets, namely sales and marketing, R&D, and G&A. Let's start with sales and marketing. You'll notice that sales and marketing actually shows lower than the prior year, but that's solely due to the OPEX that came out of our expenses as the offset to the revenue reclassification I covered earlier. Adding that back, for comparative purposes, sales and marketing was $15.6 million, representing a $3.5 million increase, primarily the result of the addition of the Net Fortress sales and marketing staff, the channel partner commissions, and the accompanying marketing program spend. With respect to R&D, the increase in the fourth quarter of fiscal 22 from the same quarter in the prior year is largely due to the addition of the Net Fortress engineering teams and their continued investment in innovation. This follows our general approach to OPEC spending. As measured in absolute dollars, Sangoma continues to invest more money every year into R&D for product development than we spent in the prior year, but we closely control that spending as a percentage of revenue. And finally, the G&A expense also shows an increase year over year. which, as in recent quarters, was driven primarily by the addition of the net fortress and min groups, the non-cash amortization of the intangible assets, and the increased cost of compliance associated with the TSX uplisting and the NASDAQ cross-listing. Adjusted EBITDA was a record in the fourth quarter at $11.1 million, an increase from the $9.8 million from the fourth quarter of the previous fiscal year, and exceeding $10 million for the fourth consecutive quarter. This level of adjusted EBITDA is equivalent to about 18% of sales. Our continued attention to generating meaningful and leading EBITDA margins as our business continues to grow, combined with the net fortress cost restructuring were important factors. Net loss for the fourth quarter was $99.3 million, obviously up a lot from the prior year due to the significant goodwill impairment, which I'm sure you will have noticed. This impairment resulted primarily from the substantial and rapid decline in our share price and market cap during the latter months of fiscal 22. While virtually all other companies and our industry sector have experienced similar and in most cases even sharper declines, that is of no consolation. We are extremely disappointed to see our stock price where it is today. And believe me, you have all 750 plus staff, as well as our board of directors, focusing intensely on the tasks at hand to reverse the recent share price trends. Trends that are not immune to the factors I'm sure you all see, such as economic uncertainty, inflation, higher interest rates, risk of recession, etc. Without getting too technical here in explaining the impairment, IFRS requires that we undertake an annual assessment of potential impairment to goodwill. That assessment is a prescriptive process which considers the recoverable amount to be the higher of the fair value, less costs to sell, and value in use. When we perform the valuation of the recoverable amount, it was less than the carrying value as of June 30 by $91.7 million, again driven mostly by the decline in share price. Accordingly, we recorded a non-cash write-down of goodwill by that amount, bringing the carrying value down to the recoverable amount, and that's why the net loss was so unusual for Q4. That brings my commentary on our Q4 income statement to a close, so let's turn our attention to the full year results, and I'll then touch on some balance sheet and cash flow items. Mayor Mrakas, sales for the fiscal year 22 or a record $224.4 million up 71% from the 131.4 million in fiscal 21. Mayor Mrakas, Please allow me a moment to explain our fiscal 22 sales versus guidance realizing that such guidance was provided prior to the accounting reclassification which I described in details earlier. As you may recall, our guidance for annual revenue was 230 to 232 million for fiscal 22. If one considers that revenue as reported was 224.4 million and adds back the effect of the reclassification at $5.5 million for the year, given our guidance was provided on that basis, you see that our comparative revenue for fiscal 22 would have been almost exactly $230 million on guidance, albeit at the low end of that range. The 71% increase year over year was due to a number of factors, including the continued growth and compounding of the company's services business, the inclusion of Star to Star for the full year, the net fortress acquisition, and an uptick in the product business. As a percentage of total sales, our services revenue is 71% for the year, a solid increase from 62% in the same period last year and 50% in fiscal 2020, a trend we are proud of as a team and in line with our overall strategy. Gross profit for the year was $156.9 million, much higher than the $89.5 million realized last year. Gross margin was approximately 70% of sales, up from the 68% in the same period of 21, especially gratifying given the global supply chain has been so strained throughout the year, as we've discussed on prior calls. Operating expense for the year was $162.8 million compared to $83.4 million last year. The increase was mainly due to the incremental expense associated with having star to star for the full year in fiscal 22, the addition of net fortress and the increased amortization outlined earlier. EBITDA is $42.1 million for the year, up 67% from the 25.2 million last year and 162% higher than the 16 million in fiscal 20. This is equivalent to about 19% of sales for the year and is in line with our EBITDA guidance from May. That brings my commentary on our income statement to a close, and so I'd now like to cover just a few highlights from our balance sheet and cash flow, as I promised. Our cash balance at the year end was $12.7 million, down from the prior year as we funded a portion of the net fortress acquisition with cash, made prudent purchases of inventory to manage the supply chain issues, and continued repaying debt. Both trade receivables and inventory have increased somewhat over the prior year, with AR expanding from just under $15 million last year to just under $17 million this year, and inventory growing from just under $12 million to just under $17 million, all for the reasons we've discussed previously. For fiscal 22, we've generated adjusted cash flow of $25.7 million, This represents an increase from the prior year of over 3 million. In thinking about the adjusted cash flow from operations, it's important to look at some of the major components. For example, we've needed to use working capital to respond to the global supply chain pressures, to fund receivables as our sales have grown, to draw down deferred revenue somewhat as we move more and more from a product company to a SaaS model, such that on-premise maintenance gradually declines and gets replaced with cloud MRR. We've increased modestly our development cost investments and had to pay higher taxes. As you've heard me say earlier, we expect the supply chain pressures to continue for some time, but we fully expect to manage through them as successfully as we've been doing in order to continue meeting our customers' expectations. Finally, as was the case with prior quarters, our overall balance sheet remains strong and we are, of course, comfortably within all debt covenants. That brings my comments on our full year financial results to a close. Let's now move to our third section today, a quick update on the Net Fortress acquisition. As most of you on this call will know, Net Fortress represents Sangoma's 11th acquisition in 11 years. As we noted when we announced the acquisition, it's an exciting transaction for us because it further accelerates Sangoma into the upper echelon of SaaS communication providers, and it extends our industry-leading suite of cloud services with new MSP capabilities, thereby delivering even more one-stop shopping for our customers and providing larger share of wallet for Sangoma. All at a time when we're hearing more clients seeking more of the communications they need, from fewer trusted vendors. I remain very pleased with how the companies are coming together as we continue to integrate the two businesses. In some ways, I feel like a broken record in that most all our acquisitions follow a similar pattern, revealing a successful integration. Much like with Star to Star that I spoke about last year around this time, the Sangoma and Net Fortress teams are working well to bring the two companies together. As I shared with you last quarter, we focused our integration efforts on four main areas. Customers and channel, product, the integration of the organization, and synergies. I'm pleased to provide you with an update on each of those four today so you can see how far we've come in a short time. The integration of customers has progressed nicely through our fourth quarter and is nearing completion. with a relentless focus on delivering excellent service and taking great care of our customers. I've now personally spoken to many of the larger Net Fortress customers myself, who are excited by the broader product suite and by the financial stability that Syngoma brings to the combined company. Senior leadership in both sales teams are now getting exposure to the other's customers, and at our recent sales kickoff, one of the main themes was getting the entire sales organization to cross-sell so that everyone is capable of selling the full portfolio. We are also nearing completion on channel integration as well so that both sets of channel partners can also access the full suite of combined products. Next, regarding product integration, as I highlighted last quarter, one of the first steps in the process was for us to explain the complementary products now available to each prior customer base, channel, and internal sales team. As you've just heard me say, that is nearing completion. So we've now begun work on the core part of integrating the product portfolios themselves. For example, Net Fortress did not have a video meetings as a service product, and instead they resold Zoom. In the first quarter or so after closing the acquisition, we have already successfully integrated our video meetings product called Sangoma Meet into the Net Portrait Suite and replaced Zoom. We are also already partway through replacing their soft clients for both mobile and desktop with Sangoma's versions, so we are all using the same end user facing applications. And finally, within the next few months, we will have integrated our collaboration as a service product as well. The other key early product work is on network planning as we start thinking about how to best bring the Sangoma Network and Net Fortress Network more together. This is all the data centers where the SaaS software is hosted, all the switching and routing, all of the databases, all the security, all the traffic handling. I mentioned on our Q3 call that at that last point, We had begun the work on traffic engineering, and I'm pleased to confirm that we've now already begun saving traffic costs as we've started integrating the networks and traffic handling with more to come. And now for organization alignment and integrating the Net Fortress team into Sangoma. We have already made significant progress on bringing the people together. As mentioned last quarter, our general approach at Sangoma has always been to gradually integrate the acquired businesses into our broader company, rather than have it continue as a standalone operating entity. And that's exactly how this is happening this time as well. We've already integrated most of the functional groups from Net Fortress into their respective departments at Syngoma, all in just a few short months. That includes finance, legal, HR, marketing, product management, engineering, our network group, operations, et cetera. And the sales team will integrate during our fiscal Q2. Finally, in the last part of my Net Fortress update, I want to touch on synergies. Some of you may recall that when we announced the acquisition, we explained that we expected about $4 million US dollars in annualized cost savings. These savings are coming from the areas we outlined when we announced that acquisition, namely efficiencies, removing duplication in staffing, consolidating traffic and data centers, eliminating redundant spending on things like marketing programs, audits, insurance, et cetera. That integration is sufficiently far along with the restructuring of duplicate costs well underway, but I'm pleased to confirm we now know with certainty that we will at least hit our $4 million target for synergies and likely exceed it, probably getting to $5 million in annual savings by the time the integration is completed in the next few months. That brings my Net Fortress update to a close for today, and I'll now turn to my fiscal 22 year in review. Each year at this time, I provide a section where we step back a bit from financial results and discuss what's been happening operationally and strategically in your company over the past year. To do so, today I'm going to touch on your company's competitive differentiation in the market, then on a set of the top five highlights from fiscal 22, and finally the one biggest disappointment, being candid as we have always sought to be. Okay, let's start with Sangoma's strategy and positioning in the market for competitive differentiation. As I've highlighted on previous calls, the cloud communication space is competitive and is seeing consolidation. For a company to remain a top player in this sector, one needs to have clear competitive distinction and know what you stand for. At Sangoma, we are very deliberate about what makes Sangoma stand out, and we work hard to ensure our customer-facing teams communicate this consistently to customers, prospects, and channel partners. We describe our competitive differentiation in three clear, concise points. First, we have the widest set of cloud communication services in the industry, from UCAS, to trunking as a service, to contact center as a service, to video meetings as a service, collaboration as a service, to CTAS, DAS, access control as a service, and now including MSP services, such as managed security, managed access, and managed SD-WAN. Nobody else even comes close. Sangoma increasingly believes that customers want an integrated buying experience or one-stop shopping. Most customers do not want to buy five different cloud services from five different vendors, likely requiring them to evaluate at least 10 different products or suppliers, negotiate five different contracts, have five different tech support processes to follow, receive five different invoices each month, and then have to figure out how to make those five different products talk to each other. Second, our ability to offer multiple deployment options from pure cloud to on-premise to hybrid solutions. Sangoma is arguably the only significant communications company that can say this. There are no large on-prem companies that have truly navigated this transition successfully, and there are literally no large cloud communications companies that offer an on-prem solution. At Sangoma, we just want the customer. And if they're ready for full cloud now, that's great. But if not, we still want them and we'll be there for them when they're ready for cloud in the near future. And third, we make the entire product portfolio, complementing our cloud services with our own set of products, such as desk phones, session border controllers, headsets, and their own soft switches. Doing so allows us to make these products do things our competitors cannot when they simply buy parts of their solution from other third parties. It enables us to offer a true one throat to choke commitment, or stated more pleasantly these days, one hand to shake. Contributes to network uptime performance. After all, who knows the technology better than the company that developed it? Helps us navigate challenging supply chains, especially important during the last year or two. and delivers better margins, because if you make the desk phone, you can do so at much lower costs than our competitors buy their phones from a third-party supplier, especially important if giving it away with a three-year subscription contract. Next, I said I'd cover a top five highlights list from fiscal 22, so here we go. The first highlight is one that's not glamorous, I realize, but it remains as important now as it was five years ago, consistency. Sangoma continued its trend of growth with profitability, growing 71% from $131 million to $224 million, while delivering over $40 million in adjusted EBITDA for the first time. Number two is the acquisition of Net Fortress. The idea of combining traditional MSP capabilities with over-the-top cloud services is a fairly new concept, one that few UCaaS companies have embraced and one that we believe will be a lucrative model for us, securing a larger share of wallet and ARPU while being much appreciated by our customers and channel partners. It is our existing strategy that included the widest set of cloud communication services that made the acquisition of Net Fortress such a good fit specifically for Sangoma as we further expanded that approach with our new MSP offerings. The next highlight on my list is the uplisting to the TSX Big Board and the cross-listing to NASDAQ, where we admittedly have more work to do to increase trading volumes in the U.S. Number four on my list may not be as obvious to you, but at Sangoma, we're continuing to gradually strengthen our senior management ranks, positioning us even better for future growth a trend that continued in fiscal 22. And my final fiscal 22 highlight is the progress on that fortress integration, a process which is going to deliver more synergies than we originally anticipated and is even slightly ahead of schedule. And for my final point in this year in review section, I promised to touch on my number one disappointment, which has to be our share price. a low light that should surprise no one on this call. It really is extremely disappointing indeed to see Sangoma's share price today. It's the one big item from fiscal 22 that is so upsetting to the team here and to your board of directors. At $8 per share Canadian, we are trading at less than one times run rate revenue and something like five to six times adjusted EBITDA, depending upon whether one looks at trailing 12 months or future 12 months. multiples that are very hard to understand and make our stock seem like an incredibly good buy at these prices. I just want to say emphatically and definitively that everyone at your company is completely focused on the tasks in their area of responsibility. The one that we believe will contribute to addressing this number one disappointment. That concludes my year in review commentary. And with that, I'll move on to my fifth and final section today, of guidance for fiscal 2023. I'll begin this section with a brief reminder. Our fiscal 23 guidance factors in many considerations as outlined more fully in our press release and MD&A. These considerations include items such as inflation levels not seen for many years in most parts of the world, government monetary policy in response to such inflation, ongoing supply chain challenges and their ability to manage them as in the past, our ability to attract talent in what remains a very hot job market, revenue and demand trends continuing, as well as the risk of a global recession. This is a significant list this year and is indeed one that we factored in to our forecasts for the fiscal 23 year. Our guidance reflects Our expectation for solid top line revenue growth and strong adjusted EBITDA to continue. Fiscal 23 revenue guidance is between $275 million and $285 million, which would deliver growth of 23 to 27% over fiscal 22. We are also including in our revenue guidance this year an estimated range for services revenue, which we expect to be in the 70 to 75% of sales range. true signs of sustainability and what should be value creation for shareholders. And finally, our guidance for adjusted EBITDA is for $48 to $52 million this year, demonstrating that we expect to continue generating really substantial EBITDA margins in the range of approximately 18% for fiscal 23, despite the economic headwinds I just mentioned. With that, I'd like to bring my prepared marks to a close with a quick summary. Overall, I'm very pleased with another year of solid financial results for Sangoma and with what we've accomplished. We continue to take steps to drive your company to become one of the preeminent players in the industry. We are well positioned to take advantage of an extremely large total addressable market. We have a well-defined, competitively differentiated strategy, and we continue to penetrate the market through our total growth approach. As most of our investors know, We seek attractive organic growth by investing in sales and marketing, R&D, and customer expansion. And we remain uniquely positioned to augment that organic growth with deliberate, prudent M&A using a disciplined approach that reflects an astute awareness of current share price, all while maintaining strong adjusted EBITDA and cash flow. You have a team here at Sangoma that works hard for you every day and that is determined to dramatically improve stock price and create shareholder value. And with that, I'll turn the call back over to David for questions.